This has been reflected in a sharp increase in PLS since the start of the year. While I am often reluctant to comment on short-term activity, I think that the recent action reflects a reawakening of the market to the potential of the company. A resurgence in the construction industry of California may be the catalyst which unlocks the value of the company's assets.
Polaris Minerals - Background: The Descent and Emergence
The following account from ABC Funds chronicles Polaris' journey since its formation in 2005. It's been a rocky trip but the promise of better days is on the horizon. http://www.valueinvestigator.com/en/valuefavourites/pls.php
The Value Investigator is penned by Michael Irwin and staff, managers of the ABC Funds. Irwin is a value investor. I like the directness of his commentary and his ability to explain why he brings new companies into his fleet - also why he sends some on their final voyage. It is instructive to read how he reacts to new developments in the voyages of his vessels, which he documents through periodic updates. On several occasions, I have invested in companies as a result of learning about them on this web site ... but only after investigating them on my own.
Background to the Industry
While somewhat outdated, the following report, Market Analysis: Coastal Aggregate Development Opportunities (2004), provides an overview of the market potential for BC quarries on on the coast of British Columbia.
Development Opportunities
In reading the report and those referenced in the following text, it will be useful to frame your intake with these points in mind:
- annual production and estimated life of existing quarries
- the over-riding importance of cost of loading, transportation, unloading and movement of unloaded aggregate to destinations
- the inexorable trend for demand to exceed supply
- the conservative attitude of the construction industry with regard to the use of alternatives to either reduce or replace imported aggregates
- potential competition from sources of aggregate within Canada, the U.S. and Mexico.
Short to intermediate influences such as the recent recession in the U.S. construction industry will not alter the dynamics of these considerations over the longer term. I suspect that this is one instances where out-of-favour companies such as Polaris Minerals will benefit significantly once the markets improve in the U.S. and potentially, in B.C. as a result of new infrastructure e.g. new port facilities.
Aggregate Demand and Supply
In Polaris' key market area, coastal California, I have the sense that infrastructure renewal and expansion will increase.
Permitted supply is inadequate to meet demand. The following map (click on link) shows the demand/supply imbalance. Note the paucity of supply in coastal areas, especially the major urban centres where future demand is projected to be highest. Map of Supply/Demand in California
One study (Aggregate Supply- An Economic Assessment, California Department of Transportation, 2007) made the following observation:
According to the California Geological Survey (CGS), California has an estimated 74 billion tons of aggregate resources underlying mineral lands classified by the State Geologist. However, only about 5.3 billion tons of aggregate (7.2 percent) have actually been permitted by cities and counties for mining activities. Permitting of mining sites takes between five and ten years. At the current rate of production of 177 million tons per year, the permitted reserves will be exhausted in about 30 years. Aggregate Supply
The above-noted survey was recently updated. 2012 Update
The supply/demand situation is mapped here: Aggregate Supply
The following conditions have persisted through recent decades:
- a trend for greater haulage distances
- a steady increase in the price of aggregate with noteworthy variations in local pricing (coastal areas seem to have higher prices)
- the trend for demand to outstrip permitted supply
- a strong and consistent correlation between population growth and demand
Given the dispersed nature of settlement and community interests in preserving coastal lands, my sense is that economically viable sources of supply for the coastal belt are at a premium - thus exacerbating the situation described above.
Further the quality of Polaris' product provides it with a competitive advantage:
The quality of the aggregate being shipped in from the Polaris Minerals Canadian quarry meets the high standards set by the California Department of Transportation for use in the Bay Bridge project, meaning that it is especially strong when made into concrete. As a matter of fact, the Orca Quarry is one of only nine quarries that are certified to Caltrans specs and the only one outside of California. (This may have changed since 2007.) http://www.baycrossings.com/dispnews.php?id=1909
The Shipping Advantage
Estimates of trucking costs vary but a general rule of thumb is that beyond a 20 to 25 mile radius of the quarry, shipping costs will start to exceed the costs of aggregate. The following table sets out comparative costs for transporting aggregate via different modes on the west coast of the U.S. (2005 data):
http://www.ocapa.net/uploads/Hidden_Cost_Relocating_SandGravel_Mines.pf
Other Considerations
The aggregates market is competitive. Polaris has some long-term agreements with major aggregates consumers in California which should blacken the balance sheet once the market improves as it most assuredly will over time.
Assuming that Polaris is able to exploit new opportunities, it will have to address the issue of securing additional unloading capacity in its key markets. This will be costly and the process of permitting will be challenging and lengthy.
Polaris has demonstrated its ability to secure additional financing, largely on the basis of its inherent value ... but at the cost of share dilution.
Competition from other suppliers within and outside California (most notably, Mexico) is difficult to assess. However, like Polaris, they will have to surmount barriers to entry such as: supply agreements with consumers, securing unloading facilities, meeting the requirements for domestic permitting, and the like. Polaris has the benefit of being able to ramp up production quickly without much additional cost.
The price and capacity of shipping has been addressed through a revision of Polaris' contract with CSL International. For these and other details, read Polaris' 2012 Annual Report: Annual Report
Conclusion
Polaris is a speculative investment in the sense that it is based on the company's inherent value as opposed to the current state of its balance sheet. It has several advantages which warrant attention:
- its proven ability to survive a prolonged drought in the market for its products
- its ability to secure additional funding, even in "bad times" for the mining industry
- the absence of bothersome technical problems associated with the extraction, loading and shipment of material
- the high quality of its products, the significant volume of permitted annual extraction and the size of its reserves
- its strategic location which facilitates the economical movement of its products to a wide market (always an advantage for producers as it allows them to capitalize on pricing variations as opposed to being locked into a single market)
In short, the company is resilient and well-positioned to profit when the demand for aggregate increases.
Note:
I have PLS in the portfolios I manage. PLS was first introduced to readers of The Financial Passage Maker in June, 2007.
Note:
I have PLS in the portfolios I manage. PLS was first introduced to readers of The Financial Passage Maker in June, 2007.
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