This document discusses lessons that can be learned from the explosive growth and subsequent downturns experienced in the frac sand and lithium industries. It summarizes the available resources and recent market behaviors of frac sand and lithium, as well as how the industries have positioned themselves to respond to changes. Key points discussed include overcapacity in the frac sand industry leading to loss of pricing discipline, and abundant global lithium resources that suggest no long-term scarcity. New extraction technologies also threaten to commoditize lithium and reduce pricing power of current producers.
Explosive Growth in Frac Sand and Lithium- Lessons To Be Learned?
1. Explosive Growth In Frac Sand And Lithium - Lessons To Be Learned?
SME, Colorado MPD 67th Annual Conference
Colorado Springs, Colorado
Joel Schneyer – Managing Director
jschneyer@headwatersmb.com
303.619.4211
May 4, 2017
2. Lithium:
- Available Resources
- Recent Market Behavior
- Industry’s Position to Evolve
Frac Sand:
- Available Resources
- Recent Market Behavior
- Industry’s Position to Respond to Change
Agenda
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3. Major Sand Basins Sit Between Lower 48 Shale Plays
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Source: U.S. EIA based on data from various published studies as of April 2015 & US Department of Interior Open-File Report 2015-1107
Shale Basins Frac Sand Sources
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4. Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921
Sand Supply - No Shortage of Frac Sand Deposits
40/70 & 100 mesh: Southern White
20/40, 40/70 & 100 mesh: Northern White
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5. Completion Trends Create New Proppant Demand Drivers
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Longer
Laterals
MoreStages
Overpacking
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2012 2013 2014 2015
Average Sand per Well
(Permian/ Bakken/ Eagle
Ford)
CloserWell
Spacing
>2xincrease
2016to2018
0
5,000
10,000
15,000
20,000
25,000
2014 2016 2017 2018
# Horizontal Wells
0
200
400
600
800
1,000
1,200
1,400
2014 2016 2017 2018
# Active Horizontal
Rigs
• Increase in frac
sizes per stage
• Increased interest
in utilizing finer
mesh sand (40/70
& 100 mesh) & CRC
Source: Goldman Sachs Global Investment Research (July 2016),
Bloomberg Intelligence 0
500
1,000
1,500
2,000
Permian Williston Eagle
Ford
Pounds Sand Per
Lateral Foot
2012 2016
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6. US Proppant Demand Is Projected To Increase
• Projected proppant rebound to ~ 55 MM tons in 2017, followed by ~ 73 MM tons in 2018
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$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
-
10
20
30
40
50
60
70
80
90
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
OilPrice(WTI,USD/barrel)
Proppant(MMtons)
Energent - actuals Superior Silica - Consensus Smart Sand S/1
"Tudor Pickering & Holt" Jeffries Goldman Sachs
Wells Fargo RBC Oil Price - EIA
Sources:
• Smart Sand Inc. S/1 dated September 16, 2016 filed on Edgar
• Rich Shearer (President & CEO) Superior Silica Sand presentation at the Industrial Minerals 4th Frac Frac Sand Conference in Minneapolis Sept 13, 2016
• Wells Fargo, Oil Service Statistics and Valuation Handbook, January 6, 2017
• RBC Capital, Frac Sand Supply Demand Update, December 5, 2016
• Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices
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7. Source: Company Reports
Industry Concentration Indicates Surviving Oligopoly
• Top 4 public sand producers saw growing market share by surviving market downturn (e.g.
controlled 59% of the 2016 North American market)
• New producers enter the market, few barriers to entry
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0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2016201520142013
ProppantSold–MillionTons
US Silica Fairmont Santrol
Hi-Crush Emerge
Source Energy Services Smart Sand
Mammoth Energy Services Eagle Materials (estimated from 9 months)
Carbo Ceramics Non-Public Companies
8. Strong Regional Variation in Proppant Demand Exists
• Proppant demand fell 17% between 2014 (52 mm tons) and 2015 (43 mm tons) and
current run rate for 2016 was 32 million tons, 24% less than 2015
• Permian Basin forecast to be most active…because it has the best economics
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Source: Energent Frac Report, data as of January 2017
-
1
2
3
4
5
6
Proppant(MMtons)
Other Fayetteville Granite Wash Mississippian Woodford (Total) Williston
Utica DJ-Niobrara Barnett Marcellus Permian Eagle Ford
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9. Shifting Sand Marketplace Favors Local Sources
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Sources: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014)
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$210 million : July 2016
U.S. Silica purchased brown-
sand miner NBR Sand in July
2016 with plans to double
output near Texas oilfields
to 2 million tons/year
$275 million : Feb 2017
Hi-Crush purchased Permian
Basin brown-sand deposit in
Feb 2017 with plans to
produce 3 million tons/year
REGIONAL SANDS
SOUTHERN WHITE
NORTHERN WHITE
Regional Sand Market Share
• Trend toward “In-Basin” sales
versus FOB Mine
• Use of finer grain sizes
• Acceptance of lower quality
“Brown” or “Regional Sand”
16%
2014
Northern White Regional Sands
34%
2016E
10. Sand Proppant EBITDA Margins Are Rebounding
$PerTon
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-$60
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
2016Q42016Q32016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q42013Q32013Q22013Q1
Adjusted EBITDA US $ / Ton Sold
Hi-Crush P Emerge P US Silica P Fairmount Santrol P
_____
Sources: SEC, Edgar, Yahoo Finance, Headwaters MB research
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11. Key Point: Sand Overcapacity & Loss of Pricing Discipline
Industry can produce in the range of 108 million
tons of frac sand annually. The industry built
big, efficient mines and distribution hubs in WI,
IL, and MN to meet this growing demand …
… but in 2016 sand consumption was in the
range of 32 million tons with a rebound to 55
million tons projected in 2017.
