After two years of careful groundwork, Toronto-based junior Claim Post Resources (TSXV: CPS; US-OTC: CLMPF) is well on its way to becoming a provider of premium white silica sand proppant to the oil and gas industry in the U.S. and Canada.
Claim Post’s efforts centre around its wholly owned Seymourville frac sand project, located 1 km south of the small town of Seymourville, on the southeast shore of Lake Winnipeg, some 200 km northeast of Winnipeg. Immediately east of the property is the 16 sq. km Hollow Water First Nation reserve, with a population of 1,500. To the south, there are cottages dotted along the Lake Winnipeg shoreline, and paved Highway 304 passes within 6 km of the property to the southeast.
Claim Post assembled the property package in 2013 from two vendors — privately held sand and gravel company Char Crete and Gossan Resources (TSXV: GSS) — for a combined $2.6 million in cash, 3 million Claim Post shares and a production royalty of $1 per tonne of frac sand sold. About 70% of the deposit was on Char Crete ground while the rest was Gossan’s.
The resulting property now covers a single silica sand deposit totalling 7.3 sq. km that was discovered in 1977 and drilled by the Manitoba government in 1981 and 1989, and later by Gossan. The government delineated a historical resource of 41 million tonnes of high-silica sand on half the property as part of a feasibility study for a 500-tonne-per-day mine that would produce 99.6% pure silica for use in the plate glass industry.
Gossan became interested in its part of the property because it had a separate magnesium asset and needed silica for a proposed magnesium smelter.
“Gossan got looking into frac sand, but five years ago there was very little information available on it,” Claim Post’s president, CEO and founder Charles Gryba says. “There’s a lot more information available now, but even if you want more technical information on frac sand, unless you’ve been to the right conventions and get the right people, it’s a difficult thing to research.”
The deposit rests within a 25-metre-high hill composed mainly of Lake Winnipeg formation, which is the on-shore extension of the historical Black Island silica deposit to the west.
“It’s free-running sand,” Gryba says of the Seymourville deposit. “There was a flat-lying sandstone horizon, but a lot of hot water went through it somewhere along the line and basically defragmented it, mainly back to sand. We have a few percent clay, so what we have to do is wash the fine silica and clay off the coarser sand. About 80% of the sand meets frac sand size ranges.”
Right off the bat Claim Post had the property and surrounding 70 sq. km region flown with a $70,000 lidar survey at a 0.5-metre contour interval to create a high-resolution contour map (lidar or “light radar” is a remote-sensing technique to measure distance by illuminating a target with a laser and analyzing the reflected light.)
“Until you have a really good contour map, you don’t really know what way the drainage goes,” Gryba says. “It would be hard to deal with the cottage owners if you didn’t know exactly how close the deposit is to their cottages.”
In April 2014 P&E Mining Consultants calculated a National Instrument 43-101 compliant resource estimate for Seymourville using drill data collected by the Manitoba government and Gossan.
The headline figure is 26 million inferred tonnes of sand-clay mixture grading 94.31% SiO2, 1.94% Al2O3 and 0.91% Fe2O3. The key sand layer is 5 to 17 metres thick within the 20% of the quarry lease area that has been drilled to date, leaving plenty of room for resource expansion.
SGS Laboratories in Lakefield, Ont., has carried out metallurgical test work for Claim Post on a 1-tonne representative sample from 25 sonic drill holes. SGS’s preliminary results show the mixture of silica sand and kaolinite clay has a bulk density of 1.73, with the mixture composed of 94% silica sand grading 99.3% SiO2, with 4% clay and 2% magnetic particles.
Claim Post has also sent its silica sand to PropTester Inc. in Houston, Texas, which is carrying out independent testing to confirm that the product meets American Petroleum Institute (API) standards.
“We’ll soon have the API testwork, and that’s what the oil and gas companies want to see,” Gryba says. “We’re also going to produce enough sample that they can have independent samples if they want to ship it out to an alternate lab to double-check it.”
Claim Post should have a preliminary economic assessment (PEA) completed at Seymourville in the fourth quarter.
“Then I can start marketing sand because I’ll have legitimate capital and operating cost estimates and a production schedule,” Gryba says.
As part of that PEA work, Claim Post intends to drill off the hill on 400-by-400-metre centres and fill in at 100 metres in areas where mining might start, for a total of 2,000 metres of shallow drilling.
“That will be adequate if you’ve got sand that’s ten to fifteen metres thick, and horizontal and consistent,” he says.
It’s still early days, but Claim Post is proposing to build a private road from the southeast corner of the deposit, passing a kilometre south of the Hollow Water reserve, and linking to a north–south road that connects to Highway 304.
Mining would take place during the warmest six months of the year, with half the material stockpiled so that processing could go on year-round.
“We’re setting up to mine maybe four 40-acre parcels at a time, and we’ll have 40 of them, and those first four we might be mining for six or seven years before moving on to the fifth parcel,” Gryba says. “So it’s like a checkerboard clear-cut: as you finish a 40-acre parcel, you’ll rehab it and move on to another 40 acres. By the time you get to the end of the property, the trees planted on the first parcels will be forty years old.”
The mining would be a fairly simple process of removing trees, moving glacial till and hauling or pumping sand to a plant. There, clay would be washed from the sand, fines would be removed by a cyclone and magnetic minerals would be separated out. The wet feed would then be dried, crushed and screened, with sized frac sand conveyed to individual bins.
“It’s going to be a benign operation,” Gryba says. “We won’t have a tailings dam. We’ll recycle all of the water from the pit to the plant. We’ll be drying the sand and screening it on-site, and shipping it in the same kinds of trucking containers you’d ship cement around Toronto. They’re dust-proof, so you’re not blowing around dust or anything.”
