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Polaris Minerals


doc75
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I noticed today that an offer has been made for Baffinland Iron Mines (BIM.TO)... and it got me thinking about a small position I hold in Polaris Minerals. 

 

Does anyone here follow Polaris (PLS.TO)?

 

It's a west coast aggregate supplier, started in 2006 with much giddyness.  The game is to ship construction aggregate from coastal British Columbia down to markets in California.  Polaris has developed a very high quality quarry and dock, fully permitted to ship over 6 million tonnes per year. The quarry has well over 120 million tonnes of resource.  They also have interests in other, as-yet-undeveloped quarries with enormous resource.  They have a solid shipping system for delivering these materials to coastal Californian markets.

 

The business plan was greeted with enthusiasm back in 2006/7/8 and the stock commanded a hefty valuation in its growth phase.  And we all know what then happened to the California market.  Apparently aggregate sales are down 40% from 2007 levels.

 

Management expected a turnaround in demand in 2010 because of infrastructure spending.  But infrastructure money hasn't yet percolated from the design phase to the construction phase, and Polaris has found itself in a bit of a tight situation.

 

The shares have traded down below $1.  This appears to me to be WELL below the intrinsic value of the company, and it's hard to imagine it can stay at these levels for long without being scooped up.

 

As usual, any thoughts from smarter people are appreciated!

 

FYI:  Irwin Michael and his ABC funds hold a significant position, bought at much higher levels. 

 

------------

 

(Incidentally, BIM only reminded me of this because of the takeover offer.  I had eyed BIM as a speculation when it reached very low levels but never pulled the trigger.  Don't know if anyone here followed their story. They needed a huge amount of capital to move forward on a high quality iron mine in northern Canada.  A number of major steel players were interested, which gave the story some credibility.)

 

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I noticed today that an offer has been made for Baffinland Iron Mines (BIM.TO)... and it got me thinking about a small position I hold in Polaris Minerals. 

 

Does anyone here follow Polaris (PLS.TO)?

 

It's a west coast aggregate supplier, started in 2006 with much giddyness.  The game is to ship construction aggregate from coastal British Columbia down to markets in California.  Polaris has developed a very high quality quarry and dock, fully permitted to ship over 6 million tonnes per year. The quarry has well over 120 million tonnes of resource.  They also have interests in other, as-yet-undeveloped quarries with enormous resource.  They have a solid shipping system for delivering these materials to coastal Californian markets.

 

The business plan was greeted with enthusiasm back in 2006/7/8 and the stock commanded a hefty valuation in its growth phase.  And we all know what then happened to the California market.  Apparently aggregate sales are down 40% from 2007 levels.

 

Management expected a turnaround in demand in 2010 because of infrastructure spending.  But infrastructure money hasn't yet percolated from the design phase to the construction phase, and Polaris has found itself in a bit of a tight situation.

 

The shares have traded down below $1.  This appears to me to be WELL below the intrinsic value of the company, and it's hard to imagine it can stay at these levels for long without being scooped up.

 

As usual, any thoughts from smarter people are appreciated!

 

FYI:  Irwin Michael and his ABC funds hold a significant position, bought at much higher levels. 

 

------------

 

(Incidentally, BIM only reminded me of this because of the takeover offer.  I had eyed BIM as a speculation when it reached very low levels but never pulled the trigger.  Don't know if anyone here followed their story. They needed a huge amount of capital to move forward on a high quality iron mine in northern Canada.  A number of major steel players were interested, which gave the story some credibility.)

 

 

Hi Doc75,

 

Thanks for the idea. I like the numbers here but was just curious why the management has not bought any meaningful amount of shares on the open market. Insider buying is an absolute must before I pull the trigger.

 

And also you said the company is trading below its intrinsic value. Can you share a little about this?

 

Thanks in advance.

 

Fan

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Just on a pure asset basis, Polaris certainly looks cheap.  But, there are a couple things that make me wonder about current mgmt.  First, the share dilution has been crazy (from 30 million to 53 million since 2006).  When will that end?  Second, the Long Beach expansion "strategy" seems a bit muddled.  First they bought a location for $15 million, then changed their minds to lease a property and sell out the land they just bought.  Even with the lease they need to put $5 million into capital improvements at the new location.  It just seems like they didn't really know what they were doing there.  I guess I'm not sure their expansion plans outside of the S.F. Bay area will come off as smooth as they're portraying it.  In a take-over scenario, that may not matter as a new owner would hopefully have a plan for that.

