The Old Dump and Load Routine

On Monday, I wrote to you about the bedlam I saw at the Vancouver gold conference.

Although the industry has plenty of honest people, gold mining is known as a notorious industry for liars and cheats... but I moved on and forgot about gold for a while. The next stop on my Canadian resource tour was an even dirtier business.

First, we’ll cover why I was even in Canada... and then we’ll discuss a thriving business that serves as a bridge between two regions that desperately need each other.

Canada holds the single greatest hoard of natural resources on the planet. Gold, diamonds, oil, timber... it has them. It’s politically stable. The customers are close. The transport infrastructure is excellent and the global supply and demand picture is as favorable as it’s ever been.

In sum, we expect Canada will rank among the world’s five wealthiest nations – as measured by GDP per capita – within the next 15 years.

Our job is to find the companies that will profit from this movement... which brings me to Westshore Terminals (TSE:WTE.UN).

Westshore operates a simple business: They dump coal from a train, pile it up and then load it back onto a ship.

The company sits at the end of a long spit in the waters just south of Vancouver. With Asia just across the pond, it’s the perfect location for a coal terminal.

The coal comes from a consolidation of mines in the Rocky Mountains called the Elk Valley Coal Partnership. This is high-quality metallurgical coal, used for steel production. Elk Valley produces around 25 million tons per annum - 20% of the world seaborne market.

The coal arrives by train. Five or six trains arrive every day, each carrying 12,500 tons of coal. To remove the coal, they pull the train through a machine called a ‘rotary dumper.’ This machine rotates the coal hoppers upside down, one or two at a time, pouring the coal into a hole in the ground. The train never gets uncoupled.

For me, watching them flip 120-ton railcars was the highlight of the tour!

Next the coal is sorted, blended and formed into mountains on the quayside. Each customer wants a different blend of coal. Six kilometers of high-speed conveyor belts and a collection of gigantic cranes and diggers whip the coal around the site.

This is the real value of Westshore’s service. They match the customers’ needs with the mine output with the schedule of the shipping companies.

Westshore never actually owns the coal, it just gets paid by the mine to handle the shipment. But the price of coal is still a major factor in Westshore’s business because coal price is the major determinant of the contract value between Westshore and the coal pit.

Volume is the other major factor: the greater the volume, the greater the profit. Therefore, strong global demand for steel coupled with high coal prices – a combination we have today - is the perfect situation for Westshore.

When the customer is ready, they send a ship. Asian steel companies like Posco and Nippon Steel are the largest consumers of Canadian coal. Chinese, Brazilian, and European steel companies also buy large shipments. The mine covers the cost of train transportation. The steel company pays for shipping.

Although handling coal is considered plenty dirty, it’s been plenty profitable for Westshore. In 2005, Westshore paid shareholders CDN$1.16 for every share they held. The stock averaged about CDN$13 a share over 2005, which makes Westshore’s 2005 payout the rough equivalent of a 9% annual dividend. There’s little re-investment required, so Westshore returns almost all the profits back to the shareholders.

As an interesting aside, Westshore holds the world record for loading the largest single coal shipment – 239,084 tons on board the Hyundai Giant in May 1987.

The story is quite simple, and there isn’t much more I can add... strong demand for steel... tight supplies of metallurgical coal... giant deposits of coal in Canada... a simple business with a 9% dividend...

If that’s the sort of company you like, then buy Westshore’s stock.

Regards,

Tom Dyson