Initial capital expenditures are pencilled in at $50 million for a 500,000-tonne-per-year producer, and any 500,000-tonne-per-year capacity expansion could cost another $40 million.
The proposed plant would be 2.4 km from the cottagers on the east side of the deposit, and served by the new road.
“People won’t even know that the operation really is there, and we’ll put all the stockpiles in storage buildings, so there won’t be any sand blowing around,” Gryba says. “I’ve been designing this to be ‘out-of-sight, out-of-mind.’”
From the plant, the frac sand would be trucked to Winnipeg, where there would be 3,600 tonnes of storage at a rail site. From there, the sand would be loaded into containers and transported by rail 2,500 km to customers in the Montney basin in the northern border area between B.C. and Alberta, and the Horn River basin in northeastern B.C. Closer customers operating in the booming Bakken shales of North Dakota, Montana and southern Saskatchewan could get their order via trucks driven 300 to 700 km from the Seymourville plant gate.
By comparison, shipping frac sand from Wisconsin — North America’s dominant frac sand producer — by rail to Fort Nelson in northeastern B.C. is a 3,500 km trip, or 1,000 km farther than from Seymourville.
Claim Post notes that the selling price of tier-one sand is $80 per tonne, and describes its product the “only tier-one frac sand in Canada.”
Gryba reckons that Claim Post should be able to deliver sand to Fort Nelson, B.C., at a cost of $250 per tonne, compared to $350 per tonne from Wisconsin.
“Accountants in oil companies are like accountants in anything else, so they go out for bids for something 20,000 tonnes per month, or else it can be negotiated, and they could put up the capital so that they get a certain percentage share of the plant, or a take-or-pay contract,” Gryba says.
“I expect that the Canadian market will go to 10 million tonnes a year, and there’s virtually no tier-one, high-quality frac sand made in Canada — and we’ll have tier-one frac sand,” he says. “So if [as a country] you’re importing 8 or 10 million tonnes from Wisconsin, we should be able to sell 1 million or 2 million tonnes of Canadian product.”
He notes that Encana (TSX: ECA; NYSE: ECA) this year will probably use somewhere between 500,000 to 1 million tonnes of frac sand, and they have searched out three major suppliers. “So if you can get 200,000-tonne orders from someone like Encana, you only need one or two of those,” Gryba says.
Gryba says he’s gone to seven frac sand conferences now, and even started speaking at them. “What I had to do was basically study the entire frac sand market to figure out when Seymourville could come into production and at what rate, because if you go into production and the market isn’t there, you go bankrupt.”
Gryba says he discovered that over the last eight years, every year people predicted the frac sand market was going to go flat or drop, and instead, every year it went up 8 million or 10 million tonnes a year. He says that in 2013, 42 million tonnes of frac sand were produced and consumed in North America. One brokerage firms is predicting 50 million to 54 million tonnes in 2014, and well over 60 million tonnes in 2015.
“I think that’s just going to continue over the next four to five years until it hits 100 million tonnes, and then it may continue beyond that because Mexico is going to get into major [fracking] programs then, and the Americans will be stepping up [oil and gas] production and exports, so the market is just going to grow and grow.”
Another wrinkle is that permitting new frac sand mines in Wisconsin is hitting a bottleneck due to push-back from environmental groups, farmers and other rural landowners, leading to sand shortages and higher prices in Canada.
Meanwhile, Claim Post has met with representatives of the Hollow Water First Nation and the nearby villages of Manigotagan and Seymourville. Hollow Water and Seymourville have both expressed an interest in participating in the venture, and have been offered three options for doing so: a $3-per-tonne royalty, a 70–30 joint venture or a $3-per-tonned royalty for the first three years that converts into a smaller joint-venture stake, and smaller royalty.
Gryba says they are leaning towards accepting the pure royalty, to avoid any upfront payments of millions of dollars.
He comments that the negotiations with Hollow Water aren’t being rushed. “That’s one of the problems in Canada, they have elections every two years for chief and council. So it’s like the U.S. — you never stop campaigning. By the time you get a relationship with one chief and council, they’re already politicking for the next election.”
But by taking some time in negotiating, Gryba says, “people have time to come to grips that we could be creating 80 jobs in their backyard. We’re going to create more jobs than there are people to fill them. If someone wants to work, there’ll be a job for them.”
“It’s a very simple project, apart from the First Nations and federal politics,” he says. “I’m just methodically going through it. It’s just that we’ve lucked out on getting our hands on a good deposit right when the market is going from 30 million tonnes to 100 million tonnes. We should become a good tier-one sand producer, and the only one in Western Canada.”
In a side curiosity, Dow Chemical built a $25-million, 6 MW submerged arc furnace in Winnipeg in the nineties as a test facility to make silicon metal out of the Seymourville deposit.
Today, however, the small smelter is on the verge of being scrapped, as there are plans to build a natural gas co-gen plant at the same location.
“Unfortunately I didn’t find out about it early enough,” Gryba says. “What I wanted them to do was have Manitoba Hydro or the Manitoba government make a deal with the Ontario government and leave that plant in place, as it’s exactly what you need for the Ring of Fire chromite to prove up the technology before you go bigger.
“They had a perfectly good one there that would cost $50 million to build new, and they’re probably selling for a million bucks in scrap.”
Claim Post’s shares last traded at 10¢, with a 52-week range of 3¢ to 19¢. There are 118 million shares outstanding (172.7 million fully diluted), for a $12-million market capitalization. Outstanding warrants priced between 10¢ and 15¢ are due to expire in 2014 and 2018. In-the-money warrants exercised at 10¢ this coming December could bring another $1 million into the treasury.
Thanks to a mid-June $1.8-million private placement financing, the company now has $2 million in cash, which is the amount the company intends to spend on its work program and other commitments at Seymourville this year.
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