At the beginning of this year, I published
an article on Athabasca Minerals
([[ABCAF]], or ABM on the TSX Venture) that introduced the Firebag
River frac sand project to readers. In it, I described that Firebag
River is a large (500 acre) Canadian frac sand project that is
controlled by a profitable small cap aggregate producer that
remains largely under the radar of the market. Response to the
article was positive, and the majority of the interest in the
company seems to be from people interested in the frac sand, not
the company's existing gravel operations. As a result, this article
is specifically geared towards those who are interested in
Figure 1: Magnified images of Firebag frac sand that has
undergone only minimal processing. Not all sand is created equal.
This sand meets all API/ISO specifications for use as a proppant in
hydraulic fracturing operations, and compares favorably with
well-known industry-standard sands like Northern White and Brady
(click to enlarge)
Source: Athabasca Minerals Corporate
Why Do Investors Care So Much
About Frac Sand?
When looking at the 12-month share price performance of U.S.
), Hi-Crush Partners LP (
), and Emerge Energy Services LP (
), it's easy to see that there is a lot of interest in frac sand,
as investors in these stocks have enjoyed gains in the range of
150%-300% over that time period. Why such impressive performance?
In brief, the market has realized that frac sand is a critical
commodity in North America's "new normal" energy paradigm; namely,
unconventional resource development.
As a result of the shift in the energy industry towards the
development of tight oil and tight gas resources, frac sand has
become an integral part of the energy production process.
For every frac stage, in every well, in just about every new or
recent resource play, frac sand is the little-known Atlas of the
industry. Once the pressure pumper trucks have completed the
fracture stimulation of an unconventional oil (or gas) well, the
frac sand grains that were pumped into the well are the only things
keeping the induced fractures open. The fact that those fractures
remain open after the well stimulation program is what allows
hydrocarbons to flow at higher rates, which ultimately drives the
profitable well economics in unconventional resource plays. Frac
sand is, quite literally, a pillar of today's energy industry.
Every year, somewhere around
25 million to 30 million tonnes
of frac sand are pumped into the ground in North America. Once that
sand is in the ground, it isn't coming back, so frac sand is a
consumable commodity. Think about that... a consumable resource
that is a critical input to the North American energy industry.
That's great news if you are a frac sand producer; it's no wonder
that frac sand mines are popping up all over the place in states
like Wisconsin and Iowa, where this sand is abundant.
Aside from the sand itself, the single-biggest cost in the frac
sand equation is transportation, so naturally, it makes sense to
develop frac sand resources as close to the end-user as possible.
With that in mind, when I learned of Athabasca Minerals' Firebag
project, it was clear that it was a project with significant
strategic potential with respect to the Canadian energy industry.
Firebag is a large-scale project (>30,000 acres of industrial
minerals leases) adjacent to the main highway, located about 139
kilometers north of Fort McMurray, Alberta. In a business where
proximity to the end-user is everything, Firebag was closer to some
key areas of Canadian energy development...
Figure 2: The location of the Firebag Project relative to key
Canadian frac sand markets.
The Canadian Frac Sand Market Opportunity
The Canadian frac sand market demand is roughly 2.5 million
tonnes per year, but only perhaps 30% of that is produced within
Canada. The balance of the sand is being imported from U.S.
sources, largely from states like Wisconsin.
For Canadian frac sand users, that means they are paying to ship
sand about 1500 miles just to get to central Alberta (Edmonton). At
3 cents to 4 cents per tonne per mile of bulk transport on rail,
it's no wonder that transportation is the single-biggest cost in
the Canadian frac sand equation, aside from the sand itself.
Depending on your pricing assumptions, these frac sand imports
are a drag on Canada's current account to the tune of roughly $100
million to $150 million per year (exchange rates obviously play a
role as well). Also consider that the Canadian frac sand market is
expected to grow at ~15% per year through at least 2017... and if
Canada starts shipping LNG from B.C.'s west coast, all bets are
off. This is not an issue that is going away.
Even to the casual observer, the case for developing domestic
frac sand resources in Canada is pretty clear. Using Firebag as an
example, the transportation cost savings of shipping sand from Fort
McMurray, as opposed to Wisconsin, could be expected to be on the
order of $36-$48 per tonne (Fort McMurray is about 1200 miles
closer to Edmonton than central Wisconsin). I would also think that
Canadian energy and energy service companies would like to have the
security and stability of supply that comes with a domestic frac
sand source. As it stands today, when drilling activity levels are
high in the U.S., Canadian energy companies end up paying more for
sand than they would if they weren't competing as directly with a
hungry U.S. market.
