Fortune had an interesting story about Seth Klarman’s Baupost Group today. The article is not a typical Klarman article about the man being an investment genius or a new investment he made. It is about a contraverisal quarry that Baupost Group has gotten involved with in Ontario. Our genius writer. Kim Palacios has written several (very popular articles) on the topic, which can be found here. She also was invited to speak on the radio twice about the topic.
Most people do not know about the quarry, but it would be the second largest one in North America.
Klarman’s Baupost has a 16% stake in Highlands company. We think that Baupost owns a much larger stake than that. Klarman has set up more companies in other areas similiar to Highlands (more details to follow in future article).
Clint Carlson's Carlson Capital Double Black Diamond fund returned 3.34% in August net of fees. Following this performance, the fund is up 8.82% year-to-date net, according to a copy of the firm's August investor update, which ValueWalk has been able to review. On a gross basis, the Double Black Diamond fund added 4.55% in August Read More
Either way, Highlands owns land containing 6 billion tonnes of lime. The company bought the land stating its intention to farm Potatoes. Klarman is a shrewd investor and we doubt he sees potato farming as a very profitable venture, although the article does note a local Potato farmer “didn’t lose a single potato from his crop.”
However 6 billion tonnes of Lime is worth $60 billion, which would be more up the alley of an investor like Seth Klarman. . Highlands has applied for zoning to drill on land holding one billion tonnes of Lime.
Klarman would not comment on the quarry, however, the article notes the following statement was released from a Baupost Spokesperson (likely Elaine Mann):
“Baupost’s investment in the Highland Cos. is consistent with our long-term, value-oriented strategy,” the statement reads. “We take our role as a responsible investor seriously.” It goes on to say that Baupost is confident that Highland will proceed in a way that respects the community and environment.
What is interesting is that Baupost has an official policy not to comment on investments. The only time that we know when Baupost broke their silence, was when a Bank of America Lawyer stated that the Hedge Fund was Walnut Group, the fund admitted it in a public statement. However as we have noted in recent articles, this project is attracting wide oppostion from local farmers. We therefore think the pressure is heating up on Baupost as a result of these efforts by local residents.
The article also does not note the possible losses on the investment, assuming that Highlands even gets zoning approval. In a recent article we noted:
The production volume is so much smaller than anticipated and road for the Highland quarry is becoming so long that the numerator (annual revenues from aggregate production) will be smaller, the divisor(the revenue-earning/payback period) larger and the quotient (annual revenues), therefore, much smaller. This means a longer overall investment payback period, and does not accurately predict whether the project will be able to go online with timing advantageous to the Ontario aggregate industry growth window.
And the following as well:
Though the proposal references 2,316 acres in mega-quarry land, Highland clarified that operations would ramp-up slowly. Further, maximum extraction would take place only on 300 acres at a time and extraction would take place only 270 days a year. Messages underscoring gradual installation and smaller-scale operations were mentioned to mollify local opponents. Yet, downsized production may be of little appeal to investors.
For one, investors want returns to arrive as robustly, and as early, as possible. A slow ramp-up means delayed revenues, and a 300-acre limit means less inventory to supply market demand; and Highland executives indicated that the largest opportunities are short-term. Referencing the “State of the Aggregate Resource in Ontario Study”, conducted in 2010 with the participation of “the Ministry of Natural Resources, the Niagara Escarpment Commission, Gravel Watch Ontario, and members of the scientific and planning communities,” demand will increase by 13% between 2011 and 2030. That doesn’t give Highland much time to get a mega-quarry project approved, built, ramped-up, and operating at full steam.
A few months ago Seth Klarman stated in an interview with Charlie Rose that he wanted to devote his life to philantrophy. Currently he has gained the ire of the entire community in the region. We can completely understand why the local residents oppose the quarry. No one would want a nigra falls pit in their backyard. In this case there would be no nice tourist attractions; just lots of trucks, noise and possible pollution to the water supply.
The stated investment on the quarry is $80 million. However the costs surely have risen as residents have been fighting tooth and nail to prevent a permit for drilling. While the payoff might be higher than the cost, this could be a phyrric victory. Moreover, it is now increasingly likely that Klarman will lose a lot of his well earned good reputation, and could even lose money on this investment.