Sunday, October 12, 2014

Update on Ceres Global Ag Corp: Building The Northgate Commodity Logistics Hub $CRP

Press release:

"Ceres Global Ag Corp. (TSX: CRP) announces that it has received equity and debt financing proposals to advance the construction and development of the Northgate Commodity Logistics Centre. The major aspects of the proposals include: 1. an offering of rights to purchase common shares for gross proceeds of C$70 million. VN Capital Fund C, LP, a limited partnership controlled by the two principals of VN Capital Management, LLC, James Vanasek and Patrick Donnell Noone, and funds managed on behalf of Whitebox Advisors, LLC, have announced their intention to fully backstop the rights offering."
Ceres is up 40% since it was mentioned here in December 2011. Here's the current business description:
"a Grain Storage, Handling and Merchandising unit, anchored by its 100% ownership of Riverland Ag Corp., and a Commodity Logistics unit, containing its 25% interest in Stewart Southern Railway Inc. and its development of the Northgate, SK Commodity Logistics Centre.

Riverland Ag Corp. is a collection of nine (9) grain storage and handling assets in Minnesota, New York, and Ontario having aggregate storage capacity of approximately 47 million bushels. Riverland Ag also manages two facilities in Wyoming on behalf of its customer-owner. Stewart Southern Railway Inc. is a short-line railway with a range of 130 kilometres that operates in South-eastern Saskatchewan. The Northgate Commodity Logistics Centre is a proposed $96 million grain, oil and oilfield supplies transloading site being developed in conjunction with Riverland Ag and several potential energy company partners, connected to BNSF Railway."
The way you make money in grain storage is to buy grain, store it in your elevators, and sell it forward. In order to be profitable, that strategy requires the futures market to be in contango: future prices that are higher than the spot price. And in order for the market to be in contango, there needs to be a glut of the commodity. Basically, the grain storage facilities get paid the most when there is a lot of commodity to store, which makes sense.

When we wrote the 2011 post, corn and hard red spring wheat were both in backwardation - future prices lower than spot prices. That has changed and now corn and wheat are in contango. Dec 15 corn is 14% more expensive than Dec 14 and the wheat is 10% more expensive. There ought to be some money in storage now.

I don't know much about the grain storage business, but Ceres has 48mm bushels of capacity. I would think the economics are that you could buy and store say $160mm worth of corn and sell it a year later for $183mm, for $23 million in profit minus financing costs. But in their investor presentation, their 2014 EBITDA projection for the Riverland segment is $2.6mm. Of course, it's only recently developed that grains are in contango again.

The Stewart Southern Railway is a Bakken play. They own 25% of it, it does 40 railcars a day full of oil, $5.8mm annual EBITDA. Ceres' original investment in the SSR in December 2010 was $1.7 million for its 25% interest. So they picked a very high rate of return project once before.

Neither the SSR nor the Riverland segment seem like that much earnings power for a company with a $100 million market cap. So what do VN Capital and Whitebox see here? Maybe it's the company's Northgate project,
"We are in the process of constructing a new commodity logistics centre on 1,300 acres of land, located on the border between Northgate SK and Northgate ND, effectively linking Saskatchewan’s resources to the U.S. Midwest. The Northgate Commodity Logistics Centre is designed to utilize high-efficiency rail loops, capable of handling unit trains of up to 140 railcars. The site will initially contain a grain handling and shipping facility, followed by the construction of an oil and natural gas supply logistics centre to facilitate exports from Saskatchewan’s and Western Canada’s energy sector. A frac sand, pipe and cement unloading centre will be added to bring these products in from the United States to service Western Canada’s energy industry."
This could be interesting. Here's a map of where the Northgate project will go:

That looks like a good place for a rail link. Here's what they say about the cost:
"an additional investment of approximately $112 million over the next 3 – 5 years, is required for NCLC to reach full capacity including a 2.2 million bushel grain elevator, 7 2 ,000 barrels per day of oil capacity and 29,000 gallon per day in natural gas liquids capacity. Within th is budget, approximately $35 - 40 million is required to complete the first phase of the project which would enable the movement of grain, oil and natural gas liquids."
In the investor presentation, management thinks that the Northgate grain operations could generate $3.8 million in EBIT and the oil and NGLs over $20 million in EBIT.

