Westshore Terminals Set to Decline Another 70%
Westshore Terminals (WTSHF) got hammered after a shocking press release by Teck (NYSE:TECK) that it is increasing its commitment to a competing terminal. Unfortunately, I think this is only the beginning of a long and deep decline. Ultimately, Westshore may not survive the challenges it faces, making it is a great short idea in my opinion.
Westshore is Canada's busiest coal export terminal. A coal terminal is basically a piece of "unique" real estate. The coal comes in on rail and is loaded onto ships. Defacto you get to operate under a local monopoly, but that enviable position can come under a lot of pressure if your customers start building their own facilities instead.
A terminal is operated with a ton of fixed costs. If a terminal gets to full capacity, it can be a great business that is hard to compete with, but all too often a terminal ends with everyone losing money if business is diverted to another channel. Because of the operating leverage, this puts even more pressure on profitability.
Teck Resources ships about 20 million tons in metallurgical coal volume each year through the Westshore terminal. However, it has been dissatisfied with Westshore's service and is building its own coal terminal in Vancouver - awfully close to Westshore's.
The new terminal is called the Neptune Terminal and will be coming online in the first quarter of 2021. It will have the capacity for throughput of up to 18.5 million tons per annum.
At that same date, Teck's contractual agreement with Westshore Terminals wil lend. From that point, the Teck volume is mostly going to go through Neptune. From yesterday's press release, it is clear that Teck wants to shift all of its business away:
"The agreement runs from January 2021 to December 2027, and increases contracted capacity from 3 million tonnes per annum (Mtpa) to 6 Mtpa with an option for Teck to extend up to 9 Mtpa. This will enable Teck to increase its shipment volumes through the Ridley terminal to provide greater flexibility and improved performance within its overall steelmaking coal supply chain.
This agreement with Ridley Terminals, in combination with upgrades underway at our Neptune Terminal and our recent agreement with CN, will contribute to improved overall performance throughout our steelmaking coal supply chain," said Don Lindsay, President and CEO of Teck. "We are looking forward to building on our strong working relationship with RTI and new principal owners Riverstone-AMCI to safely and efficiently transport our product to customers."
The reason for the change is that Teck has historically not been satisfied with the Westshore service. One major complaint has been that they've polluted Teck's metallurgic coal with lesser-value coal.
Westshore's throughput stands at around 30 million tons of coal per year. Teck is its major customer and is going to leave with its annual 20 million tons in the first quarter of 2021. The clock is on Westshore, as it now has less than 12 months to come up with a solution. Because it is a fixed costs business, Westshore is in major trouble if it can't replace the volume.
If revenue is slashed to a mere $1.50 per share I can't imagine Westshore operating profitably. Maybe it can find other coal companies, but I'm not aware of a lot of investments in the coal space in Canada, and it has to happen now.
To illustrate how bad this is, I've used the GuruFocus discounted cash flow model. The parameters I've put in are a one year decline of 66% in earnings per share. Actual revenue is set to decline by 66% and EPS is likely to do worse, but it's probably best to be conservative. I've put the terminal growth rate at the inflation rate and added $1.50 to the company's fair value for excess cash on its balance sheet.
Currently, the stock is $12.60 (the U.S. ADR that is) and its fair value, as per the DCF model, is potentially as low as $3.85. From here, there's still a 70% decline to come.
In my opinion, the market is ultimately going to figure out how devastating of a loss this is and the stock is going to re-rate downwards quickly. If it can't find some replacement volume, I think it will ultimately goes out of business, or at least undergo a thorough restructuring.
Disclosure: Author is short Westshore Terminals.
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This article first appeared on GuruFocus.
