AND I DECIDED….TO DO NOTHING WESTSHORE TERMINALS (WTE – TSX)

What do you invest in when your largest trading partner is slapping 25% tariffs on everything crossing the border?

How about a company that is tied 100% to Canadian exports that go to everywhere BUT the United States.

That is what we’ve got with Westshore Terminals (WTE – TSX), which operates THE LARGEST coal loading terminal on the West Coast.

So I did a deep dive on it. I initially thought this could be a big dividend growth story because of upcoming BHP (BHP-NYSE) contract to handle potash from their new Jansen mine in Saskatchewan. Meaningful revenue is not until 2027 for WTE. But after some digging–and last Friday’s news confirming quite large cost overruns–$45 M to $225 M–I think the dividend stays put for a few years.

Today Westshore pays out CAD$1.50/sh with the odd special divvy (which I now think are on hold for a few years). That’s just over 6%, and there is no debt. In fact they have $147 M net cash! Which they are now going to need.

Westshore just updated investors on late Friday, confirming some cost inflation here and re-affirming they have $225 million into the project.

Allow me to back up and segue into the rest of the business–what’s the risk? I like that it’s part of an oligopoly and basically unique. And Jimmy Pattison, an investing and business legend, controls it.

Westshore is tied to thermal coal, so all the usual climate caveats apply.

A year ago, climate would be a big deal for any coal investment. Today, I’m not too concerned. While I wouldn’t go so far as to say that coal is making a comeback, I do think that the pressure from the environmental lobby is going to be far less for the next few years – so long as Trump is in office.

The second risk is the loss of a big customer. Their relationship with Teck Resources, now Glencore (GLEN – LSE) has been in the crosshairs in the past.

This is largely done and done. Their business with Glencore is already greatly reduced. They do have a contract with Glencore that comes up in 2027, but it seems less likely given that I can’t see anywhere else for the coal to go and I doubt Glencore wants to be completely reliant on a single terminal anyway (they partly own the Neptune Terminal outside of Vancouver).

I’m comfortable with the risk. I’m convinced the 6% dividend is rock solid. Add that to the upcoming potash growth and this looks like a pretty clean-coal story (pun intended). And again, this is a Jimmy Pattison company (BC’s richest person and an investing legend).

Westshore should be a steady-eddy dividend play with upside as the potash volumes ramp up in 2026, with newly guided meaningful revenue in 2027. But as you’ll read, I’m just not sure shareholders get rewarded that fast.

 

QUICK FACTS

Trading Symbols: WTE
Share Price Today: $23
Shares Outstanding: 61.8 million
Market Capitalization: $1,355 million
Net CASH: $147 million
Enterprise Value: $1,219 million
Dividend: $1.50/sh per year or 6.5% at $23

 

BRINGING COAL TO THE WORLD!

Westshore operates the largest coal loading terminal ANYWHERE in the Americas.

Source: Transportation Safety Board of Canada

The terminal can handle up to 33 million tonnes of coal per year. The last few years it has been operating well under that capacity – in a range of 23-27 million tonnes.

Source: Westshore Terminals Annual Reports

This business is as simple as it gets. Coal is delivered to the terminal in unit trains operated by Canadian Pacific Kansas City (CP – NYSE), Canadian National Railway (CNI – NYSE) and BNSF Railway.

Coal is loaded onto vessels that are destined for approximately 14 countries Worldwide.

Westshore is paid on tonnage. This makes for an extremely transparent revenue model with long-term set contracts.

In 2024, Westshore received $13.76 per tonne loaded. Already Westshore knows that in 2025 they will get $13.55 per tonne for 26 million tonnes of coal. This is ideal for dividend visibility.

Most costs are fixed so margins on the business are largely determined by volume.

Source: Westshore Terminal Annual Reports

When Westshore loaded 28,000-29,000 tonnes in 2020 and 2021, gross margins were 50%+. When volumes dipped in 2022, margins dipped along with them, to 38%. In 2024 margins have been 47% and the last two quarters have exceeded 50%.

With very little G&A (only $15M a year or less than 5% of revenue), Westshore can run a very profitable operation.

This allows Westshore to pay a 6% dividend and still fund some of the growth like the potash project. BHP is paying for part of the expansion at the terminal, but WTE is on the hook for $225 M of cost overruns. But between cash on hand and cash flow, they have that.

