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TABLE OF CONTENTS Jul 21 - 27, 2014 Volume 100 Number 23 - 0 comments

US Silica ups its capacity to meet growing frac sand demand

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U.S. Silica Holdings (NYSE: SLCA), like many other U.S.-based frac sand miners, is boosting its production capacity to meet the growing demand for this special type of sand used in oil and gas drilling.

By the end of 2013, U.S. Silica, which has two operating segments — oil and gas, and industrial and specialty products — grew its oil and gas capacity to more than 4.5 million tons (4.1 million tonnes) per year, up 50% from 2012, as it opened two new production facilities. This year it is starting up a greenfield mine and processing plant in Utica, Ill., boosting its capacity by 1.5 million tons (1.4 million tonnes).

And it’s not stopping there. U.S. Silica announced receiving a green light from the town of Fairchild, Wis., to build a 3-million-ton-per-year (2.7-million-tonne-per-year) frac sand mine and plant. The Union Pacific Railway will serve the proposed operation, expected to come online in late 2015. The firm anticipates its annual production capacity could reach 9 million tons.

“This is an important step in our plan to bring on additional capacity to meet customers’ rapidly growing needs for high quality, Northern White frac sand in all of the major shale basins in the U.S.,” Bryan Shinn, the company’s president and CEO, said in a release.

Northern White sand comes mainly from Wisconsin, Minnesota and Illinois, and is the strongest, most spherical sand available for hydraulic well fracturing, or fracking.

 In this process, drillers blast water, sand and chemicals into a well bore to crack open the rock layer. The sand keeps the fractures open and is permeable, so that the oil and gas can flow out into the well for extraction.

Each well could use up to 10,000 tons of frac sand during its lifetime, and there are 50 wells being exploited in the U.S. every day, according to InsideClimate News.

In a June corporate presentation, the firm said customers are asking for as much as five times the contract amounts.

U.S. Silica, which last year noted the market was fairly balanced, expects this year’s demand to grow by 10–15%, pushing up the prices for all grades of frac sand.

Cowen & Co. analyst Marc Bianchi predicts U.S. frac sand demand would increase from 36.2 million tons in 2014 to 47.5 million tons in 2015. “We see a tight market supporting higher frac sand prices with the potential for material increases should new supply encounter delays,” he writes in a recent research report.

The U.S. Geological Survey reported that the average sand price per ton jumped from US$34 in 2009 to US$50 in 2013.

U.S. Silica reported first-quarter 2014 oil and gas sales of 1.3 million tons, up 45% from a year ago. Under this division, the average sale price per ton was US$100.45. “This number is a mix of both FOB mine and FOB destination sales,” Bianchi says.

During the quarter, the company’s industrial sales slightly increased to 975,400 tons, putting overall sale volumes at 2.3 million tons.

Total revenue for the quarter was up 47% year-over-year to US$180.1 million. Net earnings were US34¢ per diluted share.

Its second-quarter results should be out shortly. U.S. Silica anticipates full-year adjusted EBITDA to reach the upper end of its US$180–$200 million guidance.

U.S. Silica’s shares last closed at US$55.37, up 147% in the past year. Bianchi has a US$48 target and an “outperform” rating.

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Machines at U.S. Silica's frac sand mine in Ottawa, Illinois. Credit: U.S. Silica
Machines at U.S. Silica's frac sand mine in Ottawa, Ill...

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