Cadiz: Dressed in Sheep's Clothing?

A new company has been added to the energy alternative indices in the Water Conservation group:  Cadiz, Inc. (CDZI:  Nasdaq).  The company is a self-styled renewable resource company with a 45,000-acre land holding in the San Bernadino Valley in California.  The land is zoned for agriculture and the fields support cultivation of table grapes, citrus, melons and vegetables.  More important than what grows on top of the land is what secrets away below the surface.  Cadiz property sits atop a naturally recharging aquifer system.  In drought-ravaged California, water supply is a very dear asset.  

Cadiz is pushing forward a water supply and storage project on its property that is designed to provide local ground water supply for Southern California.  The company proposes to ‘capture and conserve’ an average of 50,000 acre feet of water for the next fifty years.  Two pipelines are also proposed to run along existing railroad right of ways to increase water importation capacity to one million acre feet.  The water is contracted to water retailers in the seven counties surrounding the Cadiz property.

The company has been pursuing this project for over nine years, facing criticism and opposition along the way.  An original plan to import and store water from the Colorado River.  That plan had to be abandoned when other water-hungry partisans laid claim to the same water supply.  Cadiz leadership then switched their ‘water witching’ efforts to mountain runoff water that is being ‘lost’ to evaporation. 

An illustration on the company’s website shows how snowmelt or from nearby mountain ranges ends up in dry lake beds and then is ‘lost’ through evaporation.  The company claims snowmelt accounts for an average 32,000 acre-feet of water per year.  Cadiz now proposes to ‘save’ this lost water by pumping it into extraction wells where it will be ‘conserved’ and eventually sent by pipeline to the Colorado River Aqueduct.  Water retailers will then have access to the water for deliver to water users.

The Cadiz diagram labels the snowmelt at ‘recharge’ but fails to mention what is being recharged.  Most other diagrams of the weather cycle would explain that snow originates from precipitation that comes from none other than water evaporating from lowland lakes and pools.  Cadiz is coyly not explaining that it plans to interrupt this normal cycle of recharging snowmelt and evaporating lake beds by diverting the water to another part of the state where it will be used in agriculture, drinking and recreation.  The question needs to be asked whether the average 32,000 acre-feet per year will hold if the source of the recharge is altered.

The last point in the Cadiz diagram and a point that is repeated throughout its corporate website and presentation materials is a claim of “No environmental impacts”.  It seems like that is a premature claim until actual experience proves the normal weather cycle of snow and evaporation are not impacted.

Cadiz describes itself as a renewable resource company with agricultural interests, claiming permanent crops of ‘dried-on-the-vine’ raisins and lemons. The company managed to squeeze out $412,000 in agriculture revenue in the year 2016, largely through a lease of farmland to Fenner Valley Farms.  The year ended in a loss of $26.3 million or $1.41 per share, Investors might be better informed by considering the use of a much lower figure of $9.5 million in cash to support operations during the year.

Cash is not necessarily a problem for Cadiz.  The relationship with Fenner involves infrastructure improvements, for which Cadiz received a one-time advance payment of $12 million in February 2016.  Indeed, the company still had $12 million in cash on its balance sheet at the end of 2016.  Since then the money management firm, Apollo Global Management, has agreed to help with financial arrangements up to $240 million for the construction of the Cadiz water project.

California is desperate for water to keep its existing agriculture industry alive.  The state’s hydrologic cycle has experienced dramatic change in recent years, raising alarms in a state that is accustomed to drought as well as deluge.  Experts have raised more questions than answers and the verdict is certainly out on the Cadiz water project.  The problems is that if Cadiz leadership is wrong, that $240 million investment will never achieve its projected cash flows because it counts on ‘recharge’ to generate new water resource.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.