A significant portion of the Canadian economy is based on the extraction sector, whether it be metals and minerals or oil and gas. This is especially so in Western Canada, the primary beneficiary of the resource sector’s cyclical boom of the past many years. But all booms are inevitably followed by busts: the slow leak of the metals sector over the past few years and the spectacular fall of oil prices since November 2014.
This has led to a rise in resource based insolvencies and restructurings in Canada as companies are finding it difficult if not impossible to service debts and operating expenses with revenues declining. In the mining sector, the persistently low gold, silver and copper prices have pushed a number of higher cost operators into insolvency proceedings over the last 12 months. The same if not worse can be said for the iron ore sector, where projects are being shelved, even seemingly economical ones, given the expectation of low prices for several years to come.
And the oil patch is similarly challenged – low prices have caused spending on capital expenditures to be curtailed or outright suspended (along with dividends to shareholders), and layoffs, causing an insolvency ripple effect across the economy.
While the news is bad and there is no reasonable expectation of a quick or painless recovery in sight, the resource sector does represent opportunities for distressed investors and solvent resource companies. Distressed companies have been and continue selling off equipment and reserves in an attempt to generate cash and cut expenses. As a result, there is a glut of cheap large scale extraction equipment on the open market. As well and more importantly, mining claims and oil fields are also on the selling block, many at discounted prices. And public companies are finding that they too are for sale, whether they like it or not, given their depressed stock prices.
The result has been a number of asset deals and hostile takeover bids being announced in recent months as the stronger players gobble up smaller weaker players or their assets. This de facto restructuring of the sector will continue for some time. Distressed investors and those sector players with money and time to wait for prices to recover will be the big winners.