RE: Newbies...DD starts hereFriday, June 22, 2007
Polaris ready to rock California projects
PETER EVANS
It's not often that an investor comes across an infrastructure play with a market capitalization under $500-million, but that seems to be the case with Vancouver-based Polaris Minerals Corp.
The stock has done some interesting things lately. Last Friday, it closed at $11.25 before beginning a rapid march upward. It closed yesterday at $13.20, about a 17-per-cent gain in six days.
So what does Polaris have that's left investors drooling? Rocks. Hundreds of millions of tonnes of them, in fact.
Polaris is a producer of construction aggregates - the gravel and sand for which the construction industry seems to have an insatiable appetite. It operates two quarries in British Columbia, but its main customer base is the U.S. West Coast, especially California.
Focusing on that part of the world seems like a particularly astute plan at the moment, due to California's rapidly growing demand for aggregates and its waning local supplies. The gap between how much gravel California uses and how much it produces was 13-million tonnes in 2005, and that's forecast to increase to more than 40-million tonnes by 2010.
What's driving the Golden State's demand for stodgy, old rocks? Last year, Governor Arnold Schwarzenegger announced $222-billion (U.S.) worth of infrastructure projects to keep pace with the state's rapid population growth. He followed that up this year with $44-billion more for additional projects.
As Desjardins Securities analyst John Hughes pointed out in a note to clients on Tuesday, Polaris's Orca quarry is one of only nine quarries to be approved for use on California Department of Transportation projects. He said it is the only non-U.S. site to be approved.
Environmental concerns have made it difficult to develop new quarries near urban areas, and "as haul distances increase between quarries and end markets," Mr. Hughes said, "trucking of materials from distant locations is becoming more costly."
But Polaris has a cost advantage: moving 45,000 tonnes of gravel by sea from Vancouver Island to San Francisco - as Polaris does - costs as much as moving the same amount only 41-kilometres by land, Mr. Hughes noted. He takes a bullish view on the stock, with a 12-month target price of $22.20 (Canadian).
Irwin Michael is a portfolio manager with ABC Funds in Toronto. ABC holds two million Polaris shares in its Canadian-equity focused Fundamental-Value Fund and an additional 925,000 in its North American Deep-Value Fund. They acquired those positions around the initial public offering price of $4.80.
"It's essentially a hole in the ground, so there's no R&D expenses, and you barely even need a night watchman," he said. "We really like the cash-flow story, where the economics are amazingly attractive."
But back the gravel truck up a bit. On the downside, while the company's main revenue streams are only now coming online, in the most recent quarter, Polaris posted a loss of 14 cents a share ($4.3-million), up from 7 cents a share ($1.9-million) during the same period last year.
And securing access to shipping terminals on the crowded West Coast could be tricky. "Our view of the company's future production and sales is therefore at risk of fluctuating based on the availability of shipping terminals," Mr. Hughes noted.
Still, the strong fundamentals of supply and demand are intriguing. And Wellington West analyst Catherine Gignac, who has a target price of $13.75, noted a different reason for optimism in a note in March.
Larger industry competitors such as the Holcim Group, Vulcan Materials and Cemex have been buying smaller companies to try and capitalize on favourable market conditions. "[These] market transactions have driven valuations higher for companies in the sector," she said.