 

As a speculation on the assets and a turn in the West Coast construction market, it looks a little appealing.  A take-over would probably be a best case scenario.

 

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  • 4 weeks later...

Just on a pure asset basis, Polaris certainly looks cheap.  But, there are a couple things that make me wonder about current mgmt.  First, the share dilution has been crazy (from 30 million to 53 million since 2006).  When will that end?  Second, the Long Beach expansion "strategy" seems a bit muddled.  First they bought a location for $15 million, then changed their minds to lease a property and sell out the land they just bought.  Even with the lease they need to put $5 million into capital improvements at the new location.  It just seems like they didn't really know what they were doing there.  I guess I'm not sure their expansion plans outside of the S.F. Bay area will come off as smooth as they're portraying it.  In a take-over scenario, that may not matter as a new owner would hopefully have a plan for that.

 

As a speculation on the assets and a turn in the West Coast construction market, it looks a little appealing.  A take-over would probably be a best case scenario.

 

 

Fan & Zarley,

 

Sorry for the delayed response.  My research on Polaris was primarily in the form of various online resources.  My plan was to put together some links but it seems I've lost the bookmarks.

 

My assessment of intrinsic value was based purely on a quick survey of the costs associated with permitting and bringing a quarry into operation. I'm sorry I don't have specific numbers anymore for you to compare with, but the gist is that permitting is generally contentions for environmental & "neighbourly" issues and quarry development costs are nontrivial.   

 

At current market price, Polaris' EV is roughly $70 million.  That's pretty a pretty cheap price to pay for (1) a quarry that is permitted to produce over 6 million tonnes/year of high quality aggregate, (2) a loading system & tidewater port for Panamax vessels, and (3) a new receiving terminal in San Fran (Richmond). 

 

So here are the positives, as I see them:

 

- As Zarley said, Polaris seems quite cheap on a pure asset basis.  This was particularly so when it was trading at < 0.90.  It's up over 20% since then, but is still cheap.

 

- Even with relatively high fuel prices, Polaris can ship a vessel full of aggregate 1000 miles at about the same cost per tonne as trucking it 25 miles.  The business plan is to have Polaris terminals supply large markets like San Fran, L.A, San Diego, where it is very costly to truck in aggregate from domestic (Californian) producers.  If/when the US west coast construction market comes alive (in the year 2087??), well-documented aggregate supply constraints will return to the fore, and Polaris' business plan is very sensible. 

 

- Polaris has standing supply contracts with Cemex & Shamrock Minerals.  Cemex is of course a huge player (with its own problems, admittedly), and is actually a JV partner with Polaris in their L.A. operations.  Shamrock is a big player in the San Fran construction supply market.  These supply arrangements allow for fuel surcharges to be passed on from Polaris to their customers on a month-by-month basis.

 

- The aggregate that Polaris supplies is particularly suitable for high-quality ready-mix concrete... which makes it ideal for large-scale infrastructure construction in earthquake prone areas.  So Polaris' fortunes are more closely tied to infrastructure/commercial construction as compared to residential.

 

And the negatives:

 

- They live & die by volumes.  Management predicted volumes would rise back in 2007 and entered long-term shipping contracts with CSL.  The problem is that they're on the hook for large deadfreight charges if they don't ship certain minimum tonnages... and those minima are pretty big compared to today's volumes.  The minimum volumes increase each year over the life of the contract, all the way into 2020 (as I recall).  So their success is highly dependent on Californian construction demand.  Not an enviable position to be in at this time.

 

- Management did renegotiate the shipping contracts earlier this year. They payed a substantial charge to do so (6mm). This is probably money well spent, but even under the new contract they're not going to meet the minimum shipments for this year.  It seems that most observers were expecting stimulus money to crank up infrastructure spending, but between long lead times and California's budgetary woes, the stimulus money hasn't trickled down in the second half of 2010 the way people expected. 

