Description

Cadiz, Inc. (Cadiz) is primarily an agricultural company with significant landholdings in Southern California. Its primary business is selling fruit that it cultivates from its own land. More importantly, the company owns an aquifer at Cadiz, California for which the company is currently finalizing negotiations with the Metropolitan Water District of Southern California (MWD) to provide water to the Los Angeles region. The aquifer, as well as having indigenous water supplies, will be developed to provide storage to the MWD. Cadiz will receive a fee both for the storage, as well as indigenous sales. Importantly, terms between the MWD and Cadiz have already been negotiated for a 50 year storage deal, details of which have been filed in an 8-K by the company. Without rehashing all of the details from the filing, the important point is that storage capability over and above what the MWD has contracted for will be available for Cadiz to sell into Southern California at market prices. While the price to the MWD starts at $230 per acre foot (and can escalate up to 15% per year depending on market conditions), recent transactions in Los Angeles have been signed closer to $500 per acre foot. Industry sources indicate that annual average water inflation in Southern California has averaged 9% a year for the past half century, although I have had a difficult time getting hard numbers to confirm this. Nevertheless, there is plenty of anecdotal evidence that water in the Los Angeles region is getting extremely tight, such that new housing developments can’t get approvals to go forward unless they they demonstrate that the water supply is secured. The bottom line is, the discounted cash flow of the aquifer, assuming an 8% discount rate equates to $13-15 per share depending on the escalation rate used for water prices. Depending on how hot the market for water gets, these numbers could prove to be low. The kicker to the water story is that once the deal is inked, it has been strongly suggested that the company may spin the water asset into a REIT structure.

Regarding the rest of the company, I believe the value of the agricultural assets equals about the value of the debt on the books, so I consider that a wash. However, they do have a deal with Prince Alawaleed to develop agricultural property in Egypt, from which the royalty payments could equate to $20 million a year starting in the next couple of years, which may add another $3 to the stock valuation. Lastly, Cadiz has other aquifers around California and Nevada, which may one day be developed. While I give zero value for them, they may surprise us. All in, I think the stock is conservatively worth in the high-teens.

Catalyst

Once the final Environmental Impact Review is filed, which is expected in the next few weeks, it triggers the first $54 million payment to Cadiz. Later in the year, I would expect to hear more details on whether or not they will spin the water assets into a REIT.