Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

Getting a cement permit is not easy....

Thus, I was surprised when it was announced in the Q4 CC on April 26, 2010, that EXP pulled its Mountain Cement expansion permit last September .... The stated rationale was that

...the operational improvements that Mountain Cement achieved produced the majority of the cost savings associated with our plant modernization project. Therefore, we’ve effectively eliminated the need for the large capital project. The current plant is now well positioned for improved profitability when the market returns.

However, the modernization included cost savings that cannot be gained from operational improvements; notably, reducing electricity and heat consumption by nearly a third. With the cancellation of the expansion plan, I’m wondering if the long-term market projection has changed, if new plants by competitors have filled the gap, or if EXP is committing to their historical model of using low margin imported cement to fill the gap when demand is high so that during a cycle nadir the high margin local production is not idled. All of these possibilities suggest that growth for Mountain Cement is capped for the foreseeable future.

The original announcement of plans to modernize the Mountain Cement plant and increase production to 1.1M tons was made on January 25, 2006. In the 2006 Q3 CC the anticipated capital expenditure of approximately $120M was justified by “strong market conditions in the Mountain region including increased oil and gas exploration”....

As explained in the January 26, 2006 8K, the modernization was designed to 1) expand capacity by 60% to 1.1M tons, 2) reduce heat consumption by approximately 40% to 2.6 mmbtu per ton, 3) reduce electricity consumption by approximately 35% to 105 kwh per ton, 4) reduce manpower and SG&A costs by approximately 40%, and 5) reduce maintenance unit costs by approximately 40%. Presumably, most of these outcomes would have resulted from replacing the current 2 stage preheater and long dry kiln with a 5 stage pre-heater, pre-calciner, and single kiln.

The construction permit had been submitted before March 21, 2007 (per the 8K of that date). The engineering was finished by July 31, 2007 (per the Q1 2008 CC), and the state (Wy) had deemed the application complete by January 1, 2008 (per the Q3 2008 CC).

The first foreshadow of a change of heart regarding the Mountain Cement expansion that I can document was in the May 27 2009 10K, i.e.

Cement production is capital-intensive and involves high initial fixed costs. We previously announced plans to modernize and expand our Nevada Cement and Mountain Cement facilities, which are our oldest and least efficient plants. Due to the current conditions in the Mountain and Nevada markets, we do not expect to begin significant construction activity on these plants during 2009. Once significant construction is begun, we expect it will take between 18 and 24 months to complete.