With mining and processing equipment inventories piling up, this recession would seem to be a buyer’s paradise. But, not so fast, says Martin Burhans, a financial consultant with Heartland Resources. He’s been dealing with heavy-equipment and finance issues for more than 25 years, part of that time working for such companies as Lafarge and Hanson.

Describe your background as it applies to capital equipment investment for aggregate operations.

Right now, 40% of my activities are working with clients in assessing the heavy-capital investments for equipment in mining and processing aggregates, minerals and cement. I look at the type of equipment needed and the logistics of the equipment, all the way from equipment design to buying new, looking for used or leasing. I spend a lot of time assessing the return on equipment. I’m dealing with the equipment manufacturers and dealers and companies that will loan money for equipment or invest in equipment.

Equipment decisions are very important because it is cash-flow management; and if you miss the boat, your business takes a huge cash hit. Understanding the proper ways to purchase equipment, what equipment to purchase, and the application and serviceability are huge plays. Even with a down market, equipment is very expensive; it is very important that you know what you are going to do with your money.

The first thing you ask yourself is, if I use that money for something else, what kind of return can I get? If that’s your comfort level for getting a return on that money, that’s the number you use for the true value of that equipment. It is determining the net value of the investment. Do I spend $500,000 for this loader today, or do I go to the bank and borrow the money and pay 4% or 5% interest? The 5% will cost $25,000 or $2,000 per month, but the loader may save $50,000 in maintenance costs. It is pretty smart to borrow the money because the positive cash flow from that loader is $25,000.

What type of aggregate producer is best advised to buy capital equipment in this recession?

The majority of the buyers right now are going to be private companies. Most of your smaller companies that have been in this business before the rise in demand for aggregate started to grow in the 1990s have been enjoying the fruits of the market pricing and volumes; they should have a sizable amount of cash. In public corporations, nine times out of 10, it is going to be very hard to get replacement equipment from maintenance capital. Many of the corporate that people I’m involved with have the same story: the useful life of a loader is now 12 years not 10, unless it needs maintenance that exceeds a certain amount of money. If you have a strong preventive-maintenance program, you are going to be comfortable doing that.

How much of a buyer's market is it right now?

The equipment guys will negotiate today. For equipment such as loaders and trucks, you are going to get pretty decent prices. For specialty iron like crushers, you’ll see discounts, but it is not like talking to auto dealers. The equipment that has the least demand will have the best deals. The Chinese probably have the cheapest equipment in price, but it is not the cheapest in quality. There are not a lot of parts available. At Conexpo-Con/Agg, the sense was that their equipment was 30% to 40% below the value of standard equipment.

Is used equipment a better bargain?

If you look at the auctions these days, you can buy used equipment from 20% to 50% less than you did two years ago. A few weeks back, you could buy a hauler for $1,000 per ton that it hauls. If you get good maintenance records and oil samples, you might get a bargain. A lot of guys will buy used equipment, run it until it breaks down and go get another one.

I haven’t researched this, but the feedback I’m getting is that about 70% to 80% of the equipment sold at auction is going to Latin America. Buying used equipment is unattractive to the guys in the United States. That probably means that they are getting better bargains buying new equipment right now than we can even think of. If you are buying a loader at 60% of what it was worth a year ago, you are not going to worry about resale value.

What are the pros and cons of leasing versus buying capital equipment during this recession?

Where is your best application of your dollars? Is it to expand your market presence and get a hold of more reserves or spend the money on maintenance and capital-expenditure stuff to improve your cost a couple of pennies per ton? You are getting companies that have investor money and are going out to buy … assets that will probably go for half of what they were worth two years ago. In three to five years if the market changes they could sell it to the big boys for twice what they paid. It is more than looking at the equipment now. For the regional guy, it is still about the equipment. The guys that are national or multi-national know the economy is what it is and will see if they can get a bargain. There are not many corporations that have that flexibility. Over the next six to 10 months, the competition for dollars is going to be tight. The equipment guys are going to lose more than others. People are going to opt to buy existing operations and increase their cash flow, using money on bargains like that rather than for bargains on equipment, which only compounds equipment manufactures’ problems.

For those who are buying, what types of financing terms should they be looking for and what pitfalls should they watch out for?

With interest rates as cheap as they are, you can get a loan if you find the right banks. There are a lot of prudent banks that survived this. They have a lot of cash that they want to loan. There’s a lot of regional banks that have assets of only 10% of the big boys but are flush with cash and doing well. Good banks that aren’t tied up in the Troubled Asset Relief Program money and obligations are going to give some pretty good rates. Most private companies with a solid credit rate can probably get London Interbank Offered Rate to one over LIBOR. LIBOR is the rate they use as an international rule of thumb for rates. There are companies that I deal with that are paying one under the prime rate [the interest rate banks charge their most credit-worthy borrowers]. With the federal government more involved, you may be able to find grants and aid to do things.

On the other hand, the guy with a lot of cash has to be careful where he puts it, so leasing is not a bad idea. Strong leasing companies are going to be easier to deal with than those getting any kind of monetary support from government. We’re finding that the banks that are getting help from the government are the least cooperative to work with for underwriting equipment or land acquisition. Most leasing companies are going to want a lot more return on their money than what a bank will loan to you. It comes down to how much cash you have available and how much you are comfortable leaving in the bank. Some public corporations with good balance sheets can probably negotiate some pretty good leases right now. The ones with really bad balance sheets are not doing anything; they are liquidating.

But there’s a lot of risk out there still. The reality of the stimulus package is that all the states that get this money are required to implement most of the money this year. Some are told that if they haven’t used the funds by November [the money is] going to go somewhere else. With the downturn in the funding, you are going to be down this year anyway 20% to 30% in federal aid. The stimulus package basically brings you back to that or a little above. Next year, it is going to drop again. If you are in markets where you are going to get a big spike and you can’t find good used equipment, I would go out and look for an open-ended lease. If that spike goes away in 15 months and state economies are still in a wreck, you can take the equipment back. Or, if it looks solid, you can go back and buy it at a predetermined rate, today’s rate. But if you get stuck with a four-year lease with a balloon payment at the end, you are probably better off buying it. There are a lot of banks now that will buy the equipment and lease it to you.

Any predictions when the economy will begin to grow?

I just heard today that we’ve hit the trough, and we’re going to see a turnaround. But, you listen to another guy and we hit the trough and we’re not going anywhere, we’re staying here. By the end of the year, things might make a little more sense, but it is going to be a rough road for equipment manufacturers in general. Looking at them, you might see some consolidations of companies. You are not going to see a lot of import manufacturers trying to get a foothold right now.