INSIDE INVESTOR: Digging for gems in mining services

Last week we talked about counter cyclical investing, about devising a medium to long-term strategy for your investments.

A classic example occurring right now is an entire sector that has been dumped by all the major investment houses, despised by the analysts and out of favour with shareholders.

It is the mining services sector: the companies that drill the holes, cart the raw materials, deliver the food and house the workers on big mine sites.

This time last year, they were the heroes of the stockmarket. But in the space of a few months after Christmas, they went from rooster to feather duster.

It is easy to understand why. The big resource companies sniffed the wind, figured the investment phase of the mining boom had peaked and began put an end to their massive expansion plans.

It was time to settle down and make money out of what they had, rather than continue to invest it all for the future.

As the projects were pulled, the mining services companies watched the contracts they had banked on evaporate and their share prices collapse as investors headed for the exits.

The boom time for the sector may have well and truly passed. But the mining companies will always need the mining services companies to supply them. It certainly isn’t the end.

And in the investor rush to jump ship, a couple of very good and very well-run operations saw their share prices sink alongside the worst of them.

So how do you choose which company is good and which to avoid? First up, check the balance sheet. See how much debt your target is carrying and compare it to the assets. But remember asset values can fall. Debt remains and sometimes increases.

If your target has comfortable debt  levels, check to see if it has the kind of operations that can easily be scaled back, to cut costs so it can adapt to a tougher environment.

Third, check to see if it has a good range of blue-chip clients, and that it is not just dependent on one project or one commodity.

In this downturn, minerals have been the hardest hit, particularly coal. Energy, such as oil and gas, has maintained momentum.

If you can find one of these, and they are out there, then it might be worth investigating as a medium to long term counter-cyclical investor.

This is just one example. But the same principles always apply. Whenever you see a crash or a crisis, and the herd all racing in one direction, think of it as an opportunity. But do your homework first — only fools rush in.