Dundee initiates coverage of Athabasca Minerals

Production at Athabasca Minerals’ (TSXV: ABM; US-OTC: ABCAF) Firebag silica sand project in northern Alberta could ramp up in late 2016 and early 2017 — perfect timing to capitalize on  growing frac sand demand in North America, a report from Dundee Capital Markets says.

Dundee analysts Maxim Sytchev and Shereen Zahawi point out that the market for proppant — solid material made up largely of raw frac sand that helps the fissures in the rock stay open during fracking — will grow in Canada at a compound 16.3% annual growth rate between 2012 and 2017 (from 5.8 billion to 12.5 billion lb.), and in the U.S. by 11% (from 53.2 billion lb. in 2012 to 90 billion lb.).

“The market will grow, driven by horizontal drilling, and we haven’t even started thinking about LNG optionality,” the analysts write. “The sentiment towards providers that sell proppants has been skyrocketing.”

Over the last decade, the number of frac sand players has soared from four providers (controlling 85% of the market) to 63 players (with the top four making up half of the total). At the same time, the amount of proppant used has increased nearly ninefold, the Dundee report estimates.

“In 2012, there was a concern in the market that supply capacity would overwhelm the demand equation, leading to a depressed pricing environment,” the analysts note. “The fears were overblown, however, as the demand side driven by continued increase in horizontal wells and a moratorium on some sites in the U.S. to develop additional resources brought the market back into an equilibrium position, which we believe is sustainable on the back of an improving oil and gas commodity backdrop.”

As a result, Athabasca Minerals’ 500-acre Firebag silica project, 140 km north of Fort McMurray, finds itself in a sweet spot. Dundee estimates the project holds 16 million tonnes of sand and has a 17-year project life.

Dundee initiated coverage of the company on June 25 with a $5.50-per-share target price. At press time the Edmonton-based company’s shares traded at $3.08 within a 52-week price range of 70¢ to $3.20 per share.

The company is planning a preliminary economic assessment. If all goes well, environmental studies and a feasibility study will begin next year, with construction kicking off as early as July 2015.

Dom Kriangkum, the company’s president and CEO, says the PEA could be finished before 2015, and says the production target is 1 million tonnes of frac sand a year.

“We have been looking at developing frac sand and silica sand since we formed the company in 2006,” he says. “It took us a while to locate the sand and isolate an area that has the quality the market demands.”

He also notes that some of the delay was getting permits from the Alberta government. “In the last year or so the Alberta government has gone through various transitions, so that’s why everything got delayed in getting approval. We anticipate we will receive approval soon so that we can get going with our development.”

Athabasca Minerals describes Firebag as hosting high-quality silica sand that will be suitable for use as frac sand in the oil and gas industry, and will be one of the first major deposits developed in Canada. Kriangkum says that “there are other local sand deposits and operators in Alberta, but I like to say that we’ll be a major one. Our quality will be a lot better than the rest, based on our results from lab work so far.”

Its location north of Fort McMurray gives Firebag an advantage over frac sand producers in the U.S., which must transport their frac sand 2,700 km by rail from Wisconsin to Canada, the Dundee report states.

“The bulk of Canadian requirements pertaining to frac sand have actually been satisfied by the U.S. players, with the sand coming from Wisconsin,” the analysts explain.

Kriangkum estimates that more than 70% of the frac sand used by companies in Canada is imported from the U.S. “Being in Alberta and supplying material for the Alberta market definitely has that transportation advantage,” he says. “We want to take advantage of that.”

They note that in Canada the biggest producers are Sil Industrial Minerals with 900,000 tons of capacity, and Peaskie Minerals with 600,000 tons of capacity. “With a number of players contemplating expansion, we should assume that only a small fraction of them will get the required financing in order to get the projects moving. Environmental permits also take time to approve,” they argue.

Dundee estimates Firebag’s total capex could reach $50 million, financed by 30% debt and 70% equity. They forecast equity will be issued at $3.50 in 2015 and at $4 in 2016.