Canadian commodities firms face uncertainty as stock markets toughen growth

By David Friend, The Canadian Press

TORONTO - Crumbling stock markets and increasingly difficult borrowing conditions are putting a damper on the ability of Canadian companies to raise new capital, while mergers and acquisitions that once seemed certain are being tossed by the wayside.

The failure of a quick U.S. bailout plan has stoked already widespread economic anxiety and knocked the wind out of international stock indexes - the TSX was down more than 800 points on Thursday alone.

And with investment banks, commercial banks and other lenders feeling the effects of a credit crunch that has been worsened by political opposition to a US$700-billion government bailout of the country's financial industry.

Many Canadian companies are operating with "flak jackets on and heads down," said Ann Wilkinson, vice-president of investor relations at miner Breakwater Resources Ltd. (TSX: BWR.TO).

"Fundamentals have been thrown out the window. There are two driving forces in stock markets - greed and fear - and greed is nowhere to be seen."

While many industries are affected by the credit squeeze, the capital-intensive miners are particularly vulnerable.

"Our stock has been so badly beaten up," Wilkinson said.

"Our market cap is below what one of our analysts has calculated as the net asset value for one of our four mines."

Breakwater's shares have lost an astounding 94 per cent over the past year, dropping from a 52-week high of $3.41 on the TSX to a five-year low of 17.5 cents on Thursday.

The uncertainty has made it tough to take out a loan and depressed stocks mean less can be raised in equity financings to fund projects, said Brian Hinchcliffe, president of Kirkland Lake Gold Inc. (TSX: KGI.TO).

"Things are changing rapidly," Hinchcliffe said from his office in New York.

"Prices of iron ore and steel have already made forecasting out three or four years incredibly difficult. Now it's hard to understand where things are going to be a few months from now. The disappearance of the investment banking industry in the United States suggests that... anything can happen."

On Monday, the Toronto Stock Exchange ended the day down more than 840 points, and while it recovered some of its position throughout the subsequent sessions, slid another 814 points.

Referring to the $32-billion ABCP crisis that hit Canadian pensions, companies and individuals, Hinchcliffe said: "There's going to be a lot more instances of the asset-backed capital freeze up that happened in Canada last year."

Some Canadian companies, including the Jean Coutu Group (TSX: PJC-A.TO) and Ivanhoe Mines (TSX: IVN.TO), had tens of millions of dollars locked up in ABCP as the financial industry debated what to do with their money, which had lost much of its value.

The restructuring of the Canadian ABCP has taken more than a year and some of the details are still being worked out.

Even as Canadian firms discuss how their bottom line, and future growth, could be impacted by the developing headwinds, others are already suffering the consequences.

On Thursday, NIR Diagnostics Inc. (TSXV: NID.V) consented to foreclosure after a creditor enforced security on convertible debentures worth $2.75 million. The company said it would need more money to continue operating in the third quarter.

Meanwhile, Coro Mining Corp. (TSX: COP.TO) halted plans to buy a copper mine in Chile, due to weaker copper prices and uncertainty in arranging a "bridge" debt facility because of credit market conditions.

Capital pool company Software Growth Inc. (TSXV: SGW-P.V) abandoned its planned acquisition of Lavell Systems Inc. because the two companies couldn't meet "a number of conditions" required to complete the deal.

"Certainly it's safe to assume that the current market conditions were not helpful in the situation," said Mark Lawrence, president and CEO of Software Growth. "The ability to source financing... will remain a very important element of any transaction going forward."

Some companies are slashing their workforce to contend with financial problems.

Ambrilia Biopharma Inc. (TSX: AMB.TO), a Montreal-based drug developer, says it's cutting a third of its staff - about 14 positions - and reducing research plans.

International companies have also taken a major hit from the downward credit spiral.

Xstrata PLC scrapped a US$10-billion bid to take over U.K. company Lonmin PLC as credit markets began their latest descent.

While not every Canadian company is feeling the financial pinch yet, Scotia Capital analyst Anthony Zicha described an apparent safe-zone that could soon be flooded with its own problems.

He said management at both engineering and construction giants SNC-Lavalin (TSX: SNC.TO) and Stantec (TSX: STN.TO) reassured him that neither company had experienced a material increase in project cancellations or deferrals because of the credit crisis. Those attitudes are expected to change, he suggested in a note.

"We believe the likelihood of project cancellations could increase as a result of the current credit environment, declining commodity prices, and fears of a global economic slowdown," he wrote.

Some of the Canadian companies most deeply submerged in uncertainty now are the same ones that were previously basking in a stock surge that, at the time, seemed to promise only further growth.

And nervous investors have kept many from entering the public marketplace, according to a survey from PricewaterhouseCoopers. During the third quarter, there wasn't a single initial public offering on the Toronto Stock Exchange, the study found.

It was the weakest new-issue activity on the TSX ever tracked by PricewaterhouseCoopers, which began the survey a decade ago.

"It would be tempting to blame the disruption in the global credit markets and the volatility in equity markets for these results, but in fact this is part of a long-term trend that started late in 2006," said Ross Sinclair, national leader for PwC's IPO and income trust services.

"We didn't get here overnight."

And the problem isn't going to be solved overnight either, according to Hinchcliffe.

He said that the commodities sector will be feeling reverberations for years. Stalled projects could mean lower inventories in the future, and ultimately higher fuel prices.

"There's going to be a lot of projects that were going to go forward that won't go forward, which is probably going to come back and boomerang the commodity sector two years from now," he said.