‘Holy Grail’ of oil sands ramping up for commercial production in Utah

American Sands Energy Corp. (‘AMSE’, OTCBB: AMSE) is a pre-production oil company with oil sand resources located near Sunnyside, Utah. The company proposes to mine oil sand ore using conventional mining techniques and use a proprietary solvent to extract oil from the oil sand ore. This water-free process produces high quality bitumen, recovers nearly 100% of the solvent, requires no tailings ponds, and its only by-product is reclamation ready sand.

AMSE expects to be in commercial scale production of oil by the summer of 2016. A key factor for anyone evaluating this opportunity is the highly attractive production curve of oil sands operations. We’ve all read about the unconventional oil shale and gas plays that have steep decline curves. So steep, that in many cases initial production is halved within a year or two. With oil sands extraction there is no decline curve — because it’s really a mining operation, not an oil drilling play.

AMSE-ProcessZero decline curve, with limited (if any) meaningful cost escalation — that’s the Holy Grail of oil production. The only reason why oil sands production in Canada is not the Holy Grail is because of the heavy use and pollution of valuable water resources. AMSE’s licensed technology/process does not use water and therefore does not require the design, permitting, funding, building, monitoring and reclamation of tailings ponds. A huge difference and hugely compelling part of the AMSE story.
Assuming the conversion of all Series A preferred shares into common, AMSE has a market cap of approximately $50 million, and no debt. Readers should take a few minutes to review the company’s corporate presentation. On page 15, the company estimates that by 2017, it could operating at a run-rate of $63 million of annual EBITDA from its initial-phase 5,000 barrels of oil per day “bopd” operation. That’s based on an assumed $100 WTI oil price. The company plans to operate at 5,000 bopd for 4-5 years while it builds a much larger facility, which could allow for the production of up to 50,000 bopd.

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AMSE-2Cleaner, more profitable oil sands extraction is coming to the U.S. It’s a question of when, not if. Utah is the furthest along in allowing this to happen. I feel comfortable that AMSE has a more profitable business model than Canadian peers for one simple reason. The Canadian oil sands extraction methods require steam to separate bitumen from sand. The cost of building a steam generation facility alone (a mini power plant) can run into the hundreds of millions of dollars. AMSE completely avoids that expenditure.

Although the main focus for now in in Utah, the company’s opportunities outside of Utah are huge. They can earn royalties from projects outside of Utah, including internationally. The royalties would be split with the owner of the solvent extraction technology. Even a 5% royalty stream on gross revenues of a third-party project could be very substantial. These are 30-year projects. Each project could be a meaningful annuity to AMSE. For example, a third-party operating at 5,000 bopd and paying a 5% royalty on gross revenues to AMSE would be paying about $9 million annually. The Net Present Value of 30 years of $9 million a year is close to $100 million. And that $100 million would come with no associated costs.

To find out more about the company, I recently interviewed newly appointed Director William H. Champion.

The following interview of newly appointed Director of American Sands Energy (AMSE) William Champion was conducted over phone and email in the first week of July 2014. I believe that Mr. Champion’s joining the Board was an important vote of confidence in management’s vision to become one of the first oil sands developers in the U.S. Mr. Champion is a senior mining executive with an experience base that spans multiple geographies, cultures and metal and mineral products. Most recently, Mr. Champion spent 11 years with Rio Tinto PLC. At Rio, Mr. Champion spent four years as managing director of their Australian coal operations with responsibility for six open pit and one underground mine producing 48 million tons per annum, overseeing a workforce of 4,500 employees. Prior to that, he ran Rio’s diamond business and spent five years as President and CEO of Rio’s Kennecott Utah Copper Corporation, located in Salt Lake City.  Mr. Champion has also worked for Cypress Amax Minerals Company and Phelps Dodge. Mr. Champion has degrees in both Chemical Engineering and Biological Sciences from the University of Arizona.

Peter Epstein (Q): You are recently retired after a highly successful mining career. You presumably are being invited to join a number of Boards, what made you jump on this one first?

