May 2007

Dewatering the Problem
How one state kept its head above water when backlash about water usage threatened the existence of some aggregates operations.

by , Senior Editor

The global demand for freshwater is doubling every 20 years, and at least 1 billion people are not sure each day where their water will come from — or whether they’ll even have any, explained Mike Newman, managing director of the Michigan Aggregates Association at the National Stone, Sand & Gravel Association’s 2007 Annual Convention.

But these water issues aren’t just third-world problems. They’re here in the United States as well — in the Los Angeles, Las Vegas, and Phoenix areas to name a few — and they affect the aggregates industry. Producers all need and use water — they handle large volumes of groundwater through dewatering and other production activities.

However, Newman notes that unlike other industries, the volume of water handled by aggregates producers is easily determined through a review of “the numerous permits and reports submitted to regulators.”

Economics, environmental issues, and social values all play a role in public policy debate on freshwater, Newman says. What’s more, is that water is being viewed as the new “super commodity” by investment banking firms, and it’s being dubbed “the oil market of the future,” he says.

In Michigan, the primary targets of criticism about water usage have been a bottled water plant, aggregate operations in specific county, and agricultural irrigators. When the U.S. Geological Survey released an open file report (No. 03-4312-2002) that was critical of quarry dewatering in a particular area, it began to make things even harder for aggregates producers. With major water restrictions, there was the potential for aggregates operations to be shut down because they are viewed as pumping too much water as a valid threat.

Averting a problem

To avoid this potential threat, the producers took a proactive approach and weighed in on various legislative and regulatory responses. For example, producers helped support Michigan

H. B. 4087, commonly know as a conflict resolution package. It was designed to help settle disputes between small well owners and large well operators who allegedly lower aquifer levels — referred to as “driveway settlement,” Newman explains. The bill also called for onsite evaluation by a registered well drilling contractor to determine validity of claim as well as implementing water use reporting fees for facilities with a capacity to pump more than 100,000 gallons per day. Additionally, the bill created the Groundwater Advisory Council to study sustainability to study Michigan’s groundwater, monitor the annex and compact, and map the groundwater inventory.

This was one of at least three bills (S.B. 289 and S.B. 850 were other recent pieces of legislation) to monitor and dictate water-usage requirements. But aiding in the development of legislation that scrutinizes the very issue about which they are being criticized served as not only a smart step, but also a protective measure.

“This issue is not going to go away, no matter what region in the country you are from,” Newman points out. That’s why, he says, it’s critical to develop a water-users coalition that meets on a regular basis. A coalition is also a good vehicle for media, public relations, and legislative activities, Newman adds.

“An appointed advisory council can be of great value,” he says, adding, “Insist on the use of sound science and the development of accurate and useable data on water resources in your state prior to debating any regulatory or legislative action.”

For a more in-depth report on how water issues are affecting the aggregates industry, watch Aggregates Manager for a future special report.

Final DPM rule upheld after facing intense scrutiny

A three-judge panel from U.S. Court of Appeals for the District of Columbia Circuit upheld the Mine Safety and Health Administration’s (MSHA) final rule in diesel particulate matter (DPM).

The case was upheld because, according to the decision, “MSHA has adequately demonstrated that DPM presents a significant risk to the health and safety of miners.”

The National Stone, Sand & Gravel Association, as well as several other industry organizations, challenged the DPM rule, citing that “MSHA did not have sufficient evidence that DPM presents a risk to miner’s health, that MSHA unreasonably chose to regulate other substances as surrogates for DPM, and that the DPM exposure limits cannot feasibly be achieved by mine operators,” according to the Feb. 9 decision.

Additionally, the petitioners argued that MSHA’s risk assessment was flawed “because the agency failed to consider whether pre-existing limitations on diesel exhaust gasses might also provide adequate protection against exposure to diesel particulate matter,” according to the written decision.

The court, however, said that this argument “ignores the fact that DPM presents health risks independent of the risks posed by diesel exhaust gasses.”

Mergers & Acquisitions

Industry merger and acquisition activity has remained brisk during recent weeks, including the industry-changing combination of Vulcan Materials Co. and Florida Rock Industries Inc. Vulcan reached an agreement on Feb. 19 to acquire Florida Rock in a cash and stock transaction valued at nearly $4.6 billion. The proposed enterprise value represents an approximate 11.4x trailing EBITDA multiple for Florida Rock, and a stock price premium of approximately 45.4 percent, based on four weeks prior to the announcement. The transaction combines two large, well-positioned industry participants to create an entity with almost 14 billion tons of reserves and pro forma aggregates shipments of about 300 million tons. Based on the recent industry consolidation trends, most being led by the large cement companies becoming more vertically integrated, this transaction provides long-term stability and market strength in key growth regions for Vulcan.

Holcim Ltd., the world’s second largest cement producer, announced on Feb. 26 its intent to buy out the remainder of St. Lawrence Cement Group Inc. Holcim plans to offer approximately $500 million for the remaining 21 percent of the business that it does not already own. The proposed price represents a 12-percent premium to the share price of St. Lawrence Cement Group Inc. on the day prior to the announcement. The full integration within Holcim will enable the company to more efficiently market its cement in the North American markets, and in particular move more Canadian cement into the United States.

On March 8, 2007, Lafarge announced the acquisition of Feltes Sand and Gravel, Inc. of Elburn, Ill. Transaction terms and conditions were not disclosed. The acquired operation produces and markets approximately 2.7 million tons of aggregate annually. The acquisition represents Lafarge’s third in the rapidly consolidating Chicago-area market during the past 14 months, and those combined operations now produce and market approximately 11 million tons on an annual basis.

Titan America LLC, the U.S. operation of listed Greek cement and building materials producer Titan Cement, announced on March 23 its acquisition of S&W Ready Mix Concrete Co., a supplier of ready-mixed concrete in the coastal North Carolina and South Carolina markets. The acquired operation has 26 ready-mix plants in key growth locations such as Myrtle Beach, S.C., and Wilmington, N.C. For its most recent fiscal year, S&W generated about $48 million of EBITDA, representing a 4.9x multiple of Titan’s $235 million cash purchase price. The acquisition of S&W further strengthens Titan’s concrete operations in the coastal markets and will provide an opportunity to leverage its cement plant in Roanoke, Va.

 — by Bill Watkins, managing director, National City Capital Markets. Watkins is a contributing editor and may be reached at 216-222-7134 or William.Watkins@nationalcity.com.

Reprinted from Aggregates Manager Magazine
May 2007