 

THE BIG RISK HAS BEEN THE CUSTOMER

Westshore’s big risk the last few years has come from their suppliers. Will they have the coal to ship or will some of their customers go elsewhere?

To understand that risk today, first consider the shipping landscape. There are really 3 options if you are a large coal miner in the northwest.

There is Westshore. There is Neptune Terminals, which is also near Vancouver, specializes in exporting metallurgical coal, but importantly: is exclusively Teck shipments. And there is Ridley Terminals, which is much further north in Prince Rupert.

The customer concerns a few years back revolved around Teck. Teck was Westshore’s largest customer. 10 years ago, Teck accounted for 20 million tonnes of coal, which is about 2/3 of total volume.

But 5 years ago that changed. The competing Neptune terminal completed an expansion and Teck began to move volumes to Neptune, not surprisingly since they owned the terminal (along with Canpotex).

For a while in early 2020 contract negotiations between Teck and Westshore got heated and it looked like Westshore might lose all their Teck coal volume. But an agreement was reached. Today Glencore is shipping 5-7 Mt of coal via Westshore (though Neptune remains Glencore’s primary export terminal).

Source: Teck Resources May 2024 Presentation

Could these volumes go away? I doubt it. The current agreement that Westshore has with Glencore ends in 2027. It is 5-7 million tonnes is a lot of coal, about 20-25% of Westshore’s total volume.

But Glencore has limited options to move more volume away from Westshore.

I’ve read that Neptune is near capacity. I don’t see any mention of an expansion at Neptune in the works. To be honest, expanding a coal loading terminal, which is going to be expensive upfront and will have volume headwinds at some point, does not seem like a great idea. That should work in favor of Westshore.

The other option is shifting met coal exports to the Ridley terminal. But Ridley is way, way north in Prince Rupert, which gives Westshore an advantage.

There’s also the consideration of optionality. If something happens to Neptune or Ridley, Glencore does not want to be stuck. They describe their Westshore contract as providing “flexibility” and that has value.

With less Teck volumes, Westshore has become more reliant on exports of US thermal coal from two privately-owned mines in Montana: Spring Creek and Bull Mountain. These mines have even less options than teck, as Prince Rupert is just too far away and requires switching rail lines, and Neptune is a Glencore-only option.

You add this all up and I’m just not that worried about that 2027 expiry or the other volumes. This is an oligopoly of three terminals, and I think any shift in volumes will be akin to shuffling deck chairs.

The second customer risk is the reliance on thermal coal. As much as 30% of the coal loadings at the terminals can come from the Powder River Basin in the United States.

In 2023 64% was thermal coal and 36% was metallurgical coal. Over time, more thermal coal and less steel making coal has been loaded.

Source: Westshore AIF

Being more reliant on thermal coal is going to be challenged by climate policy in the long run. For now, I’m not as worried about it as I might have been a year ago.

The reality is, with Trump in office the climate agenda is going to be taking a back seat. I don’t expect a big push against thermal coal – at least for the next few years.

 

EXPANDING INTO POTASH

Coal is a cash cow, but it is not the future. Which is why the infrastructure additions to the terminal to handle potash from BHP are an important diversification.

Westshore is modifying existing un-used coal loading infrastructure to handle potash. These additions include a new potash dumper, storage building, associated conveying systems, dust collectors and enclosures for the potash (it can’t get wet).

Westshore’s agreement with BHP calls for production starting in late-2026. The first phase is to handle up to 4.5Mt of potash, all of which will be coming from Jansen (Jansen is expected to produce 4.35 Mt of potash per year).

A future expansion will increase capacity to 9.2Mt per year but this is contingent on either BHP’s mine expansion of Jansen or deals with other customers.

To make it sound even better, BHP is paying for most of the expansion.

Sort of. BHP is fronting the costs of the expansion by reimbursing Westshore for the construction costs.

It sounds like a deal. However, before we get ahead of ourselves, the way its worded in the MD&A makes it sound like these costs will be counted as revenue at some future date.

Source: Westshore 2023 Annual Report

In 2023 Westshore received another $53M. In the first 9 months of 2024 they invoiced $174M.

I’m NOT 100% sure how this invoicing works. The agreement isn’t documented anywhere I have found. But because the invoices are being recorded as deferred revenue, I have to assume there will be a reduced cash revenue in return for the reimbursed construction costs.

A very brief chat with management shed no light on this. If they know, they weren’t sayin’. And Friday’s release didn’t really enlighten us either.

