EDITOR: | July 16th, 2014 | 12 Comments

Fracking Minerals – Collateral Business for Miners

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With mainstream mining in the doldrums still, enterprising boards have thought laterally about what they should be doing to survive the long drought of financing. Some have looked at their deposits and asked themselves the question “what else have we got here that we can sell?” and the answer has come back, for a lucky few, as products to feed the still healthy oil & gas E&P sector, which has been on a roll for a fistful of years now on the back of the fracking phenomenon. Before recently if we had been asked what mineral product could exploit the oil and gas trend we would have been hard pressed to think of anything more than Cesium, which is used as a drilling and completion fluid, or Barite that is used in drilling mud. We would have been equally pressed to name a player in the Cesium space besides Cabot Corp (NYSE: CBT) which makes Cesium formate brines.

However there are some names to conjure with in the fracking minerals space and all of them are new to the activity. What they are doing is largely under the radar in a “couldn’t care less” mining market but they manage to straddle the gap between a fully-valued hydrocarbons sector and down-in-the-dumps mining sector. If some of the higher value that propels the valuations on oil services players (think Schlumberger) might be afforded to these bottom-feeders in the provision of fracking minerals then managements (and shareholders) should be happy campers indeed.

The Big Dynamic

The main driver for the very rapid, steadily increasing demand of fracking minerals is the United States focus on becoming self-sufficient in energy by the year 2020 or if not sooner. The demand has been generated by the technology breakthrough of horizontal drilling combined with multiple fracking.

Key to the fracking process is the use of proppants, of which fracking sand is one of the most important. A proppant is a solid material, typically treated sand or man-made ceramic materials, designed to keep an induced hydraulic fracture open, during or following a fracturing treatment. It is added to a fracking fluid which may vary in composition depending on the type of fracturing used, and can be gel, foam or slickwater-based.

Source: Minnesota Dept. of Environmental Quality

Source: Minnesota Dept. of Environmental Quality

Natural sand is the least expensive proppant used in fracking thus the demand for frac sand continues to grow and is now 90% of the market; expensive ceramic proppants are now less than 10%.

Source: Indmin

Source: Indmin

Production – Hitherto Highly Geographically Concentrated

Total US frac sand production in 2012 was 31 million tons, of which about three million tons were exported mainly to Canada. Around 75% of the US supply of frac sand is currently produced in Wisconsin and neighboring states. In the state of Wisconsin alone; in the past five years, a total of 105 frac sand mines feeding 65 processing plants have been put into production. In comparison Canada only has four frac sand mines in production producing about two million tons of sand per day.

Demand – On a Tear

According to Hart Energy, a major US consulting firm which focuses on the shale oil and gas industry, in 2012, the US produced around two million of barrels of shale oil per day, mainly from the Bakken and Eagle Ford basins in Texas. In 2012, the US added one million barrels of new shale oil per day, while Canada added 200,000 barrels of new oil per day (mainly in Saskatchewan and Alberta).

The USGS statistics show that 28 million tons of frac sand was used in 2012, thus on average a million barrels of new oil requires about 14 million tons of frac sand. It is estimated that to increase the US oil production to six million barrels of shale oil per day would require a massive 80 to 100 million tons of frac sand by 2020. As all the Western Canadian oil fields get redrilled and fracked, the Canadian demand will increase exponentially as well. For example the 200,000 b/d increase in 2012 would have required an additional 2.8 million tonnes of frac sand, nearly equivalent to the total amount imported from the US.

Another important driver of future growth of the Canadian frac sand market is for drilling natural gas to feed the large LNG plants planned in British Columbia.

This trend sparked a land rush best exemplified by a transaction in 2011 when Natural Resource Partners purchased 2.8 square kilometers of frac sand reserves in east Texas for $16.5 million.

Dynamics

All sand may seem the same when one is sprawled on the beach. But there is a myriad of difference in the quality and usefulness of sand for the fracking process. Increased strength often comes at a cost of increased density, which in turn demands higher flow rates, viscosities or pressures during fracturing, which translates to increased fracturing costs, both environmentally and economically. Lightweight proppants conversely are designed to be lighter than sand (~2.5 g/cm3) and thus allow pumping at lower pressures or fluid velocities. Light proppants are less likely to settle. Proppant geometry (i.e. shape) is also important; certain shapes or forms amplify stress on proppant particles making them especially vulnerable to crushing.

Because the sand is used in large quantities, as production and processing are relatively low-cost, transport to the fracking location is a key component of the pricing. The largest US and Canadian locations where fracking is undertaken are distant from the sea and largely inaccessible to river transport, so the product needs to be moved by truck (mainly) or rail. Proximity to the end-user is thus an important factor.

