Overview

Construction aggregates are granular materials sourced from either naturally occurring sand and gravel deposits or from a variety of quarried rock types including limestone, granite, and volcanic rocks. Natural sand and gravel aggregates are typically preferred for the manufacture of concrete whereas crushed rock is predominantly used for asphalt, road construction and railroad ballast although it is increasingly used in concrete applications as irreplaceable sand and gravel resources deplete. The production of aggregates involves a relatively simple process of surface mining, crushing, sizing and, frequently, washing which requires large volumes of fresh water. Chemicals are not used in the processing of aggregates although minor quantities of a flocculent, or similar agent, may be used in removing sediments from process wash water. Being a natural product, aggregates are non-toxic and benign to the environment.

All forms of concrete and asphalt are comprised mainly of aggregates and are used to build roads, bridges, buildings, sewers, sidewalks and other components of civil infrastructure. Aggregates are also used in their natural state for a wide range of other applications such as rock armour for coastal and river erosion protection, crushed rock and sand in road foundations, sand in mortars, stucco, and golf course bunkers. Their predominance in the composition of concrete and asphalt, and their wide range of applications, make construction aggregates a vital component in urban development and transportation infrastructure. The fundamental driver of demand for aggregates is population and particularly the growth in population.

Aggregates are sold and used relatively close to their source of production, generally within fifty miles. In a number of locations in North America, specific circumstances allow rail transportation or ships and barges to be utilized in order to access more distant sources. Construction aggregates are relatively heavy materials with low intrinsic value and the costs of transportation are frequently over half of the final selling price of the material. Thus, the market in North America is, in reality, a large number of local markets within which competitive and supply forces are quite different. The choice of aggregates used in any market is based upon the location, quality and availability of the aggregate sources together with the cost of transportation to the point of usage.

Aggregate Resource Availability

Local reserves of construction aggregates in the Company’s target markets have been diminishing as operating quarries have become depleted and new resources are increasingly more difficult to permit unless they are located well outside of the market. In California, local quarries’ depletion rates declined from 2008 through 2012 as the fallout from the global financial crisis drove the weakest market for construction materials in living memory. Markets have now recovered from trough levels and demand is steadily returning to pre-crisis levels. As the markets return to growth, increasingly longer and more costly overland haulage will eventually be required to meet supply shortfalls when they arise. This is expected to have the effect of raising the delivered prices of aggregate products in markets such as the San Francisco Bay area, the Los Angeles Basin, and San Diego. In Hawaii, local sand supplies have been severely constrained, and while manufactured sand is available in some markets, the state imports a significant proportion of its sand supply. Markets closer to the Orca Quarry, such as Vancouver, British Columbia, have also experienced some shortages of construction aggregates and demand has been steadily increasing in this market. It is the closure of local aggregate sources within markets that created the opportunity for Polaris to develop its business and although the deep economic recession temporarily alleviated some of the pressures for alternate supply sources, the Company does not believe that the underlying situation has materially changed other than in terms of timing.