Cliffs Natural Resources’ Bloom Lake iron ore mining operations in north-eastern Quebec.Fred Lum/The Globe and Mail
The sad story of Walter Energy Inc.'s downfall is an ugly reminder that human beings have selective memories.
In December, 2010, at the start of the much-hyped mining supercycle, executives at the Alabama-based company felt extremely lucky. After months of negotiations, they finally found a way to buy Canada's Western Coal Corp., a company they coveted. All it took was $3.3-billion.
At the time, China's booming economic growth was the answer to 99 out of 100 questions. Ask someone why a commodity was worth so much, and the response was bound to centre on China wanting more of it.
Walter's executives built their ebullient support for the deal on this belief. "This is a transformative transaction at a time when global demand for metallurgical coal is surging," interim chief executive officer Joe Leonard said in a statement at the time. "Our combined production capacity and geographic footprint leaves us extremely well positioned to benefit from favourable sector dynamics driven by increased steel production in markets such as China, India and Brazil. Bottom line, this is the right transaction at the right time."
Only it wasn't. Last week, Walter Energy filed for bankruptcy protection. The company is now being handed to senior debtholders. Metallurgical coal, the stuff used to make steel, now sells for roughly $100 (U.S.) per tonne, less than a third of its $330 price in 2011. Couple that with the company's $3-billion in debt, most of which was taken on to buy Western Coal, and Walter needed a major fix.
Many more deals fit this mould. In 2012, Cliffs Natural Resources Inc. paid $4.9-billion to buy Consolidated Thompson, assuming China would have insatiable demand for iron ore. Two years later, the buyer put its acquired Bloom Lake assets in bankruptcy protection.
Barrick Gold Corp. paid $7.3-billion (Canadian) in cash to acquire Equinox Minerals, and when selling the deal the Canadian mining giant predicted the copper price would hover around $4 (U.S.) per pound. The metal now trades for $2.47 per pound, and billions of dollars from the acquisition have been written off.
Energy deals are no angels either. China's state-owned giants went gungho on Canadian oil and gas assets, scooping up everything they could easily buy. After spending shy of $20-billion to acquire Daylight Energy, Nexen Inc. and Opti Canada, the buyers are now struggling to justify their deals. Not only were the assets poorer quality to begin with, which is why no one else seemed to want them, West Texas Intermediate crude is selling for $50 (U.S.) per barrel again.
I could spend the entire column listing all of the billion-dollar deals that didn't pan out. But that would be like kicking a dog – it's too easy. The more pressing issue is why we keep falling for such simple logic – especially when we've been burned before.
The financial crisis was supposed to teach us about falling for resource boom hype. The chief executives who engineered mega-deals between 2010 and 2014 were supposed to have learned from all the silly behaviour right before the Great Recession, when the likes of Rio Tinto bought Alcan for $37-billion.
But they didn't, so the new crop of CEOs made the same mistakes all over again. How can we be so gullible? Turns out the human brain is partly to blame. Leading psychologists have found that our minds are designed to believe this time truly will be different. Unless we experience the exact same conditions as the last boom, we're able to believe a change in just one variable will make things pan out the next time around.
That's important to remember in these markets, because all the fervour that once existed for resource companies and deals has morphed into a pandemonium for non-resource names. In the United States, mergers and acquisitions in sectors such as health care and pharmaceuticals are on fire. While the same deal flow hasn't popped in Canada, share sales for non-resource industries is extremely heavy.
This is a blessing for the Canadian companies that deserve it. Element Financial eyed General Electric's fleet services business for years, and the hot market helped it fund the deal. DH Corp. was also able to sell shares to finance its $1.25-billion acquisition of Fundtech.
Yet our track record is so spotty that we ought to question whether investors are buying new hype. In the last year, virtually all the top performing stocks in the S&P/TSX composite index are non-resource names. Alimentation Couche-Tard skyrocketed 97 per cent; Metro Inc. popped 57 per cent.
We'd be silly not to honestly ask ourselves: Are we doing it again?