Select Sands’ (TSXV: SNS; OTC: CLICF) president and CEO Rasool Mohammad has chosen silica “frac” sand over gold, and hopes his bet will pay off with success at the junior’s frac sand Sandtown property in Arkansas, where small-scale production should start later this year.
The firm, previously named La Ronge Gold, has secured $5 million through a non-brokered private placement, where it will sell 12.5 million units in two tranches, with the first tranche expected to close shortly and the second by the end of August. Each unit is priced 40¢ and comprises a share and a half warrant, with a whole warrant allowing the holder to buy another share for 60¢ wihtin three years.
Select Sands will use the funds to buy Sandtown, clear the land and prepare for test mining, as well as drill the rest of the property.
Last October, the junior struck a deal to buy the 520-acre (2.1 sq. km) property. It has a final payment of US$1,800 per acre — minus the US$200,000 it has already paid — due next April.
Asked in an interview about the shift in commodity focus, Mohammad says the company had $1.3 million sitting in its treasury in mid-2013 and a promising gold property in Preview SW, but no market traction.
“I was scratching my head,” he recalls. “We had this 429,000 oz. deposit in Saskatchewan [in indicated and inferred] that was open-pittable and had great metallurgy, but we couldn’t excite investors.”
Wondering whether the company should drill the deposit further or preserve the cash until gold prices recovered, Mohammad says in the end he couldn’t justify either option: “I had a hunch the downturn in the gold market was going to be a lot longer than what I was hearing.”
The trained mining engineer, with more than 20 years of exploration experience, then turned to frac sand. Oil and gas drillers use frac sand in hydraulic well fracturing because it keeps fractures open, allowing oil and gas to flow out from the rock and be extracted.
Frac sand also goes into making more than 250 industrial and specialty products, including everyday items such as glass, construction materials, personal care products, electronics and renewable-energy materials.
“The reason I went after silica sand was that obviously the market was pretty receptive … and the prices were good, and it was related to mining,” Mohammad says.
In March 2014, the junior signed a letter of intent to acquire private producer Canfrac Sands Ltd.
But Select Sands later dropped the agreement, converting its $1-million deposit into a 22% equity interest.
Last December, Canfrac sold its business for $3.5 million. Select Sands received $650,000, or 65% of its initial investment.
Mohammad nows calls the loss on the investment a “tuition fee” because it gave the junior firsthand knowledge of the frac sand market.
“From that Canfrac involvement, we learned there are certain trends and there are certain products that you need to have. And the proximity to a shale basin is important. Just like in any industrial mineral, the closer you are to the end market, the better, because you can ship larger volumes,” Mohammad says.
With this in mind, Select Sands signed an option agreement on the Sandtown property, which can produce tier-one quality frac sand, also known as “Northern/Ottawa White” sand. This premium sand is the strongest, most spherical sand available for hydraulic fracturing.
Since changing its name to Select Sands last November, the junior has invested all its efforts in the Sandtown property, which is underlain by the Ordovician St. Peter sandstone (SST) formation. The SST hosts several producing frac sand mines, which all churn out tier-one frac sand.
In its first drill phase, Select Sands tested the SST’s depth and thickness to determine the sand’s properties, including sphericity and roundness, crush resistance, acid solubility and turbidity, and silicon dioxide content.
In February, it concluded that Sandtown met or exceeded the industry’s tier-one frac sand specifications.
Pleased with the results, the company kicked off its second drill phase, comprising a 20-hole infill program covering 200 acres, or 40% of the property. It wrapped up in March 2015, noting that all but one hole returned thick zones of SST.
Continuing the momentum, Select Sands applied for a quarry permit and commissioned a preliminary economic assessment (PEA). It received a five-year quarry permit in May, and a month later reported a positive PEA that was prepared by Tetra Tech and based on the drill results for 40% of the property.
Over its estimated 18-year life — which includes two years of pre-production operations — the PEA shows Sandtown could produce 865,000 tons (785,000 tonnes) of frac sand products a year, at average operating costs of US$19 per ton. Estimated average revenue is US$49 per ton for both granular and powder silica.
The study pegs Sandtown’s initial costs at US$42 million, including a US$3.7-million contingency. However, the company hopes to acquire or build its production facilities for less than those estimated costs, and finance capital expenditure with debt and equity.
Based on only 40% of the land drilled, the project has a US$92-million after-tax net present value at an 8% discount rate and a 34% after-tax internal rate of return, with a 2.5-year payback
The PEA uses an indicated frac sand resource of 22 million tons (20 million tonnes) grading 13% of 30/50 mesh, 32% of 40/70 mesh and 58% of 100 mesh. (The sum is greater than 100% due to overlap.)
Mesh indicates the size of the grain, with 100-type mesh being the finest and the most in demand, Mohammad says.
While the project’s economics are robust, they could improve after the company drills the remaining 60% of the property.
Select Sands is clearing land, with drilling and blasting expected by the end of September, Mohammad says. He adds that the company could produce — at a reduced rate from the PEA forecasts — by October.
“We are planning on selling finished silica product into the industrial and oil and gas markets by the fourth quarter at 300,000 tons to 400,000 tons per year, using third-party plants [and a toll manufacturing model],” Mohammad explains, noting the firm has received bids for the run-of-mine raw sand.
Sandtown could reach full production by June 2016. The property sits 5 km from Highway 167 near a natural gas pipeline, and has an active power line. It is 24 km away from the nearest rail system.
Select Sands’ flagship asset is 650 miles (1,046 km) closer than the Wisconsin sand mines to the major Texas and Louisiana shale plays, offering US$15 per ton in transportation savings. Sandtown is also near the Houston port.
Mohammad points out that in May, Goldman Sachs said this year’s frac sand demand could drop to 46 million tons from last year’s 54 million tons, before rebounding to 63 million tons in 2016.
The executive notes these numbers include the lower-quality tier-two and tier-three sands, explaining the demand and price for tier-one frac sand is expected to stay strong in 2015.
According to Goldman Sachs, frac sand “capacity utilization” — defined as the average annual frac demand divided by average annual frac supply — should increase to 74% next year, up from 60% in 2015, but below last year’s 79%.
strial and specialty products, “pundits report that year-over-year future growth is 8%,” the company says.
Select Sands could capitalize on the growing demand in its targeted markets next year. The emerging frac sand producer recently closed at 38.5¢ per share, with a $17.3-million market capitalization.