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‘Dirt cheap’ gravel exporter gains from soft loonie

Polaris has a majority stake in the Orca Quarry, which produces sand and gravel, on the east coast of northern Vancouver Island.


Investors looking to cash in on a recovery in U.S. construction and the falling loonie are watching sand and gravel supplier Polaris Minerals Corp.

Shares of the Vancouver-based company, whose products are shipped to Hawaii and California to make concrete, have soared 18 per cent so far this year and 130 per cent over the past 12 months.

Despite the recent runup in a small-cap stock that some consider speculative, investors are looking at it as a long-term infrastructure play in an industry that's hard to enter, typically because of communities' opposition to quarries in their backyards. The company has a high-quality, long-life quarry on the northeast coast of Vancouver Island, owns terminals in the San Francisco Bay area and is developing a new one at the Port of Long Beach.

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Investors also see Polaris as a currency play, now that the Canadian dollar is sinking against the U.S. dollar. More than 90 per cent of Polaris's sales are in the U.S. and its expenses are largely in Canada. "Costs will be trending down, so that should also give them an edge," says Paradigm Capital analyst David Davidson, one of two analysts who cover the stock, both with "buy" recommendations. Mr. Davidson also cites the U.S. economic recovery, which is expected to boost the company's production and sales, for his recent decision to raise his price target to $3 from $2.40.

With the economic downturn in 2008-09 and the dollar's climb to parity and beyond, Polaris's U.S. sales were more than halved. Its shares dropped from a record high near $15 in late 2007 to around 20 cents near the end of 2011. In 2010, it recorded sales of nearly 1.3 million tons for the entire year, in the aftermath of the recession.

Polaris has been clawing its way back ever since. It hit a 52-week high of $2.50 on the Toronto Stock Exchange in mid-January, days after the company announced record quarterly shipments for the fourth quarter of just over a million tons. "Those things that ailed us are being corrected," says Polaris CEO Herb Wilson, citing the lower loonie and the recovering U.S. construction sector.

Dundee Capital Markets analyst David Charles has a $2.50 price target on the stock. "We believe Polaris is an excellent long-term infrastructure play with an excellent strategic position in an industry with significant barriers to entry," he wrote in a recent note."The company has really turned the corner."

Mr. Charles says the stock "is not cheap anymore" but is a "debt-free growth story." Based on his estimates, its enterprise value – the market value of all its shares plus the company's net debt – in comparison to its earnings before interest, taxes, depreciation and amortization is falling. He said the stock today is trading at an EV/EBITDA of about 30 times, dropping to 16 times next year and 11 times in 2016. Polaris's stock has also outperformed industry giant Martin Marietta Materials Inc. and other aggregate suppliers over the past year.

ABC Funds, the largest holder of Polaris stock with an 8-per-cent stake, has owned the stock since it went public in 2006 and hung on through good times and bad, including buying more on the dips. "It's been a tough grind, but we think for this time in the cycle, they're in a good position to benefit," says portfolio manager Irwin Michael, calling today's price "dirt cheap."

John Stephenson, a portfolio manager with First Asset Investment Management Inc., says the stock is still too risky for his liking. "It's pretty speculative," he says, warning investors about the volatility, given the company's small size.

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