Here is what VN Capital said about Ceres in their investor letter,
"Formerly an agriculture sector closed-end fund, Ceres is now a fully-fledged operating company with grain elevators and storage and processing facilities in the US and Canada. Last quarter we said that we would likely have more to say in 2014 regarding our investment in Ceres. We certainly do. In one fell swoop in June, we purchased 7% of the entire company. Like any other investment we make, this investment is grounded in fundamentals and is based on the opportunity to realize long term value. This situation, however, is different in that it puts us in a position where we, as the largest owner, can contribute meaningfully to the direction and pace of developments at the company, and we have wasted no time. After many years of incoherence, mismanagement and, most importantly, a lack of vision, Ceres is now moving ahead aggressively to resurrect its legacy grain business as well as build out its greenfield Northgate Commodity Logistics Hub on the North Dakota/Saskatchewan border. This last project is an enormous opportunity, the likes of which is not normally available to an investment vehicle such as the Partnership, which is why we have been aggressive in devoting capital as well as time and energy to Ceres. We have an exceptionally talented Board of Directors that is up to the task, and, although a lot of work remains to be done, we expect that Ceres will turn a corner at some point to become a meaningful contributor to the Partnership’s future returns. Our holdings of Ceres represent 11.1% of the Partnership’s assets."
They also discussed it in Value Investor Insight (this was in 2012, before some of the recent significant changes to the business,
"The backstory here is that Ceres was formed in late 2007 by Front Street Capital to invest in the then-hot agricultural commodity boom. Within a year those markets crashed as the recession hit and management shifted focus to hard assets with the purchase of a dozen privately held grain elevators from a Minnesota-based hedge fund manager, Whitebox Advisors. In 2011, Ceres announced it was going to run off its investment portfolio and reinvest the cash into similar operating assets. As we studied grain elevators, we concluded the business was similar to that of the cement business, where we’ve invested with some success before. There are high fixed-cost assets, with a good that is fairly low in value but bulky and expensive to transport. That allows cement companies to have natural monopolies near their plants because it’s a lot cheaper to buy cement from the guy who’s 10 miles away than 200 miles away. The same thing applies with grain elevators, but kind of in reverse. If you’re a farmer, it’s a lot cheaper and easier to transport your grain to the elevator that is very close than one that’s far away. In these situations it comes down to what you pay for the fixed assets – the lower the price, the higher your return. In Ceres’ case, we believe we were able to buy those fixed assets for free.

The current market cap is around C$83 million. Using year-end March numbers, reflecting a full harvest season, Ceres had around C$40 million in cash and run-off investments. It owned C$160 million worth of grain in its elevators, against which it had C$80 million of debt. At the fund level there was also another C$40 million in debt. So for less than C$5 million at today’s price, you’re getting the grain-elevator assets and the profits they generate. It recent years those profits have been as high as C$12 million, with an average of around C$8 million. Discount that average annuity at 10%, and that’s C$80 million in value right there.

One significant thing happened in the third quarter of this year, which is that the Canadian Wheat Board officially lost its monopoly to purchase Canadian wheat. That opens up a significant new base of potential customers for Ceres’s assets, many of which are located in the U.S near the Canadian border. The business will continue to fluctuate somewhat based on weather and crop yields, but the new demand should have a positive long-term impact on both capacity and pricing. Another upside we see here is that as the non-elevator portfolio is sold off, there will be no need for Ceres to maintain its closed-end fund structure. Savings related to that could add another C$2 million or so annually to the bottom line."
The company looks worth keeping an eye on.


bjdubbs said...

Why not use the working capital currently sitting in the grain elevators in order to fund the logistics hub? If the elevators are so valuable, then they're valuable to rent out, not to fill with your own inventory. Or they could sell the SSR to fund the logistics hub. It looks like VN/Whitebox just wanted a larger investment.

Anonymous said...

You should buy your own grain elevator....located in "beautiful SW Missouri"

CP said...

That's an interesting question about the working capital. The grain is financed with cheap bank loans though - probably couldn't use to build the hub.

Selling the SSR doesn't make sense really either, since the purpose of their project is really to connect the BNSF to the CP.

But I think you may be right about VN/Whitebox. The VN guys recently did a PIPE with another one of their companies.

CP said...

$50k for a grain elevator!

Maybe it's like the ship in Shipping Man?

bjdubbs said...

Grain inventories and cash add up to $100M, bank debt $41M. So there's some capital tied up in the grain inventory. Maybe it's a wise strategy to pursue both (elevators and logistics hub) but there's enough cash to build the hub without selling shares to VN/Whitebox. And SSR is not at all strategic re: Northgate. In the same general area but as I understand it, Northgate will never connect to anything other than BNSF. The oil and grains will arrive at Northgate via truck.

That's at least the answer I got from this train forum (I asked under the name bradgil, though I don't remember choosing the alias - must be named after Brad Gilbert.)

"BNSF is establishing the terminal to compete for the grain and oil traffic from the surrounding region in Canada. The south end of the terminal is at the border where the still surviving BNSF trackage remains. CN would see little advantage in rebuilding to connect since they already have other suitable long haul routes and won't want to see any of their traffic syphoned off by the BNSF."

CP said...

Ah, so you've been following this much more than I have.

Worth quoting from your link:


You have to understand that the definitions of short- and long-haul trucking are very different in Saskatchewan. This is due to the very low population density and the surprisingly good road network helped by the flatness of the terrain and low yearly rainfall totals.

The Canadian portion of the Bakken oil field probably wouldn't extend more than a 100 miles around Northgate, putting such moves into the short-haul category. Truckers could likely make two round trips a day, including loading and unloading. When it comes to trucking grain, transiting distances akin to crossing smaller US states is pretty routine.

In his first book, Lee Iaccocca former President of Chrysler Corporation, tells how up until the 1980's all of the big three automakers used to buy back Saskatchewan traveling salesman's cars after one year for study purposes, because these fellows could normally put a 100,000 miles a year on their vehicles. This was before computer simulated testing and such knowledge enabled all three builders to fight off import cars for years, because foreign manufacturers could not come close to building a vehicle that could do that. Nissan(Datsun) and Toyota finally put that belief to rest.

There is a very good possibility that BNSF should have success with this project."

Leave it to railfans!!

CP said...

Anything new on this?

The stock had been tanking but suddenly rebounded:

CP said...