William Champion (A): The company is of particular interest to me as it is in a different industry — oil — from traditional mining, yet incorporates mining techniques with which I am quite familiar. I also am attracted by the fact that it is a smaller and more entrepreneurial venture, which is new to me. The company has a good resource base with a logical strategic business plan. The management team and my Board peers complement each other with their skills and experience. The company is progressing forward with the development of a very exciting project where, I believe, my own experience can be of some value in delivering a successful outcome.

Q: How is your vast experience, most notably at Rio Tinto, directly applicable to the opportunities and challenges facing American Sands Energy?

A: Probably the greatest contribution I can make in the next few years is in the project development, construction, and start up. I have significant experience in these areas. Most directly, I suppose, my mining experience can support the front end needs of the project and, ultimately, the move from an underground to open pit mining operation.

Q: Your most recent role at Rio Tinto was as MD of its Australian coal operations where you were responsible for 7 mines and 4,500 employees. How similar a mining operation (in terms of scale and complexity) does American Sands propose?

A: The scale of operations in Australia were certainly larger than the initial phase of operations at AMSE. However, as the project expands to 50,000 barrels/day, the scale of the open pit mining operation will be similar although still smaller. The complexity of projects, while influenced by size, is also determined by many of the same external issues facing any resource project, specifically financing, permitting, community and government interaction, operations, safety, etc. From this perspective, AMSE’s project is similar to my previous experience in Australia.

Q: You have a chemical engineering background, can you comment on the technology that you saw demonstrated by the pilot plant in Phoenix?

A: While I do have a chemical engineering background, my experience is mining and the various extraction processes unique to mineral and metal products; it is not in petroleum. However, when I visited the pilot plant I did note that the process itself, while unique in the use of an extraction solvent, appeared relatively straightforward and utilized a process flowsheet and various equipment (mixers, heat exchangers, separation towers, filters, etc.) that is common to petroleum, chemical, and some mining applications.

Q: How currently applicable is the considerable amount of historical drilling and mine development work done in the 1980′s?

A: For any mining operation, the more information you have about the “orebody”, the better off you are to design and operate a more efficient mine. As such, the historic information you reference remains very applicable and helpful. The fact that the core drillings remain on deposit with the state, and are therefore accessible to our geologists and mining contractors, creates a significant savings to AMSE in terms of both time and money.

Q: Given your experience working in Utah, how mining friendly is that State?

A: Utah is a very friendly and supportive state for business, in general. As the AMSE project resides in Carbon County, there is also legacy support and understanding of resource related projects.

Q: What do you envision as the biggest risks facing the company in the next year?

A: I would think financing, permitting and project development.

Q: Can you comment on the management team at American Sands Energy?

A: I highly regard the interactions I have had with them to date. Will Gibbs is very knowledgeable about the resource and the overall industry. He has support from Dan and Robin, both of whom are experienced and motivated executives. I think it is a good, collaborative combination of skills and experience, together with the Board, that supports us going forward.

American Sands Energy is a company worth watching closely. They expect to get final permits within about six months and then fund the 5,000 bopd project soon after. There’s tremendous blue-sky potential here for this highly speculative stock.

AMSE-3


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Peter Epstein

About Peter Epstein

Peter Epstein is a Chartered Financial Analyst, (CFA) and has an MBA from NYU: Stern School of Business. He worked for over 20 years as a research analyst with his most recent role a six year stint at a $3 billion hedge fund as a senior natural resources analyst. More recently, Mr. Epstein has established himself as a respected and sought after investment writer on a number of well known websites. Mr. Epstein is a consultant for Groundstar Resources, American Sands Energy and a private company, QE2 Acquisition Corp.
  1. Peter – what a thorough piece for furthering the understanding of oil sands production. I have an interview with AMSE’s Dan Carlson this morning, and your interview with William Champion reinforced my understanding of what a great location Utah is for the development of resource plays.

  2. Pingback: ‘Holy Grail’ of oil sands production ramping up & American Sands Energy … – InvestorIntel | Alberta Oilsands Pulse

  3. Pingback: ‘Holy Grail’ of oil sands ramping up for commercial production in Utah – InvestorIntel | Alberta Oilsands Pulse

  4. Great article Peter. After meeting with the management and watching the pilot plant in person, I am further bullish.

  5. Pingback: Daniel Carlson on the ‘Holy Grail’ of oil sand companies and the value of water | InvestorIntel

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