Business Breakdowns
· Rob Hansen
[00:00:00] S1: Yes. So Vulcan is a very, very old business. 1909, this was started as Birmingham Slag Company. There were a few different iterations of itself, but business continued to operate and eventually seven families formed together to create this business. But the most important date was in June of 1956, President Eisenhower put funding for the Federal Highway -- Interstate Highway System. So these families came together, merged themselves and then went public on January 2, 1957, in order to take advantage of this government money that was going to be funding this Interstate Highway program. Fast-forward to 1970, they had about 70 aggregate operations in, call it, eight states. And then you have today, 400 aggregate operations in 22 states. They have about 16 billion tons of aggregate reserves, which is about a 60-year supply. But what's interesting about these quarries is I was looking through one other 10-Ks at one point, and there's a Norcross quarry, for example, in Georgia. And this quarry has actually been in operation since 1970. So these quarries have 50- to 70-year lives. But this one has been in operation since 1970. And then if you look at today what they have left, it's the 49-year supply based on today's volume. So these things really can last for a long, long, long time.
· Matt Reustle
[00:00:00] S0: Yes. And I think I'm familiar with quarries, thinking about some of the finished material you might see in a kitchen like granite or quartz, marble. And I'm not as familiar with the quarry market in the U.S. They started in Alabama. Am I right to think that there were a lot of quarry locations there? Is there anything geographically unique? Oil, you think of Texas and certain other areas. When you think of quarries, are there certain geographical spots that these are most dominated in?
· Rob Hansen
[00:00:00] S1: They're pretty much everywhere. The bigger governor is really the cities and towns because no one likes these things. But there is an important fault line, I think it's called the Brevard Fault Line that runs from D.C. down the mid-Atlantic through Texas, where you can't get as much rock. And then you have Florida where there really isn't any rock at all. So all of that has to be shipped in by boat. But everywhere else in the U.S., there are plenty of them. I think in the U.S. in total, there's around 10,000 quarries. Another interesting set was back in 1976, the number of quarries in the United States peaked at 12,600 or something like that. So we don't tend to make a lot more of them. So that's why I mentioned the bigger governor is just cities and towns really not liking these big giant pits. Because Vulcan and there's a couple of other competitors like Martin Marietta and Summit Materials and CRH, these companies are really mining companies. People don't really think about them that way, but they're aboveground mining. They just dig up a giant hole in the earth, and then you have your quarry, and you just keep mining it and mining it and mining it for as long as you can.
· Matt Reustle, Rob Hansen
[00:00:00] S0: It's an interesting, not in my backyard, NIMBY barrier to entry, it seems like in terms of having the quarries today and restricting new folks from coming into the market. Is there a difference in quality between the different locations? You mentioned a little bit before in terms of the cost and the price you might pay and what that looks like. Is that coming down to the specific quality of what's actually being mined? Is there much difference there? [00:00:00] S1: There are some differences, and that's why it's crushed stone, sand and gravel. So there are different types of rock that are used for different things and some of them are more specific. There's the certain sands that are used in oil and gas. But for the most part, a lot of it can be very similar or it just depends on where you are. It's not a ton of differentiation, which is why when I look at this business, like this is a commodity product in a pretty fragmented industry and that's capital intensive, how could it be any good? It's actually kind of the opposite. You can have a great business based on some of these characteristics that you'd otherwise think wouldn't be the case.
· Rob Hansen, Matt Reustle
[00:00:00] S1: There are some differences, and that's why it's crushed stone, sand and gravel. So there are different types of rock that are used for different things and some of them are more specific. There's the certain sands that are used in oil and gas. But for the most part, a lot of it can be very similar or it just depends on where you are. It's not a ton of differentiation, which is why when I look at this business, like this is a commodity product in a pretty fragmented industry and that's capital intensive, how could it be any good? It's actually kind of the opposite. You can have a great business based on some of these characteristics that you'd otherwise think wouldn't be the case. [00:00:00] S0: Yes. No, it's quite interesting. I think you referenced one of the reasons why it could be a good business with the regulatory barriers to entry. The other I wanted to ask about is just the actual mining operations that's typically capital intensive. There's usually a lot of different costs that go into it up front, but then logistically, how does the business think about the cost profile of what they're doing? And what are they actually required to do in terms of, okay, they're mining that, are they required for the transportation as well? How much of that is integrated into the business versus outsourced? And anything that you could talk about just in terms of the cost profile of what they're doing and operational excellence, if that is a thing in this space.
· Rob Hansen
[00:00:00] S1: Opening a new quarry is very time intensive and it's very capital intensive. You need to have maybe $50 million if you want one that's close in, and it's going to take you 10 to 20 years to get this permitted through the environmental piece. It's very, very complex and one of the major barriers to entry. It's a scarce resource, too. I know I call it a commodity but it is scarce. It's got to be close to a population center because this is $10 to, call it, $20 a ton, so it doesn't travel very far. Every 40 miles you travel by truck, the cost doubles because it's about $0.25 per ton mile. So you've got to have the logistics and the trucking there. And then you have to have relationships with some of these downstream contractors, too, because you need to have people to use your product. So it's a very hard industry to get into. And greenfielding, Vulcan, they do greenfields every maybe one, maybe two a year, but some of those are just really distribution sites where they mine it, and then they put some rail tracks down. What's interesting though is the logistics piece is just so important. And part of that is because if you're going to transport this stuff -- I mentioned by truck, it's $0.25 per ton mile. If you do it by barge, if you can have a quarry located close to an ocean, it's only $0.01 per ton mile. Whereas then rail, I believe, is about $0.08 to $0.10 per ton mile. So transportation of this material is hugely important. I think it's an overlooked piece of the business that is just hugely important. In terms of who pays for that transportation, generally, the way they price it, they price it on a per ton basis and the transportation is included in the price. But quite often, the customer's paying for that. And -- but often, they'll pick it up as well. But in general, the stats around are that 80% is shipped by truck, and then the other 25% is shipped via barge or rail first and then using trucks. You always have to use that truck, and it's highly expensive, which is why in certain markets, you want to have multiple quarries and that's why you have this platform approach. There's a lot of different ways Vulcan adds value in terms of the operational piece to really get the price down as much as they can for their customer.