Not All Sand is Created Equal
Recognizing the need for domestic frac sand resources is easy
enough, but finding sand with the appropriate physical
characteristics is significantly more difficult. Frac sand is a
bulk commodity with fairly specific physical properties, meaning
that not all sand can be used as frac sand. Detailed laboratory
testing needs to be carried out and API/ISO standards must be met
for sand to be deemed worthy of use as a proppant in hydraulic
fracturing jobs. On top of that, because of the importance of
transportation in the cost equation, frac sand resources should
have good access to road, power, water, and rail.
Fortunately for Athabasca Minerals investors, the company sent
samples of Firebag sand to Stimlab in Oklahoma, an industry leader
in proppant (frac sand) testing. The Stimlab results are detailed
in corporate press releases
. For those who are
keen on the results of the testing, I highly suggest reading
through the company's May 31, 2011 MD&A linked
, where tables and charts detailing the physical characteristics of
the sand are presented in full. A quote from the second press
release that perhaps best summarizes the results is copied
"Previous test results demonstrate Athabasca frac sand in
20/40, 40/70 and 70/140 sizes exhibit high quality crush
strength silica ratings, and can be processed with minimal
waste. All three grades of frac sand meet or exceed API/ISO
specifications for use as quality proppants in hydraulic
fracturing in many types of reservoirs...
These results were indicated to be comparable, and in some
fractions superior, to those of selected industry standard frac
It would appear that Firebag sand "makes the grade" for use as
frac sand, and given its proximity to Fort McMurray and key
Canadian resource plays, I believe it is only a matter of time
before industry players start to pay attention to this shallow and
potentially sizeable resource. Given that the Firebag deposit sits
right at surface, with only about 2 to 3 inches of overburden on
top, mining should literally be a truck-and-shovel operation, with
minimal waste. The sand has been auger-drilled in the project area
to a depth of 15 meters (~50 feet), and the bottom of the sand has
not yet been found. Calculating the potential tonnage of the
deposit in the permit area (first 80 acres, then 500 acres) is
simply a matter of multiplying area by thickness by density (the
density of dry sand is about 1.4-1.5 tonnes per cubic meter). The
deposit is also unconsolidated, which means it doesn't require
anything more than a shovel to dig it out of the ground (some frac
sand deposits require crushing to liberate the individual sand
What About Permitting?
I have received countless comments from readers who seem to be
wondering "if" Firebag will get permitted. My answer usually goes
something like, "When you consider what
get permitted in Fort McMurray, do you think that permitting a
clean silica sand mine just off the highway will be an issue?" I
know that's not really an answer, but it is hard for me to imagine
why a permit would not be granted for what would essentially be a
large sandbox in one of North America's premier jurisdictions for
Turnover within the provincial regulatory body responsible for
permitting Firebag has been extensive over the last two years, but
that seems to have settled down now, and the permitting process
appears to be on track. On
, Athabasca submitted a Conservation and Reclamation Business Plan
(CRBP) to the Alberta department of Environment and Sustainable
Resources Development (ESRD). The CRBP is the last piece of data
that the ESRD needs to review and approve before issuing a final
permit. It is also worth pointing out that on
, the company entered into a joint venture agreement with the Wood
Buffalo Metis Corporation, which gives Athabasca "the exclusive
support of Wood Buffalo to drill, explore, produce and market
Aggregates for a period of ten years with an option to renew the
agreement, upon mutual agreement of the parties, for an additional
ten years." It would seem that the pieces are falling into
A Few Words on Mining, Infrastructure, Processing, and
I don't profess to know exactly how the Firebag operation will
look, but based on my research, I think I have a reasonable handle
on it, which I present here as my "best guess" for those trying to
get a handle on some of the moving parts.
Mining Firebag and getting the sand to rail should be a
straightforward operation using "off-the-shelf" equipment. With
minimal overburden, I would expect a truck-and-shovel operation,
whereby trucks with trailers are loaded using simple machinery and
the sand is hauled to a rail-side loading facility just east of the
Fort McMurray airport at the end of the CN Rail line. Firebag's
proximity to Fort McMurray is beneficial for a number of reasons,
not the least of which are access to labor, water, power, and
transportation infrastructure that will be invaluable in the
construction and operation of the whole project.
Figure 3: Firebag Project location relative to Fort McMurray.
Sand would be trucked south to a rail-side loading (+/- processing)
facility at the end of the CN Rail line.
(Source: modified from company reports)
In terms of rail access, Athabasca states that the company is
"in continuing discussion with a major railway company" with
regards to developing its rail-side loading facility. It is worth
pointing out that Athabasca has already made an application
(granted on a first-come first-served basis) for space at the end
of that rail line, which shows good foresight on behalf of ABM
management, and is probably one of the things that will continue to
distinguish Athabasca as a go-to domestic frac sand player as the
project moves forward. Along those lines, Athabasca has staff
specifically devoted to the planning of the loading facility to
ensure smooth integration with CN's other operations.
