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Seth Klarman Buys Land Worth $120 Billion for $80 Million!

April 24, 2011 | About:
The title is not a typo!

I found some interesting things going on in Baupost from of all places an environmental group. When you look at Baupost’s 13-Fs you will notice that despite the company having $20 billion under management only about 5% is in domestic stock. Most of the questions where what is Klarman doing with the other $20 billion?

Half of the $20 billion is cash, so that leaves $9 billion that no one knows for sure where it is going. Klarman (my source tells me) owns a lot of foreign stocks and some Real Estate.

Klarman has been buying some expensive potato farms in Ontario, paying $8,000 an acre. It is clearly not a play on Potatoes (Only 1 year worth of demand left in the local reserves), but rather what can be done with the ground.

Here is the history according to http://www.inthehills.ca/back/melancthon/:

Baupost Group, a $14 billion, Boston-based hedge fund, headed by investment guru Seth Klarman. In partnership with Baupost, Lowndes founded Highland in 2006 to develop resources in Melancthon Township. Late that year, after extensive research, Lowndes approached a number of landowners, offering them $8,000 an acre, 30 per cent or so above market value. Lowndes hoped, he says modestly, to get 1,500 acres to run a profitable potato operation.

Lowndes purchased his first 25 acres in Melancthon in November 2006. Within six months he owned 4,400 acres; within a year, 6,500. Today, The Highland Companies owns 7,500 acres in Melancthon and additional lands in Mulmur Township and Norfolk County – 9,500 acres in all.

Now some more recent news from http://www.avcanada.ca/forums2/viewtopic.php?f=49&t=72941:

The Highland Companies in Canada, owned by the Baupost Group Hedge Fund in Boston, have recently filed an application to dig what will be the largest open pit aggregates quarry in Canada right on top of the Niagara Escarpment! Just north of Shelburne, and south of Blue Mountain, Ontario they plan to mine an area that is almost 10 square kilometers to a depth 200 feet below the water table. This land is prime agricultural “Class A” soil situated at the highest point in southern Ontario. Three major watersheds have their headwaters here – the Saugeen, the Nottawasaga and the Grand Rivers – supplying fresh water to well over 1 million Ontario residents.

If successful the operation will run 24/7. Millions of tons of limestone will be extracted and sold for highway gravel or as lime for cement.

To date the companies have assembled 7000 acres (28 sq. km.) under the pretext of running the largest potato farm in Ontario.

According to HighLands website, the land contains over 6 billion tons of the highest qualities in reserve. Various types of institutions need the material, and demand in Ontario alone is close to 200 million tonnes a year, so Baupost would not have to do much shipping. The website states that the land is also valuable because it is right near a road (Road 124), there are minor environmental issues involved, it is surrounded by agriculture and wind farm, and there is no specialty planning zones.

However, environmental groups have claimed that the site of the proposed second largest quarry in North America is a UNESCO Biosphere Reserve.

Costs are estimated to be $140 million a year. The cost of the land purchased is close to $80 million. Klarman is paying a hefty price, and besides the recent announcement about the opening of the quarry (which was only filed on March 7th 211) not much else has been said by Highlands. Klarman likely wants this land due to the supply/demand imbalance for aggregates (limestone). Lime price depends on a variety of factors that makes it tough to get an exact number here. However, assuming an average of $20 per tonne (this is probably low), Klarman paid $80 million for $120billion worth of resources! It will take decades to extract but assuming Baupost gets approval it is hard to see them not making a fortune off of this.

Highlands has filed an application with the Ontario Ministry of Natural Resources to obtain a license to excavate this prime agricultural land into the 2nd largest open mine pit in all of North America, to start quarrying on some of the land they own containing 1 billion tonnes of the lime.

There will be the yearly costs, and there are a lot of environmental groups fighting this. I do not see any mention of royalty costs; only that Baupost will pay $1.2m in taxes a year to the township.

However, this looks like a steal based on the fact that the resources are worth over 1,000 times the purchase price of the land. The court will decide very soon whether the quarry can be built (According to the Highland Companies website, April 26th is “the last day for public objections). Even if Klaman is not allowed to build, it is an absurd risk reward ratio in the equation.

There is no way for the retail investor to coattail this idea even if they want to. However, it will be interesting to see how this plays out, and how much money Klarman will make from it.

I have reached out to the leader of the main environmental group fighting this (http://www.ndact.com) for comment. I have also contacted Baupost, and Highland to hear if they are willing to comment on the issue.

I am hoping both sides will be willing to answer questions on the record.

Disclosure: None

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.3/5 (35 votes)

Comments

augustabound
Augustabound - 3 years ago
Cool. I live about a half hour east of where they are (Newmarket, Ontario).

I've also built custom homes near there also. The environmental groups cry over everything around there. It may take a while to get through the red tape put up by these groups., but it looks like Baupost has time to let things work out.
superguru
Superguru - 3 years ago
"Klarman (my source tells me) owns a lot of foreign stocks"

Very interesting. I expected more debt. Europe or Emerging?

augustabound
Augustabound - 3 years ago
By the way, nice find.
yswolinsky
Yswolinsky - 3 years ago
super-I don't remember I will contact him, I do not want to give out more details about it (publicly) we all know how secretive he is and does not want people spilling the beans. I was also surprised by my friend's comments. I thought it would be more weird type esoteric securities instead of foreign stocks.

Augusta- Thank you, this is not the first time the environmental group has contacted me about Klarman on the same issue so I assume they are on a vendetta (or have a really good reason to oppose it) but I would be willing to hear their side (everyone deserves their fair chance to present their side). Klarman (to my knowledge) for a while was only accepting money from non-profits, so he seems like a nice guy.

BTW I am working more on this story and hope to follow up. I would also like to hear more about how much the lime tonnage is worth, although it seems worth a heck of a lot more than $80m according to my initial research. This story seems really interesting, it could be the investment of our lifetime, if he pulls it off.
batbeer2
Batbeer2 premium member - 3 years ago
Good stuff, thanks !
augustabound
Augustabound - 3 years ago
That's what the environmental groups are usually against. Anything that could affect the ground water there. One of my customers had his well water tested before he applied for his occupancy permit on the home we built him. The results came back close to 99% pure and the township told him they have the most pure water anywhere in North America.

I'm not sure if that's true, but if it is, I know why they're so protective of it.
peteyan
Peteyan - 3 years ago
Update: If you have invested with this hedgefund pull out NOW! The Ontario Gov't is reexamining all the complaints. The Suzuki Foundation found holes in their Proposal/Enviro Study, just as big as the proposed quarry. The cities downstream from the area like Guelph are now fighting it. And it is going to be an election issue.

The story is out how they bought off the local politicians (the Shelburne Mayor sold them insurance and can't vote against them)...so unless Seth decides to actually grow potatoes and he'll lose his money...

adamcz
Adamcz - 3 years ago
He put $80 million out of $20 billion into this, and you're using exclamation points and caps lock to advocate selling because of the risk of loss?

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