Clarity on this would help me decide to own the stock or not right now. That and the cost overrun itself is what made me decide to pass on the stock for now.

Just to give you an idea of the potential numbers, Phase 1 is 4.35 M t x $13.76 = $62.33 million revenue and 50% EBITDA = $31.16 million–on 62 M shares that’s 50 cents per share increase in EBITDA. At 10x EBITDA that’s an extra $5 per share.

WTE payout ratio is 100%. The question is, how much of this extra cash can flow through to shareholders, and how much do they have to pay back to BHP each year? Investors don’t know.

Once the expansion is complete, the overall throughput of the terminal will remain at 36 Mt. The potash capacity will replace what has been unused coal capacity.

Nevertheless that should still translate into growth as that coal capacity was idle.

 

IF IT’S COAL, IT MUST BE VALUE

Westshore paid a regular dividend of $1.40 last year and will pay $1.50 this year.

Their dividend history is up and to the right. They are also not averse to paying special dividends. They paid a big $1.50 special dividend in 2022 and are paying a $0.35 special dividend this year.

Source: Westshore Annual Reports

The dividend coverage isn’t great, but you have to look at the big picture. Westshore is completing a MAJOR potash expansion. They are spending FAR MORE capex than they have in the past.

The payout ratio was above 100% in 202, close to 100% in 2023 and right about 100% in 2024. If you only looked at that, you’d think a dividend cut was on the way.

Source: Westshore Annual Reports

The above chart includes the impact from BHP paying the cost of CAPEX. So while CAPEX is unusually high because of the construction costs of the potash conversion, cash flow is also unusually high because of the cash coming in from BHP and being added to deferred revenue.

What does it all mean? Honestly, its tricky — for me anyway–to understand. So I am going to fall back on the past: if you look at Westshore’s history, maintenance capex when they aren’t completing a big new upgrade is actually pretty modest. Which means cash flow once the potash expansion is complete should more than cover the current dividend.

That makes me fairly confident that Westshore will keep paying the current dividend even as they build the potash capacity. The caveat being that we don’t have any details on the BHP contract so we don’t know how much cash that contract will generate once the deferred revenue begins to amortize.

Once it is complete, the potash terminal will only increase cash flow and vastly improve the long-run viability of the terminal.

 

AN EASY SINGLE

The Jim Pattison Group owns approximately 46.9% of Westshore’s shares. Additionally, Jim Pattison personally owns about 30.54% of shares.

Pattison has had a lot of success over the years. I like being on the same side as him.

With the stock trading at ~$23, the yield on the $1.50 dividend is 6.5%.

That alone is pretty good, but it COULD get especially good with the growth that is coming from potash.

How about the valuation? Westshore did $1.86 of earnings per share in 2023. They are on track to likely do something similar this year. That puts the stock at 13.5x P/E. It is not expensive.

Westshore doesn’t have any traditional debt. Instead, they pay annually to the Vancouver Fraser Port Authority to lease the land and port access to their terminal.

This is an extremely long-term lease – it comes due in 2051 and even then, there is an option to extend to 2070. They pay fixed lease payments that get revised every 3-years, with the next revision happening in 2027.

Chart-wise, the stock is moving toward the middle of the channel it has been in since 2022.

Source: Stockcharts.com

That can be good and bad. Good if it breaks out. Bad if it slumps again to the low $20s. It was looking good until Monday this week, the first trading day after the ops update aftermarket Friday (rarely a good sign).

The potash volumes from Jansen are expected to begin in late 2026. As we get closer to that ramp I think we’ll see investors anticipate the increased cash flow and dividend.

In the past, what drove Westshore down were worries about Teck/Glencore and worries about coal and the environment.

I just don’t see those as big headwinds in the near term. With Trump in office there are simply too many other concerns for the environmental lobby to squeeze coal. The Glencore renegotiation is way off and even then, their options are limited.

Looking past that, we have to remember that 64% of volume today is thermal coal. And in 5 years those volumes are likely going to be lower. In 10-years they will almost certainly be lower.

That’s why I’m not going to give you any wild growth projections once the potash volumes ramp. It is safe to assume that potash replaces thermal coal over the long run. If the lifespan of thermal coal is longer than I imagine, all the better.

With the market reaction to the cost overruns, I expect any extra dividend is now off the table until 2028, and likely any yield compression (higher stock price) is a couple years away.

I am not long. Yet. More clarity here on this $225 million in deferred revenue would be good for investors. This should be an easy story. It almost is.