Western Lithium (TSXV: WLC) – Branding Products

If we recall rightly this was the first Lithium company we ever met, right at the start of the Lithium boom and it seems like an eternity ago. The company project then and now is the Kings Valley Lithium Project is located in Humboldt County in northern Nevada. The area is sparsely populated ranching land and covers approximately 40,000 acres. Humboldt County though is famous for its various mines both past and present.

The deposit has a resource of 11 million tonnes of lithium carbonate equivalent (historical estimate based on exploration work by Chevron Resources during the 1970s and 1980s) in a near surface deposit. The Pre-Feasibility Study dating from December 2011 is based upon for nominal production of 26,000 tonnes per year lithium carbonate, with nominal production of by-product potassium sulfate and sodium sulfate of 90,000 and 100,000 tonnes per year, respectively over a 20 year mine life.

However like so many in the lithium space it had to contend with the “hunger phase” of the last two years. In response to this the company thought laterally and decided that its properties resource of hectorite clay could be a short term solution to its production hiatus on lithium. Therefore it invented itself a brand name, Hectatone (not quite De Beers, but it works). It then set about exploiting the simplified refining processing requirements and properties of the WLC hectorite clay for the development of additives to drilling fluids. This organoclay is an essential drilling fluid additive for new directional drilling completion techniques that target previously inaccessible reserves of natural gas and oil.

With high active clay content, the hectorite clay-based organoclay is dry processed, and the company expects to have a cost advantage over wet processed products. It’s positioning itself as a cost competitive new entrant to the drilling industry targeting the growing high pressure high temperature market.

U3O8 – Stirrings in Patagonia

Argentina has come from nowhere in fracking a year or two back to being predicted to have one of the largest potential resources in this space. It was a particularly timely discovery as the previous ten years had been full of predictions of Argentina falling into a severe hydrocarbon deficit. U3O8, which has been in Argentina for a long while now searching for Uranium was suffering the travails of the price in that mineral and much to the surprise of many suddenly announced it had a fracking sand asset within its territory and thus decided to up the profile of that asset, spun it out into a new vehicle and hopes to ride the fracking boom in Patagonia.

Others…

Other names to conjure with are Victory Mountain Ventures (TSXV: VMV) and Claim Post Resources (TSXV: CPS) which are both pursuing fracking sands, both in Alberta.

Conclusion

Minerals for the fracking industry may not be a widely known subject but in these current tough times, they are nothing to be sneezed at if they bring in money. Companies that find themselves with a resource which can be turned to this purpose, in total or in part, would be foolish not to exploit the moment. We should recall that it is often said of the California Gold Rush of the 1850s that those who made the most money were not those doing the mining but rather those selling them the shovels. The new push for energy independence in the US and the aggressive hunt elsewhere for frackable resources means that there are good prospects for those “selling shovels” to that industry for the foreseeable future.


Christopher Ecclestone

Editor:

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>


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Comments

  • Fred

    For the moment, the story with sand is the same as with real estate in general: location, location, location. The cost of the sand is mostly the expense of digging it out of the ground and shipping it.

    Frackers will try anything. They appear to be currently backing away from ceramic, because of the extra cost. Ceramic’s only perhaps 10% lighter. They may shift their techniques back and forth. If the frackers develop a strong preference for a particular type of sand, and are willing to pay extra for it, then you have a mine. Otherwise they’re just sand pits, and there are very many of them. Companies ship containers of cement, so there is money to be made in common basic materials. But it’s a rare skill to be able to squeeze that buck out of it.

    July 17, 2014 - 12:24 AM

  • GoBucks

    From the diagram it can be seen that the fracking activity takes place a long way under any water table.

    So, unless there is a problem with the upper portion of the well casing, or there is some kind of spill above ground, it can’t affect water quality.

    Interesting stuff!!

    July 17, 2014 - 10:27 AM

  • Tony Frackiolo

    One of the best plays in the frack sand space is US Silica:

    US. Silica’s (SLCA +1.2%) price target is raised to $69 from $54 at Jefferies, which maintains its Buy recommendation and remains attracted to SLCA’s volume and potentially distribution-based growth avenues.

    July 18, 2014 - 11:37 AM

  • Fred

    US President Obama doesn’t like pipelines. Canada gave up waiting for Keystone. The oil will go to China instead. The Oracle of Omaha loves this. He’s got his trains carrying oil criss-crossing the Bakken. And there’s a train that goes right to the door step of the Wisconsin mine of Tony’s favorite stock.