 

- I believe Polaris is cash-even at around 2 million tonnes / year.  They almost certainly won't hit this target this year, so they're bleeding cash.  They are definitely in a liquidity squeeze.  The sale of a Long Beach port will put some much needed cash in the treasury, but this is not expected to be completed until Q1/11.  Another nasty equity financing (ie. dilution) may be in the cards.

 

Addressing Zarley's comments:

 

- Polaris has relatively little debt, so borrowing more against their assets may be possible.  However, one can imagine that bankers aren't looking to hand out cheap debt to a company whose cash flows are questionable in the near term.

 

- On the last Q conference call, an angry investor took CEO Herb Wilson to the woodshed over the last equity financing and over the company's continued expansion even while they were losing money.  Wilson didn't address the financing, but he did say that they are pushing for expansion into L.A. because *volume* is the key.  The sales price for aggregate has held up.  Polaris just needs to ship more of it.  They currently only serve the San Fran area and crave larger markets.  But, realistically, they won't be shipping to LA before 2012.

 

- I think they did a smart thing with the "change of port" in LA.  The new property was not available when the first one was purchased... and the first one was purchased while economic fortunes in L.A. were much rosier.  (That is, it probably seemed like a great idea at the time.)  Anyway, the new property is already permitted as an aggregate depot (3 mm tonnes/year) so it is a natural choice and should cost much less in the end.  It appears as though they won't be losing a lot of money on the initial port purchase. A sale is already negotiated from what I can tell. 

 

All said, at this point I agree that it's a speculation on asset value.  I put very little faith in the West Coast market turning soon, so I agree that a takeover is the best case scenario at the moment.

 

Disclosure:  I took profits after the run-up from 0.85 to 1.15.  I still hold a couple thousand shares as an asset play, but I fully expect some more bad news before good news.

 

 

 

 

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Doc,

 

I haven't followed up on Polaris since my earlier post, but I can't say I really disagree with your assessment.  Given the assets they own and their business relationships (shamrock and cemex) Polaris really does look cheap.  But, absent a buyout offer, the catalyst for improvement in their position really is heavy construction on the west coast.  That will certainly happen eventually, but when? 

 

I guess if you look at potential downside vs. potential upside, even if it takes 5 years for the WC construction market to turn up, Polaris may be worth the risk at current prices (~$1). 

 

It's going into my "keep looking at it file" for the time being.

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Interesting idea in an untimely sector (aggregates).  Do you have any idea if the sale proceeds from the land $12 to 15 million will be enough to get to FCF break-even as managemnet has stated?  How much do the projects have to be delayed before there is re-financing issue?  Given the current run-rate of $1.1 m per month of FCF losses it looks to be 12Qs with no cap-ex.  It appears they have a plan (see last conf call).  The question is how viable is it?  Thx.

 

Packer

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  • 3 weeks later...

Polaris has addressed their current liquidity concerns with minimal dilution.  The $14M net for the Pier B land might seem terrible, since the selling price is $22.75M, but a good chunk of that goes to Cemex, the partner on the Pier B purchase.

 

Speaking of Cemex... Their numbers were pretty nasty, and I expect Polaris to release some pretty ugly figures very soon.  They'll get hammered by dead freight charges from CSL unless they magically shipped a lot more volume in Q3.  It may provide an opportunity to pick up some good assets for a nice price.

 

When originally signed, the CSL shipping contract felt like a great win for the company.  But now it's stopping them from basically going into hibernation with minimal burn during the downturn. 

 

---------------------------------------------

 

POLARIS STRENGTHENS CASH RESERVES AND ADVANCES LAND SALE

 

 

VANCOUVER, Nov. 9 /PRNewswire-FirstCall/ - Polaris Minerals Corporation (TSX:PLS) today announced that it has secured a Cnd$5 million, non-revolving secured term loan to be used for working capital and general corporate purposes.  The Company is also pleased to announce that its subsidiary, Cemera Long Beach, LLC, has now entered into a Purchase and Sale Agreement for the sale of its freehold land at Pier B, within the Port of Long Beach, at a price of US$22.75 million.

