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“Day Zero” Water Shortages Breed Opportunity For Select Canadian Companies

— Benjamin A. Smith

Tragedy Could Mean Opportunity For One Select Victoria-Based Company

If you haven’t heard about it yet, it’s big news. Historic, in fact — and not in a good way. The fast-emerging water crisis facing Cape Town, South Africa is about three months away from causing chaos. The city faces a shortage more severe than Las Vegas experienced during the 2016 Lake Mead crisis. If water levels don’t stabilize fast, tens of thousand of taps are about to run dry—indefinitely.

According to the New York Times, the situation is so dire that Day Zero threatens to surpass anything a major city has faced since World War II or the Sept. 11 attacks.

Hyperbole? Maybe. But City officials aren’t taking any chances. Talks are underway with South Africa’s police because “normal policing will be entirely inadequate.” That tells you all you need to know about how quickly law enforcement believes security could degrade. They know there’s no surefire way to cause panic than getting cut off from the water supply. It’s akin to lighting a molotov cocktail at Sunday Service.

Even the locals know what’s at stake. The city’s four million residents are bracing for nasty infighting should water rationing at the city’s 200 collection points be imposed. As local Phaldie Ranqueste puts it, “When Day Zero comes, they’ll have to call in the army.” They may have to call in paramedics too, as exploding pathogen populations feed off vulnerable, dehydrated immune systems.

In light of these unfortunate circumstances, investors looking for situational equity exposure just might catch a decent rally with the proper forethought. This article aims to elucidate just that. Although we sincerely hope Cape Town averts disaster, there’s only so much we can do from 13,094km away.

We might as well make money and hope for the best.

 

Liquid Gold

No, we’re not talking about your favorite pilsner. To Cape Town residents fearful of lifestyle disruption, plain old water is literally liquid gold. Supply deficiencies will have a material impact on household finances due to relocation costs, employment absenteeism and price gouging. Residents generally take such things for granted until they’re no longer. Lesson learned.

Current Dam Water Levels – 9/2/2018
Major dams Storage
Ml %
Capacity when full    9/2/2018
Berg River 130 010 53.4
Steenbras Lower 33 517 41.3
Steenbras Upper 31 767 81.4
Theewaterskloof 480 188 12.2
Voëlvlei 164 095 17.3
Wemmershoek 58 644 49.7
Total Stored Ml 898 221 225 350
% Storage   25.1

Regardless of “Day Zero” final outcome, there’s an obvious need for greater water conservation going forward. This situation is much too close of a shave for city officials, even if the rain gods were only playing a cruel joke. The constant anxiety surrounding the supply uncertainty is likely to prompt the South African government to expedite a long-term solution. Averting disaster through plain luck is not viable public policy.

While our research indicates that few Canadian companies are poised to profit directly from “Day Zero” outcomes, one firm is piquing our interest. That company is Flexible Solutions International Inc. (NYSEAMERICAN:FSI), a microcap environmental technology company with very real exposure to water conservation solutions.

Particularly, FSI’s patented WaterSavrTM product offers a direct and immediate solution for the good folks in Cape Town. WaterSavr is the world’s first commercially viable water evaporation retardant. The 1-micron thick surface-level film can reduce evaporation by up to 30% on slow-moving water bodies; a solution that’s ideal for municipal reservoirs.

To put these kind of volumes in context, FSI officials tell me that if WaterSavr technology was applied to the whole of Lake Mead (whom themselves experience a water crisis in 2016), they could save upwards of 2 meters of surface water per year. Far from theoretical calculations, these concepts have already yielded real-world results.

As reported in the Globe & Mail in July 2015, Las Vegas municipalities have applied FSI’s technology with great success.

The Lakes Association, a 300-strong homeowners’ group in the private Las Vegas community of Lake Sahara, turned to WaterSavr as Lake Mead reservoir levels were staring into the abyss. FSI’s technology was applied across a 12-hectare surface of the district’s own artificial lake. The results were spectacular.

As LA president Greg Toussaint explains, “We believe we’re saving about 15 percent of our evaporation, which is a substantial amount of water.” How substantial? In 2013 alone, the Lakes Association used around 30.3 million less liters than its average annual total. That’s a lot of showers and garden maintenance.

The technology is cost effective also. Water desalination is coastal cities can cost upwards of $2,000 per acre foot (360,000 gallons). FSI’s technology: around $200 per acre foot, or 1/10th of the cost. Apparently, conservation is much more economical than reverse osmosis. Cape Town resides on the southern tip of continental Africa.

FSI officials are mum about future prospects in South Africa. Although they are currently touting the merits of the WaterSavr system to South African officials,  they caution that political inroads take time—even when sensible and economical solutions can be deployed immediately. Lobbying efforts began three months ago before the problem received widespread international media attention. There’s no guarantee or indication FSI’s lobbying efforts will achieve material results.

Even if South African efforts fall through, world demand is growing. As reported by Zerohedge, no less than eleven major cities face serious water issues in the coming years. Not all of them can be addressed by FSI’s product (i.e. underground aquifers mixing with salt water), but there’s a huge untapped market out there. Of course, countless smaller reservoirs and communities face similar circumstances.

FSI has a distributor in South Africa to meet future demand as required.

 

Conclusion

Before you go risking your TFSA on discretionary stock picks, please note there’s no assurance “Day Zero” will actually materialize. At the time of this writing, Day Zero was pushed back to May 11 after farmers from the Overberg region (about 140km away) made a donation of 10 million cubic meters of water to the city’s supply. This effectively gets Cape Town into the heavier winter precipitation months.

With that said, it’s almost irrelevant whether doomsday actually arrives from a sector perspective. The tail risk is much too real for world water-challenged municipalities to ignore any longer. We believe Cape Town’s close (or real) encounter will “Day Zero” could prompt expedited action from various global communities to deploy Flexible Solutions International Inc.’s technology. Particularly now with the perceived risk that climate change will not stabilize with president Trump in the big chair.

And that could be for another seven years.

 

Disclosure: Neither Midas Letter Group Publishing nor the author own any financial interests in the profiled company

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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bsmith@midasletter.com

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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