Birch Mountain Investors Blanch
By
Toby Shute
August 20, 2007
|
Well, I blew it. The story of Birch Mountain (AMEX: BMD) is a compelling one, and I took fhe story more or less at face value when I presented the Canadian limestone miner as a promising investment back in June. Now that the stock has been unceremoniously cut in half, it might be a little late to be reassessing the firm's prospects. But, as this lapse in judgment on my part reminds me, an investment education never stops.
Birch Mountain reported its second-quarter results on Tuesday, and they were fittingly rocky. The firm is ramping up production at its Muskeg Valley Quarry, and costs in this early stage are running very high. Output rose impressively -- in June alone, the company produced more than 15 times as much as in the entire first quarter. Unfortunately, the expenses associated with this ramp-up are running far too high to turn a profit. I'm not just talking about accounting fictions here -- the company reversed course from last quarter's positive cash flow and burned several million dollars of its limited cash.
Perhaps in the grand scheme of things, this doesn't seem like such a big deal. After all, companies like Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), Marathon Oil (NYSE: MRO), and Suncor (NYSE: SU) are pouring tens of billions into oil-sands projects, and hence pouring a lot of aggregate. Given the rich demand profile, the company has estimated the net present value of its future Hammerstone project alone to exceed $1 billion. So what's a few million Loonies down the drain at the get-go?
The problem is the big disconnect between hypothetical future cash flows and today's strained liquidity. Birch itself notes the "substantial doubt about the Company's ability to continue as a going concern" that its working capital deficit has created.
Making matters worse is the company's unwillingness to provide better clarity to already jumpy investors. When an analyst on the call asked a simple question -- what will it take to break even? -- management responded that it had not anticipated such a question. That is unacceptable.
Between the capital crunch and the failure to communicate a clear road map to profitability, Birch Mountain deserves to be avoided until there is a change in strategic direction. Suncor, Canadian Natural Resources (NYSE: CNQ), and EnCana (NYSE: ECA) all provide lower-risk ways to invest in the oil sands. For my part, I will make sure to keep operating risks front and center when writing about development-stage companies in the future.
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Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool's disclosure policy doesn't have a communication problem.
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