As for processing, Athabasca would likely be looking at
off-the-shelf sand washing and screening equipment. Whether the
sand is washed and screened rail-side into different-sized
fractions in Fort McMurray or elsewhere remains to be seen. Initial
work suggests that Firebag sand appears to require only minimal
processing, and the location of that processing will be chosen so
as to maximize efficiency and minimize handling.
Given that the company has not completed an economic study on
the Firebag Project, I'm not about to present one here. What I will
say is that I could envision a 500,000 tonne per year operation,
which would equate to about 1500 tonnes per day. In terms of a
gut-check, I'm assuming that a truck and trailer can haul 30 to 50
tonnes of raw sand per trip from the mine site to the rail-side
facility, meaning that 30 to 50 truckloads per day would be
shipped, on average. Obviously, there will be some seasonality to
the operation, but in terms of hauling, that means a truck would be
getting loaded (and unloaded) every 15-20 minutes in a 12-hour work
day, which seems more than reasonable to me, and leaves lots of
room for seasonal variability.
In terms of margins, once again, it's really too early for me to
try to predict operating costs and selling prices, but what I do
recognize is the 1200-mile transportation distance advantage that
Firebag River would have over sand sources in the Midwestern U.S.
At 3-4 cents per tonne per mile of transport on rail, my
back-of-the-envelope math says that translates into a $36-$48 per
tonne advantage, and that is totally ignoring the CAD/USD exchange
Capex is the other big unknown, but a past report by Stonecap
Securities (published March 2013) suggested figures in the range of
$50 million. If my numbers and assumptions are even close to
correct, I don't expect that Athabasca will have a problem
attracting that kind of capital for a project with this much
strategic potential. Assuming permits are granted and scoping
economics are positive, I would view an offtake agreement with one
or more Canadian energy service companies as a likely source of
equity capital, and a project like this should be quite attractive
to banks for partial debt financing as well (particularly in light
of the existing profitable aggregate business).
Summing It All Up - How Could This Play Out?
It appears that Firebag is an attractive project politically,
logistically, and practically speaking and, as a result, I'm not
sure how much longer this project will fly under the radar. I
suspect that if and when the final permits are granted, it may be a
watershed event in terms of market interest in the company. The
story should play well in both media and industry circles as a
potentially material domestic provider of a vital input to Canada's
In terms of potential interest from the energy services
industry, I think the case for Firebag is pretty strong as well.
Let's face it, if you are a Canadian energy services company that
does fracture stimulation operations, you probably spend a fair
amount of time thinking about frac sand prices and supply. It seems
to me that there's a good chance that Firebag offers those
companies the ability to lock down long-term frac sand supply at
From the other side of the coin, if you are a frac sand producer
shipping from the Midwestern U.S. to Canada, it would appear there
are two choices: 1) give up some Canadian market share (assuming
the transportation savings mean that Firebag will capture a portion
existing demand), or 2) buy the operation, integrate it into your
existing distribution network, and let some of the transportation
savings flow through to your bottom line. Any of the three public
U.S. frac sand producers mentioned near the beginning of this
article (SLCA, HCLP, EMES) would be logical acquirers, and given
the significant runs in their equity values as of late, they could
easily issue shares to Athabasca holders in exchange for the
With only 36.9 million shares on a fully diluted basis, the
leverage for Athabasca shareholders in either of the "build-it or
sell-it" scenarios could be significant. The only recent
potentially comparable transaction in the Canadian market was the
purchase of Winn Bay Sand by Preferred Sands in
, in a transaction valued at $200 million. That would be nearly
$6/share based on ABM's current share count, which is about 200%
upside from the current trading price of $2.00... and that's
assuming that the existing, profitable gravel operation is worth
zero, which is obviously not the case.
On a final note, my time spent working in Calgary's energy
industry taught me that Alberta is a province known for its loyalty
to local producers and suppliers. A project like this shouldn't
have trouble attracting some of the best talent in the industry,
and when the time is right, I'm sure that Alberta's banks and
sand-hungry service companies will roll out the welcome mat. Given
the company's proven track record in aggregate operations, I think
investors are in good hands. Of course, there's always the
possibility that a larger player will snap up Firebag once
Athabasca has served it up on a silver platter. I'm sure
shareholders wouldn't mind that, either...
This is not investment advice, nor is it a recommendation to buy or
sell shares in the company/companies mentioned. The information
contained herein is accurate to the best of the author's knowledge,
but the presented information should be verified by any party using
this information as part of any decision making process. This view
represents the author's opinion only, and as such readers should do
their own research and come to their own conclusions if they are
using the opinions contained herein as part of any larger due
diligence process. Prospective resources and extrapolated metrics
are, by their nature, subjective and interpretation dependent.
I am long ABCAF. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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