Investment Matters

Northern Silica: Patience will be rewarded

This week we wanted to report on progress at Northern Silica. For long-term clients, Northern Silica was formally Heemskirk.  It is currently being run as an unlisted company, whilst it is being readied for, firstly,  production, and then secondly, re-listing or a trade sale.

Northern Silica Overview

Operating for 20 years, Northern Silica (NSL) is Canada's only known producer of 'white' silica sand. It is located in Golden, British Columbia. 

Due to the increasing use of silica 'frac' sand in the North American fracking industry, the demand for silica in Canada has risen from 2mtpa 7 years ago, to a forecast 8-10mtpa in 2018. Brown sand supplies ~1mtpa.  Historically, at least 75% of the sand used in Canada (including for industrial uses) has been imported from the US (Wisconsin primarily).

Thanks to the substantial cost advantage from supplying Canadian oil and gas producers with local product ($100/t transport advantage), NSL is ideally located to expand considerably and to displace substantial portions of the sand currently being imported from the US.  The cost advantage is such that even at $0/t gate pricing from the US, NSL can remain profitable through all points of the cycle.

NSL has a measured resource of 37mt, but an inferred resource of 99mt (measured is a more defined and tested category of resource).  At the initial restart rate of production (300,000tpa), NSL has 92.5 years of production resource (from its measured resource only).

 

northern 1

Mount Moberly Mine (Golden, British Columbia)

The business plan, therefore, is to incrementally build production capacity, in a manner that maintains the market price and maximises the economics (and ultimately the return on the resource) of the company. The upside cases are substantial.

Poised to (re)start production

For 20 years NSL operated a 50,000tpa silica refining operation for the glass industry.  It was a basic grinding and bagging operation.  With the significant increase in frac-sand demand, NSL decommissioned this new plant - a 300,000tpa (finished product) operation on its substantial footprint (some 7-8 km’s from Golden, British Colombia).

 northern 2

Northern Silica Processing Plant (Golden, British Columbia)

After investing approximately CAD65m over the past two years, the plant is now built and due to start production during the second half of 2018.  It will ramp up into the beginning of next year.

NSL also owns its own transload (storage and handling) facility in Penhold, Alberta. This has been acquired from a logistics company, whose owner will now become NSL’s head of logistics.

Compelling economics at (re)start

Current market pricing at Penhold is CAD140/tonne (2014 high was $160-170/tonne) and given the $30/tonne ($27/t rail, $3/t car leasing costs) transport costs, is equivalent to a gate price at Golden of $110/tonne.

The costs of running the plant (at ~300,000tpa of finished product) is $46/t (including the transload costs of operation, and a corporate office in Calgary).

This gives an operating cashflow (pre-interest and tax) profit of $63/tonne. The lowest price known to be recorded at Penhold was $100/tonne during early 2015, and this would still equate to a $23/tonne operating cashflow profit.

We expect that, once operating, the sustainable operating cashflow from the 300,000tpa plant is $20-22m p.a. At the current market value, this equates to a Price to Cashflow of <5x.  With a 92.5-year mine life, we see this as compelling, making it the cheapest company First Samuel clients currently own (compared to cash flow).

Investment summary

Northern Silica has a strategic role in Canada as the only white silica producer.  This gives it a large local market, and substantially better economics than any of its competitors. Whilst the (re)development of the processing plant (and its expansion) involves some development risk, the processes themselves are simple. The goal is to build up a big sustainable operation, quickly.

We expect to own NSL until such stage as it is ready to be listed or sold to a North American player, at a price that will reflect its strategic value to the Canadian market. This is likely to be at the point at which financing is required for further growth, and will be in the next 2-3 years.