Fairmont Resources (FMR.V) recently announced it intended to acquire Grabasa, a Spanish granite producer, from a bankruptcy procedure. As this could really put the company on the map and generate cash flow that could be used to explore and develop other properties, we had a chat with CEO Michael Dehn to get some more details.
- How did you come across Grabasa?
We were originally referred to the Grabasa case through a former employee at Grabasa. As you know, geo’s like to talk rocks with each other and that’s how we learned about this opportunity and decided to investigate the potential of this company.
- Can you elaborate on the structure of the deal?
Sure. The plan is to structure the acquisition through debt financing. We have several sources currently evaluating the deal at competitive interest rates, and it definitely is our ambition to fund 100% of the acquisition with debt. We would like to keep any potential dilution of our shares limited when we acquire this company.
- Investors can be quite wary about picking up assets from a bankruptcy procedure. Why didn’t Grabasa’s business plan work out, and why do you think you can do a better job?
Simply put, market conditions have changed. Grabasa operating for about 25 years producing as much as 250,000 square metres of granite annually. In the 5 years before declaring insolvency, they were averaging approximately 6 million euros (C$9M) in annual sales. As they began scaling up their business through debt financed plant and equipment upgrades, they were negatively impacted by the mortgage backed security crisis, declining European market demand, and tightening capital spending. They were forced to declare bankruptcy under these conditions.
It’s really not a case of us doing better, but being in a better position to put Grabasa back into operation. Labour costs in Spain have declined, the market demand is recovering, and we have a more diverse marketing strategy connected to our operations in Quebec.
By going through the Bankruptcy process, you essentially reset the business. And we are acquiring the asset at a very good price, so we are confident Grabasa will be a very profitable division of Fairmont.
- What about the economics? What’s your plan for Grabasa’s mining licenses? Do you have any idea what kind of operating margin you could realize?
The mining licenses are intact and the operating plan is divided in different stages. Firstly, there is a considerable amount of finished and unfinished product in inventory which we can sell in the near-term. This allows us to finance the restart of the operations and re-open the major quarry. As we ramp up sales, we expect to re-open the second main quarry.
Margins will likely vary with market conditions and the range of product we are able to sell. For example, black granite sold in Asia will command a significant premium, coloured granite for commercial applications in Europe less so. Having said that, we have the expectation of realizing an average of about a 40% margin annually.
- Are you planning to pick up more licenses around the processing plant to become a dominant player?
Through this purchase, we will acquire 23 quarries. We will commission additional quarries as needed but hope to do these on a JV basis to better support the local economy by encouraging regional employment.
- How about the environmental liabilities and reclamation costs? Will Fairmont be liable for historic mining operations?
Since this is granite – there really is no environmental issues. As with all mining, there is a reclamation cost which kicks in when mining ceases, but this will likely be several generations into the future, so that’s not really something we are worried about right now. We are looking forward to complete the transaction and to restart the granite mining operations as soon as possible.
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The author has no position in Fairmont Resources. Please read the disclaimer
