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B.C. firms hitting profit plateau

After a banner year, the province's most profitable companies struggled to maintain margins in 2012 as slow growth and volatile global markets increasingly took their toll on corporate bottom lines
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credit rating, Energold Drilling Corp., HSBC Bank Canada, mining, Patricia Mohr, prices, Scotiabank, B.C. firms hitting profit plateau

Despite the global financial crisis and persistent black clouds on the world's economic horizons, B.C.'s most profitable companies and their bottom lines have consistently exceeded expectations.

The province's businesses have had to grow in the face of:

•a growing European debt crisis that has sparked persistent fears of the euro's breakup;

•credit rating downgrades of some of the world's largest economies like the U.S.; and

•China's continued economic slowdown.

Nevertheless, total profit of the province's top 100 most profitable companies has increased 66% between 2009 and 2011.

Since Business in Vancouver began compiling the list three years ago, total profit of the top 100 has risen to $12.5 billion in 2011 from $9.6 billion in 2010 and $7.5 billion in 2009. Most of B.C.'s key sectors are represented on this year's list, but the mining sector, services and financial institutions make up the lion's share of its entries.

As in previous years, B.C.'s largest mining and energy companies generated much of the profit. The 30 companies in those sectors on the list collectively raked in more than $8.5 billion in profit last year, up from $6 billion in 2010.

Some of B.C.'s largest companies – like Telus (TSX:T), Finning International (TSX:FTT) and HSBC Bank Canada – were also key profit generators last year, contributing to the overall bottom line of the top 100 list. But the slowdown that has affected markets around the world might already be hitting B.C.'s most resilient firms.

Of the 71 publicly traded companies on this year's list, nearly two-thirds have posted a drop in net income for the first nine months of their 2012 fiscal year.

About 60% of them have reported declining year-over-year profit in their most recent quarter, even though a similar proportion posted increased revenue.

Only a relative handful (13) have increased their revenue and profits so far this year, including Telus, Finning, Lululemon (TSX:LLL) and Ritchie Bros. Auctioneers (TSX:RBA). However, the bulk of B.C.'s most profitable resource companies aren't among them.

Key B.C. commodities face divergent future

The mining sector has been hit by tremendous volatility this year. Gold prices, while still near record highs, were on a downward trend in the first half of the year, fluctuating between US$1,540 and US$1,750 an ounce, according to World Gold Council data.

Copper prices, while also near historical highs, have swung about $0.60 per pound in the past year.

"We're very dependent on the world price of any given commodity at any given time," said David Barr, chief investment officer at Vancouver's PenderFund Capital Management. "As a commodity producer, there's not a lot you can do but wait for better pricing."

Patricia Mohr, Scotiabank's commodity market specialist, noted that aside from gold and copper, other metal commodities have not fared as well this year and their future remains uncertain.

"Generally, the outlook for base metals is a bit mixed at the moment. It's not as good as it was a year ago. Copper is the outperformer in the base metal sector."

Mohr is forecasting copper's 2012 average per-pound price to be around US$3.65 but is expecting it to fall to an average of US$3.58 next year on the expectation that global copper production will increase.

"We may finally see new copper mine development in a bigger way," said Mohr.

"One reason why copper prices have stayed high for so long is because there has been very limited copper mine development in the past five years. And China's demand is still up more than 6% this year."

In the resource industry, B.C.'s forestry sector might have the most to gain in the coming years. After lumber prices hit multi-decade lows from the collapse of the U.S. housing market, prices are forecast to rise to levels not seen in almost 10 years.

As of late October, the price for western spruce-pine-fir two-by-fours has remained above US$313 per thousand board feet (mfbm). She's forecasting the 2012 average price to end up above $285 mfbm and rise to $350 mfbm over the next couple of years.

"Historically, prices were actually a lot higher, over $400 at their peak, so there's plenty of room to move up."

Mergers contributing to growth in sluggish economy

For companies in other sectors, Barr remained optimistic that the economies in the U.S. and China will continue to recover, providing growth opportunities for North American businesses.

In the Pender Small Cap Opportunity Fund that he manages, Barr noted at least 10 portfolio companies have been involved as either acquisition targets or acquirers in the past year alone, which has contributed to the fund's positive performance.

"Part of the reason is large U.S. companies that have huge amounts of cash in the bank, and so when you combine that with smaller companies, which investors haven't been interested in, it becomes very attractive for large companies to buy these smaller companies at a price that's very favourable."

Vancouver's Energold Drilling Corp. (TSX-V:EGD) has been among many B.C. companies that have made strategic acquisitions in the past couple of years.

Last July, it closed the acquisition of Bertram International Corp. for $15 million, which since then has contributed to the company's stronger position in the market.

Fred Davidson, president and CEO at Energold and president at Impact Silver Corp. (TSX-V:IPT), noted the Bertram acquisition has not only contributed to higher revenue and better profit margins, but has also diversified the company's drilling activities to include oilsands drilling and services in addition to its traditional mineral exploration services.

"Our energy division has shown surprising resiliency this year, with oil-gas and oilsands activity in North America and Canada still growing in this market, indicating energy companies are forecasting a longer-term view on energy prices and exploring for five to 10 years down the road," said Davidson.

While the current economic climate remains challenging, one key lesson for Davidson from the impact of the 2008 financial crisis is to avoid being "overly exuberant" about expanding and leveraging up the company.

"Prudent financial management cannot be emphasized enough, which includes managing a reasonable growth rate – a difficult thing when everyone else is borrowing to grow."