VANCOUVER-The vultures have begun to circle a massive Vancouver Island gravelpit. Last April, Polaris Minerals Corp. opened its Orca Quarry with allthe optimism of a company convinced the 121 million tonnes of graveland sand buried in its Port McNeill property were in fact overlookedtreasure.
Armed with numbers showing a huge resource and a hungryCalifornia market, it raised $142-million and, three months intoproduction, watched its shares loft above $14 on the Toronto StockExchange.
Now, with its stock at less than a quarter of that mark-- it closed at $3.21 yesterday -- Polaris faces the possibility ofdefeat at the hands of the catastrophic downturn in U. S. construction,which has dropped aggregate demand in the state by more than 30%.
"Mostof the majors, including ourselves, are waiting to see when do you pickit off," said Ray Collier, the B. C. vice-president general manageraggregates for Lehigh Hanson Co. "People are positioning themselves totake it out when the stock price goes low enough."
For Polaris,the talk by competitors comes as just another blow after it launchedinto a disintegrating market and fast-rising fuel prices, which hackedat the already tight profit margins in the aggregate business.
"Unfortunatelyfor Polaris, they got in right when the downturn started to happen. Soyou talk about putting a lot of money into a venture and the bottomjust absolutely falling out of the construction business. That's justbad luck," said Ted Wilkinson, vice-president of the U. S. West Coastdivision for Lafarge Concrete.
"Do I think they will get takenout in the future? They have to be. I don't think it's sustainable. Ithink they're going to run out of cash." Polaris management declined tocomment on what it called "rumours" of a possible takeover, butoutgoing president and chief executive Marco Romero struck anoptimistic note. The company did cut its 2008 production guidance by aquarter earlier this year "as a result of a very sever decline inhousing construction. It went off a cliff. People stopped buildinghouses overnight virtually," Mr. Romero said.
"But when you seethe sector down 30% in one year across the board in California andwe're effectively doubling our sales from what we sold last year, wecan't complain too much," he said. "Our performance has been reallygood, notwithstanding the growth hasn't been as fast as we thought itwould be. Operations are performing very well, customers love theproduct quality, the logistics is virtually flawless. So we're quitepleased."
The company, which reports in U.S. dollars, hasUS$8-million in cash and carries no debt apart from US$20-million inbridge 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 cashin the first quarter, but slowed that to US$220,000 in the followingquarter.
"So, from an operations perspective, we really aren'tusing very much cash," said Polaris director of corporate developmentMike Westerlund.
Some market observers agreed, saying the company is not at any imminent risk.
"It'sdicey times," said Veritas Investment Research analyst Chris Silvestre."But I wouldn't go so far as to say that they're going out of businessimmediately, although there are significant risk factors."
Mr.Romero did, however, admit that one-or two-year delays are likely toPolaris's growth plans. Those include ramping up production at Orca tovolumes that would make it the largest quarry in the country, as wellas developing a granite quarry at its Eagle Rock property in PortAlberni, and spending $30-million to build terminal facilities at itsnew Los Angeles location.
But it's not alone. Sinking U. S.construction figures have also drowned ambitions for export-orientedquarries in Stewart and Kitimat, both northern B. C. towns. Thosedevelopments, planned by Venturetraded Ascot Resources Ltd. andprivately owned Arthon Construction Ltd., have both been put on hold,their owners breathing sighs of relief that they did not startoperations at the same time as Polaris.
"We would be hurtingright now if we were having to be in this market, in this downturn,right now," said Arthon president Kerry Leong.
Will thoseprojects ever be economic? The major players doubt it. The currentdownturn is "a reality check," said Mr. Collier. "Put it this way: Wehave looked at aggregate pit development and can't justify it based onCalifornia sales alone and never have been able to. There's a notionout there that aggregate is gold. Well, it's not."
Still, bothPolaris and Mr. Leong pointed to California demand statistics --a 2006study by the California Geological Survey found that the state'scurrent reserves will satisfy only 32% of its projected demand over thenext 50 years, creating plenty of demand for B. C. product -- asevidence that, once the current storm clears, the outlook is brilliant.
"TheCanadian aggregate exports into the California market business model isstill really in its infancy," said Mr. Leong, who hopes to beginproduction in a year or two. "Ten years from now, I think that anyproducer of aggregates that can put it on large bulk carriers will beat maximum production for a long, long time."
nvanderklippe@nationalpost.com
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