As Global Warming Melts the Arctic, Who Will Build Canada's $50 Billion New Navy?

With 152,100 miles of seacoast to defend -- and that coast growing by the day -- Canada needs a bigger navy.

Jun 29, 2014 at 4:45PM

Blessed with ample landmass, and one of the craggier coastlines found on this planet, Canada boasts the longest coastline of any nation on Earth -- 152,100 miles long, as the drunken crow flies. That's a devilish amount of water-border to defend. And as global warming continues to melt the Arctic, that coastline is only getting longer.

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Canada's Iroquois-class destroyers help to keep the Arctic sea lanes safe -- but with only three of them in the fleet, they're getting a bit stretched. Photo: Wikimedia Commons.

This all makes for quite a dilemma for the Canadian government, and the mere 34.4 million taxpayers who support it. This month, though, Canada committed to spending what it needs to in order to defend its borders, announcing a program to invest up to CAD$50 billion (that's about $48 billion in American money, or $1,395 per man, woman, and tiny Canadian) to build up the strength of its Navy and Coast Guard.

Canada? Oh! Canada!
Down here south of the border, we don't ordinarily think of the Canucks as a particularly militaristic nation. But $48 billion is a sizable chunk of change to spend on defense, even from the perspective of the U.S. defense market. As such, Canada's plan to build 28 warships, and 116 smaller seagoing vessels, over the next 20 years is raising some eyebrows in America.

According to DefenseNews.com, two Canadian shipyards, Irving Shipbuilding of Halifax and the Vancouver Shipyards/Seaspan Marine of Vancouver have been chosen to perform the bulk of the construction work. But sensing chum in the water, foreign defense contractors are swarming Canada for their share of the loot.

French shipbuilder DCNS and Britain's Babcock International have already expressed interest in capturing some of the Canadian work. Franco-German defense conglomerate Airbus (NASDAQOTH:EADSY) and Germany's ThyssenKrupp also number among the interested parties.

They may have to get in line, however. America's General Dynamics (NYSE:GD) is already a close partner of Canadian shipbuilder Irving. Defense contractors L-3 Communications (NYSE:LLL) and Lockheed Martin (NYSE:LMT) own a piece of a Canadian contract to design new Arctic/Offshore Patrol Ships. Meanwhile, civilian ship specialist Seaspan Corporation (NYSE:SSW) has already won a contract to build a Polar-class icebreaker for the Canadian Coast Guard.

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Canadian medium icebreaker CCGS Henry Larsen will soon get some help breaking the ice. Photo: Wikimedia Commons.

What it means for investors
Their interest is entirely understandable. This is a really big deal for investors in America's defense contractors. Faced with increasing competition from a growing Russian Navy presence in the Arctic, Canada's plan to build 28 new large warships implies close to a 50% increase in the size of the Canadian fleet, which currently boasts only 15 warships and four submarines (plus an assortment of support ships, minesweepers, and training vessels), over the next 20 years.

Which American companies will win a piece of the action? Which ones should investors be looking at? Certainly, you should start with the four U.S.-based firms named above, all of which already boast significant Canadian business. Historically, Canada's Navy vessels have been mostly homegrown, with Iroquois-class destroyers and Halifax-class frigates, for example, all being built at shipyards in Quebec and New Brunswick. But the fact that the U.S. firms already have contracts in hand will surely give them a leg up on new awards as they are parceled out over the next few years.

If I had to pick just one single stock to focus on, though, I'd say General Dynamics probably will be the most likely winner. The company's history of shipbuilding for the U.S. Navy gives General D the expertise that Canada will be looking for as it builds out its fleet over the coming decades. General Dynamics' "in" with Irving Shipbuilding should help as well. Topping it all off, the company is building a nice reputation as one of Canada's most trusted military suppliers, as evidenced by it recently getting tapped to build thousands of new Canadian light armored vehicles for sale to Saudi Arabia.

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GDLS's LAV-25, on patrol. Photo: US Marine Corps

Canada's Ministry of Foreign Affairs, Trade, and Development called that deal "historic," boasting that General Dynamics' work would create "more than 3,000 jobs" for Canadians, "benefiting more than 500 local Canadian firms," and bringing some $13 billion in revenues into the country. If that didn't win General Dynamics some good will in Ottawa, I don't know what will.

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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, L-3 Communications Holdings, Lockheed Martin, and Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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