By Tom Bradley

I’ve written about our home team, Teck Corp., in previous postings.  This week Rio Tinto is in the headlines.  Its situation is similar in the sense that six months ago it was a leading resource company, perhaps the premier one in the world.  It is well diversified across commodities, but unfortunately it also did a debt-laden acquisition of a Canadian company (Alcan) at the peak of the market.  Rio now finds itself in a position where it needs to sell assets at distressed prices to reduce its debt load.

I may sound like a hindsighter on this (which is fair enough, although I did write about this topic well before the cycle was over - see The Wise CEO Rides the Cycle), but it amazes me that highly cyclical companies with seasoned management teams came out of this ‘super cycle’ on life support.  I know it’s impossible to tell when a cycle is going to end, but surely the first order of business for a company wanting to play the acquisition game in a cyclical industry should be a clean balance sheet. 

There are good parallels between mining companies and investors.  Getting too carried away on a particular theme (i.e. an asset class, industry sector or currency) to the detriment of reasonable diversification carries huge risk.  It reminds us that even when we are absolutely sure about something (in the case of mining, China will grow forever), it doesn’t mean it will happen.  Indeed, if everyone has the same view, it’s likely not going to happen.  And like the cyclicals, before an investor gets too adventurous pursuing a particular theme, they should have the core of their finances well secured, both in terms of leverage and diversification. 

Risk management, diversification, responsible investing...call it what you will.  All of these terms mean that we sometimes have to do things that run against the grain or don’t feel good at the time.  That may mean owning bonds when their returns pale in comparison to stocks, or paying down debt even though it’s been working for us, or buying stocks when the world is coming to an end.  And most importantly, it means doing all of those things in the context of a sound overall plan.