Competitors aim 'to take out' unlucky Vancouver Island gravel pit owner
"Unfortunately
for Polaris, they got in right when the downturn started to happen. So
you talk about putting a lot of money into a venture and the bottom
just absolutely falling out of the construction business. That's just
bad luck," said Ted Wilkinson, vice-president of the U. S. West Coast
division for Lafarge Concrete.
(VANCOUVER, Canada) -- The vultures have begun to circle a massive Vancouver Island gravel
pit. Last April, Polaris Minerals Corp. opened its Orca Quarry with all
the optimism of a company convinced the 121 million tonnes of gravel
and sand buried in its Port McNeill property were in fact overlooked
treasure.
Armed with numbers showing a huge resource and a hungry
California market, it raised $142-million and, three months into
production, watched its shares loft above $14 on the Toronto Stock
Exchange.
Now, with its stock at less than a quarter of that mark
-- it closed at $3.21 yesterday -- Polaris faces the possibility of
defeat at the hands of the catastrophic downturn in U. S. construction,
which has dropped aggregate demand in the state by more than 30%.
"Most
of the majors, including ourselves, are waiting to see when do you pick
it off," said Ray Collier, the B. C. vice-president general manager
aggregates for Lehigh Hanson Co. "People are positioning themselves to
take it out when the stock price goes low enough."
For Polaris,
the talk by competitors comes as just another blow after it launched
into a disintegrating market and fast-rising fuel prices, which hacked
at the already tight profit margins in the aggregate business.
"Unfortunately
for Polaris, they got in right when the downturn started to happen. So
you talk about putting a lot of money into a venture and the bottom
just absolutely falling out of the construction business. That's just
bad luck," said Ted Wilkinson, vice-president of the U. S. West Coast
division for Lafarge Concrete.
"Do I think they will get taken
out in the future? They have to be. I don't think it's sustainable. I
think they're going to run out of cash." Polaris management declined to
comment on what it called "rumours" of a possible takeover, but
outgoing president and chief executive Marco Romero struck an
optimistic note. The company did cut its 2008 production guidance by a
quarter earlier this year "as a result of a very sever decline in
housing construction. It went off a cliff. People stopped building
houses overnight virtually," Mr. Romero said.
"But when you see
the sector down 30% in one year across the board in California and
we're effectively doubling our sales from what we sold last year, we
can't complain too much," he said. "Our performance has been really
good, notwithstanding the growth hasn't been as fast as we thought it
would be. Operations are performing very well, customers love the
product quality, the logistics is virtually flawless. So we're quite
pleased."
The company, which reports in U.S. dollars, has
US$8-million in cash and carries no debt apart from US$20-million in
bridge financing it secured to buy port land in Long Beach last month.
After losing US$18.4-million in 2007, it burned US$1.8-million in cash
in the first quarter, but slowed that to US$220,000 in the following
quarter.
"So, from an operations perspective, we really aren't
using very much cash," said Polaris director of corporate development
Mike Westerlund.
Some market observers agreed, saying the company is not at any imminent risk.
"It's
dicey times," said Veritas Investment Research analyst Chris Silvestre.
"But I wouldn't go so far as to say that they're going out of business
immediately, although there are significant risk factors."
Mr.
Romero did, however, admit that one-or two-year delays are likely to
Polaris's growth plans. Those include ramping up production at Orca to
volumes that would make it the largest quarry in the country, as well
as developing a granite quarry at its Eagle Rock property in Port
Alberni, and spending $30-million to build terminal facilities at its
new Los Angeles location.
But it's not alone. Sinking U. S.
construction figures have also drowned ambitions for export-oriented
quarries in Stewart and Kitimat, both northern B. C. towns. Those
developments, planned by Venturetraded Ascot Resources Ltd. and
privately owned Arthon Construction Ltd., have both been put on hold,
their owners breathing sighs of relief that they did not start
operations at the same time as Polaris.
"We would be hurting
right now if we were having to be in this market, in this downturn,
right now," said Arthon president Kerry Leong.
Will those
projects ever be economic? The major players doubt it. The current
downturn is "a reality check," said Mr. Collier. "Put it this way: We
have looked at aggregate pit development and can't justify it based on
California sales alone and never have been able to. There's a notion
out there that aggregate is gold. Well, it's not."
Still, both
Polaris and Mr. Leong pointed to California demand statistics --a 2006
study by the California Geological Survey found that the state's
current reserves will satisfy only 32% of its projected demand over the
next 50 years, creating plenty of demand for B. C. product -- as
evidence that, once the current storm clears, the outlook is brilliant.
"The
Canadian aggregate exports into the California market business model is
still really in its infancy," said Mr. Leong, who hopes to begin
production in a year or two. "Ten years from now, I think that any
producer of aggregates that can put it on large bulk carriers will be
at maximum production for a long, long time."
By: Nathan Vanderklippe,
Financial Post
SOURCE: www.financialpost.com