Gamble of the week: A punt on Californian water

The smaller end of the stock market is stuffed with companies that make no money today, but have the potential to make lots of it at some time in the future if something good happens. Quite often, though, the profits never arrive and investors lose all their money.

These types of companies and their shares are very high risk. Normally, I wouldn’t go near them, but as long as you are not investing your life savings, they can be a lot of fun.

However, shares in Nasdaq-listed stock have piqued my interest due to the fact that successful London-based hedge-fund manager Crispin Odey has just revealed that he owns 10.7% of the company. So what does he see in the stock?

Cadiz (Nasdaq: CDZI) owns 45,000 acres of land in San Bernardino county in California. About 10,000 acres is allocated to farming, where it grows crops such as lemons, grapes and seasonal vegetables.

But it’s the other 35,000 acres where the potential for Cadiz shares lies. California is short of water and prices have been rising strongly. Underneath Cadiz’s land are billions of gallons of water from aquifers that are topped up every year with rain and melting snow.

In order to exploit these, it plans to build a 43-mile pipeline and use an old 96-mile gas pipeline to connect its supplies to the Californian water grid.

If it gets planning permission to do this – which will hopefully be settled in the next year – then Cadiz could be awarded a 50-year contract to supply water into California with annual price increases of 5%.

Cadiz share price chartAfter the costs of building and running the project are taken into account, Cadiz reckons that a supply contract could have a value – in today’s money – of between $500m and $700m.

That is higher than Cadiz’s current stock exchange value at $8.28 per share of $233m ($133m market value, plus $100m of debt). And there could be extra value to come on top of the potential supply contract, from storing water and from surplus land and properties.

But the fact that the project has not been given the go-ahead yet makes Cadiz shares risky. What’s more, if approval is granted, the firm might need to raise more cash to build it, potentially diluting existing shareholders.

Cadiz also has $100m of debt, of which $54m can be converted into shares at a price of just over $8. This has the potential to increase the shares in issue by nearly 60%. That said, even allowing for all these extra shares, it looks like the share price could double from here if the project comes off.

Verdict: a speculative punt

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