The one year, second priority, term loan, provided by a private syndicate of lenders, has a 15% coupon.  The lenders have a one-time option to require repayment of the loan, when the Company sells the Pier B land, at the face value of the note plus accrued interest.  The Company can repay the loan at any time at the face value of the note plus accrued interest with a 5% interest penalty.  The Company will issue 625,000 common share purchase warrants to the lenders, exercisable at a price of $1.50 per share for a period of five years.

The Purchase and Sale Agreement of the Pier B land is subject to the satisfactory completion of due diligence by the purchaser and closing is anticipated by the end of January 2011.  Net proceeds to the Company, after selling costs, are expected to be approximately US$14.0 million of which US$1 million will be used to reduce the outstanding debt with CSL.

Herb Wilson, President & CEO of Polaris, said: "The one year term loan addresses the Company's liquidity while we await the completion of the Pier B land sale for which we have high expectations. We are also continuing with negotiations in respect of the promissory note held by the Company that would further improve the cash position. These steps should provide a significant measure of stability to our situation while we await the much anticipated recovery in the construction markets".

 

Polaris Minerals Corporation is exclusively focused on the development of quarries and the production of construction aggregates in British Columbia for marine transport to urban markets on the Pacific coasts of North America to meet growing local supply deficits. In 2007, Polaris began shipping sand and gravel from the Orca Quarry to San Francisco Bay, Vancouver and Hawaii.

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Q3 results were ugly as expected, but it seems the market likes knowing that they're liquid enough to keep the lights on for another year.

 

Up 43% today on relatively low volume.  I sold out.  I hope/assume I can get back in lower.  Usually I hold on these types of pops and then curse myself for it, so of course this time I'm sure I'll curse myself for selling... :)

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  • 6 years later...

I see it's been nearly 7 years since this thread has been active.

 

I've been watching Polaris (PLS.TO) for years as an asset story.  I've been in and out a couple times, fortunately with lucky timing.  I'm updating today because there have been some nice developments and an opportunity that may be of interest. 

 

In late August, Vulcan Materials (VMC) made a buyout offer at $2.79 per share, a very healthy premium over the $0.95 or so trading price.  The shares traded in the $2.71--2.73 range after the buyout, but the sale agreement allowed for superior offer and for Vulcan to match any such offer.  So I picked up some more because I was building cash anyway and I viewed this as a (nearly) risk-free way to have a liquid piggy bank that paid nominal tax-advantaged interest with material upside potential should another bidder come along.

 

Last week, I woke up to a nice surprise:  An unnamed buyer came in with a higher offer at $3.40 per share.  Polaris shares then traded in the $3.60-3.70 range awaiting Vulcan to match.  I sold half of my position because I felt the greed monster taking over.

 

Today Polaris announced that Vulcan didn't match, and that they have entered an agreement with US Concrete (USCR) at $3.40/share.  Shares traded down to $3.35 on large volume.  But the agreement with USCR also allows for superior offers. Vulcan is 10x larger than USCR and may themselves come back with a counteroffer now that they know the identity of the other buyer.  I bought what I had sold plus a little more.

 

The spread is tiny, but if you're Canadian and are looking to park some cash then this offers a better after-tax return than any short-term risk-free fixed income I know of... and there's possible (albeit unlikely) material upside.

 

 

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Well done. I was close to buying this before the second offer appeared as the spread was reasonably juicy but unfortunately I never pulled the trigger. At this point in time I think it is very unlikely that Vulcan comes back with a higher offer (if they still wanted to buy this I'd say they would use their right to match in a large % of cases?) but still not the worst idea in the world.

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Well done. I was close to buying this before the second offer appeared as the spread was reasonably juicy but unfortunately I never pulled the trigger. At this point in time I think it is very unlikely that Vulcan comes back with a higher offer (if they still wanted to buy this I'd say they would use their right to match in a large % of cases?) but still not the worst idea in the world.

 

Agreed. Given their relative sizes and the market dynamics on the west coast, it seems very strange Vulcan is going to let USCR take this. But after posting here I read Vulcan's PR on the situation and it certainly implies they're moving on. 

 

I'm sticking with it as a place to park some cash.

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