    If I wanted to supply fracking sand, I’d pick supplying the American side of the Bakken, because they have richer oil fields. It’s more lucrative to sell to people who have more money. I’d also look to supplying the frackers in Texas, New Mexico, Oklahoma, and Kansas, because that’s where the action is, and the local people aren’t hostile to fracking. I’d ask the oil companies exactly what type of sand they want. For the Bakken, I’d look for it in ancient lakebeds from ancient Lake Missoula on eastward to the Bakken, never going too far from the railroad tracks.

    July 19, 2014 - 8:08 PM

  • Dr. Copper

    try do the maths again and consider how much sand is used in dry wells and
    you may end up with a different mathematic model.

    July 20, 2014 - 3:49 PM

    • Fred

      I figure he had a typo. Important numbers I attempt to wrap my mind around. The other numbers I try to ignore anyway.

      I feel sorry for people trying to wrap their minds around Chinese REE numbers. In the early stages of its adventure with capitalism, China sent a reporter to jail for revealing state secrets. He had reported the market prices of publicly made gold sales. Years later China realized that it needed real numbers to make capitalism work. Then it became the individual companies that manicured the numbers. Everyone trying to cheat the import/export currency laws collectively produced national numbers which were nonsense.

      With REE’s, the highest value REE’s are obtained largely through black market mining and trade. After the Chinese statistical people do their best with the data, their boss clears his throat a few times and points to a newspaper article about REE quotas vs WTO complaints. So the adjusted numbers get released. If you try to get a handle on the situation by instead looking at the prices, you have to realize that the Chinese government is putting its heavy hand on the scale balancing supply and demand equilibrium.

      Harold Hamm of Continental Resources (CLR) is perhaps the most outspoken on fracking growth. He’s heavily into the Bakken, and more recently into Oklahoma, in what he calls the SCOOP. I think he was quoting company-wide projections, but his company is probably as good a proxy as any for the US oil (not gas) fracking industry as a whole. If my memory is right, he was looking for a 26% compounded annual growth rate over the next five years. (But don’t rush out to buy CLR. Harold’s divorce from his wife could dump a pile of shares onto the market. Tread with care.) Gas, also fracked, is currently in a desolate market. Fracking found too much of it, and it’s currently forbidden to sell US LNG overseas. This may change, but it would quite literally take an act of Congress. But Congress is discussing it.

      July 20, 2014 - 10:20 PM

      • GoBucks

        The “black market” for HREEs…how does that work? The reason I ask is this: as an engineer, I help select materials. They are all bought to specifications with requirements for composition, grain size, mechanical properties, etc…

        So how does this work with smugglers? Do they do analyses and provide certifications? If the customer finds the materials actually do not meet his requirements, can he reject them back to the smugglers?

        July 22, 2014 - 10:59 AM

        • Fred

          It works from bribing people. You need money to start. You find a favorably shaped hill among one of the many hills of ionic clays in China. You stuff a perforated pipe down from the top of the hill, pour acid down it, let it sit, and collect it out of the bottom of the hill through pipes. It’s incredibly inefficient, but cheap to do. And the acid ruins the surrounding crop lands. And through bribery or cheaper pricing it finds its way through the processing chain.

          July 22, 2014 - 11:38 AM

          • Fred

            Think of it like TRER’s Round Top project being done by amateurs,

            July 22, 2014 - 11:45 AM

  • GoBucks

    It still doesn’t add up.

    All I can see is risk. You could very well have a couple million bucks’ worth of (name your heavy rare earth material) in your receiving area which doesn’t test out at the required purity levels. If you use it in your products, their performance will suffer, and your customers will not be pleased. They can and will reject your products back to you.

    By way of summary, then….

    (1) Unacceptable smuggled heavy rare earths–expensive.
    (2) Angry customers–very expensive.
    (3) The look on a smuggler’s face when you tell him you want your money back–PRICELESS!!!

    July 23, 2014 - 9:56 AM

    • Fred

      Try these:
      4) Faked/fraudulent production numbers, my basic point
      5) Black market products blended into legit products; they will get purified
      6) For conspicuously black market sales, the only guarantees are at a point of a gun

      You’re looking at this from the perspective of office workers, but you’re dealing with gangsters. If China turns off the spigot too soon, it finds a huge shortfall of HREEs. It will fix the problem, but it hasn’t happened yet.

      July 23, 2014 - 10:40 AM

  • GoBucks

    The seamy side of high tech!!!

    A great gig for an investigative (and technically astute) reporter.

    July 23, 2014 - 3:25 PM

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