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 [www.avcanada.ca]:
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.
Also check out:
- Seth Klarman Undervalued Stocks
- Seth Klarman Top Growth Companies
- Seth Klarman High Yield stocks, and
- Stocks that Seth Klarman keeps buying