Stikine Energy Corp. sees gold in B.C. frack sand
A plan to supply drillers hinges on LNG exports
The Stikine River cuts through 500 kilometers of glacier and rock in northwest British Columbia and Alaska. Before it empties into the Pacific near Wrangell, the river hurtles down a roiling stretch of hell called the Grand Canyon of the Stikine. Though the provincial government classifies the canyon as totally impassable by anything or anyone, crazed kayakers successfully ran it 15 times between 1989 and 2006.
As chief executive officer of a mining company that bears the name of the same river, Scott Broughton needs similarly steely nerves these days. In 2009, his Vancouver-based company ditched the gold business to bet on an explosion in shale gas drilling.
Since then, gold prices continued to climb, rising 40 per cent, while the price of natural gas plunged, dragging the TSX Venture-listed company’s stock down with it. “I’m not sure it’s all going successfully at the moment,” says the CEO and president of Stikine Energy Corp. “It’s been a pretty difficult story to tell with not a very broad audience, with gas prices where they’re at.”
But that audience is poised to grow if the next three years pan out the way Broughton hopes. Stikine has proposed developing two open-pit mines – dubbed Angus and Nonda – that abut B.C.’s big shale gas plays. Both projects will produce silica sand used in hydraulic fracturing operations as a proppant to hold fissures blasted into dense rock open. These fissures are what allow oil, liquids and solids to flow to the wellhead.
Like its namesake river, Stikine is cutting through virgin territory. Perhaps more striking, however, is the company’s ambition. It believes its mines are rich enough to supply so-called frack sand for nothing less than the entire life cycle of every shale gas basin in B.C.
The projection is no doubt brash, not least because Stikine’s entire business plan is inextricably bound to the western province’s budding boom in liquefied natural gas (LNG). Three planned coastal projects that would ship supercooled B.C. gas to Pacific markets are scheduled to begin operation by 2020.
The proposed export volumes are staggering. Shell alone plans to ship 24 million tonnes of LNG, or 3.4 billion cubic feet of gas per day, to overseas markets. The total, equivalent to a quarter of Canada’s total output in 2011, will require a tremendous amount of drilling.
Broughton knows this. In a way, Stikine is setting itself up in the fashion of a proprietor of a hardware store in a gold mining town. Broughton is banking on LNG developments to kick-start drilling and demand for frack sand.
What’s more, he says Stikine’s proposed mines, because of their close proximity, could supply sand to well sites in the nearby Montney and Horn River gas plays at a fraction of the cost Encana Corp., Shell, Talisman Energy Inc. and others currently pay for the stuff.
His bid to undercut current suppliers like Sil Industrial Minerals and Radnor, Pennsylvania-based Preferred Sands LLC is supported by the oldest rule in real estate: location, location, location. “This is specific to the northeast of B.C., but around 70 per cent of the cost of frack sand is just shipping and handling of the material,” he says.
A Stikine investor presentation in early 2012 puts the figure higher still, pegging the proportion of transport costs at 80 per cent per tonne of sand bound for B.C.’s Horn River play. To get one tonne of sand to a well in B.C., operators like Apache, Encana and Nexen pay anywhere from $250 to $500 – this for a product that costs around $60 a tonne to produce.
Broughton traces the markup back to the cost of hauling the material thousands of kilometers from mines in Saskatchewan and as far afield as Wisconsin and Texas.
Those costs generated enough cash to earn lavish praise from Canadian National Railway executive vice-president Jean-Jacques Ruest on the company’s second-quarter earnings call. He described the sudden interest in moving sand as “a phenomenal progression,” according to a transcript of the call, and noted that CN is in the process of investing $35 million in Wisconsin to access a new mine opening this year.
Stikine, by comparison, can eschew the middleman. The junior miner believes it can make a healthy profit charging drillers in the province a price close to Stikine’s nearest competitors delivered prices.
One thing is clear: demand for the proppant appears poised to skyrocket. In September 2011, the Canadian Association of Petroleum Producers estimated the Horn River and Montney plays near Fort St. John and Fort Nelson are big enough to provide 100 years of natural gas supply.
In June, Apache announced a find big enough to pop the eyes of energy analysts everywhere: the company estimates its Liard Basin holdings could yield 48 trillion cubic feet of marketable gas. The estimate is based on test results from a single well described by Apache Corp. chairman and chief executive officer Steven Farris as “one of the best shale wells we’ve seen in any play.”
Well completions in the Laird formation, together with the Montney and Horn River, could amount to demand for upwards of six million of tonnes of sand per year by 2015, Stikine projects. That could translate into a brisk trade, provided the company can secure financing. Pre-development costs for the two mines are pegged at roughly $970 million.
“There’s no equity financing to do; that’s just absent completely,” Broughton says. “Same across the sector – it’s impossible for most junior mining companies to raise anything right now.”
It also seems impossible for Stikine to raise its stock price above the cost of a cup of coffee. Since peaking at $0.72 in 2004, the company’s price on the Venture exchange looks like the outline of a mountain range slowly succumbing to the power of erosion; it hasn’t traded above $0.15 since March.
If Stikine can hang on until drills in B.C. start to spin en masse, it could mean a remarkable turnaround for a company that debuted on the TSX in 2003. Broughton, along with fellow Stikine executives David Skerlec and Robert Chambers, had just gone public with another venture, Roca Mines Inc., where he is also chief executive officer, when Stikine Gold Corporation made its public debut.
The trio of executives seemed poised to collect a packet thanks to promising gold mineralization tests at Stikine’s Williams Lake project near Toodoggone Lake in B.C. But additional research revealed the deposits were uneconomic to operate, and the company’s other forays into copper, gold and uranium also failed to pan out.
In June of 2010 the company changed its name to Stikine Energy Corporation to reflect its retooling toward frack sand. (Roca Mines likewise dabbled in base and precious metals before eventually settling into mining molybdenum, which is used in stainless and structural steel as an alloying agent. The company’s stock also mimics Stikine’s, trading below $0.06 since March).
Broughton spent the first half of his career as a consulting cog in much larger mining companies. The experience informs his current outlook. He reports no regrets about starting either Stikine or Roca, which is considering an exit from the molybdenum business as part of a strategic review.
“It’s difficult, but there’s the old adage – you have to give the market what it wants. Right now, the market doesn’t want this,” he says of Stikine. “Yet there was a moment in time when the market was there and had an appetite for it and we raised a fair amount of cash. In the long term, we’ll show that the story was good.”
He just needs natural gas export plans to solidify first.