Therefore sand production utilization in 2016
was a very low 30% …
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But there are headwinds. More in-basin sales,
acceptance of finer grained sand, & lower
quality regional sands have put pressure on
pricing and market structure.
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12. Global Lithium Resources Suggest No Scarcity Exists
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Source: Lithium X Investor Presentation November 2016 and US Geological Survey, Mineral Commodity Summaries February 2014
Most lithium manufactures have produced lithium
through the natural evaporation process, which
takes 12-18 months, but with POSCO`s new
technology, it takes as short as 8 hours and as long
as 1 month to extract lithium through chemical
reaction. The lithium collection rate is remarkably
improved from 30% to 80%.
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13. Lithium Demand Largely Driven by EV Growth
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Source: Deutsche Bank Market Research May 2016; Albemarle March 2016 Goldman Sachs HCID Conference
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100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
LithiumDemandinLithiumCarbonEquivalent
(LCE),kt
Non-Battery Battery E-Bike Electric Vehicle Energy Storage
Application LCE Amount Demanded
Cell Phone 3 g – 0.1 oz
Notebook 30 g – 1 oz
Power Tool 30 g - 40 g to .4 oz - 1 oz
Hybrid (HEV) 3kWh 3.5 lbs
Plug-in Hybrid (PHEV) 15 kWh 26 lbs
Electrical Vehicle (BEV) 25 kWh 44 lbs
Tesla 85 kWh 112 lbs
Energy Storage to
increase further with
high variable renewables
(solar, wind)
14. • 12 advancing megafactories and expansions will add 98 GWh production capacity in the
lithium ion battery industry: orders of magnitude increase by 2020
• Tesla is only major US operation: approx. 65% of new capacity in East Asia (China, Korea)
near established supply chains
Lithium-Ion Battery Cell Mega Factories Are Here
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Source: Benchmark Mineral Intelligence
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0
20
40
60
80
100
120
140
2013 2014 2015 2016 2017 2018 2019 2020 2021
LithiumBatteryProductionCapacity
(GWh)
Current LG Chem Tesla Foxconn BYD Boston Power
Takeaway:
Battery manufacturing will not be bottleneck to meeting market demand
15. Lithium Resource Development is Not Easy and Takes Time
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Source: SRK Consulting May 2016;
Albemarle March 2016 Goldman Sachs HCID Conference
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Time
Investment
% of $$
Exploration Feasibility
Pilot
Design
Constr. Production
Simbol
Brine
Bankrupt at Pilot
Canada Lithium
Spodumene
Bankrupt at Production
Capital
Intensive:
4 projects in
Feasibility have
$120 M spent &
< 20 M cash
reserves
Time
Intensive:
Min. 5 years
in best case
(without
delays)
16. Lithium Supply Determined Currently By An Oligopoly
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Source: Albemarle March 2016 Goldman Sachs HCID Conference, Orocobre Ltd April 2016 Investor Update, CapIQ (as of April 6, 2017)
Market Share Production Capabilities
Market Cap (USD) 11.65 9.01 9.62
% Lithium Revenue 36.1% 24.7% 8.0%
EV / TTM EBITDA 15.6 13.1 16.1
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17. Tech-Focused Newcomers Push Direct Extraction Processes (DEP)
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Source: Company press releases
Notes: “LCE” = Lithium Carbonate Equivalent
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Company w/
Proprietary DEP
DEP Target
Enirgi Group
(Sentient)
Salar del Rincon,
Argentina
50,000 tpa LCE
POSCO
Pozuelos Salta,
Argentina
40,000 tpa LCE
by end of 2017,
and 135,000
tpa of LCE by
2020
Tenova Bateman
Technologies
Clayton Valley,
Nevada, USA
Mini-pilot
Eramet S.A.
Centenario-Ratones
Salar, Argentina
20,000 tpa LCE
before 2020
Alger Alternative
Energy (Simbol
Energy)
Salton Sea,
California, USA
Pilot plant
separated high
temperature,
corrosive brine
18. Global Lithium Projects In Development
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Source: SNL Metals & Mining, Company press releases, Headwaters MB research
Reserves
Development
Prefeasibility
Scoping
Feasibility Construction Operating Expansion Closed totals
% World
Supply
Number of Projects 29 6 10 3 13 4 2 67
Argentina 132,400 4,159,000 1,573,000 2,059,000 7,923,400 12.7%
Australia 8,784 983,000 322,872 2,883,600 178,000 4,376,256 7.0%
Bolivia 18,001,000 18,001,000 28.9%
Canada 1,077,415 455,917 1,234,178 573,860 3,341,370 5.4%
Chile 217,500 1,400,000 1,590,622 5,300,000 8,508,122 13.6%
China 1,133,200 3,639,168 1,397,727 6,170,095 9.9%
Mexico 1,670,000 1,670,000 2.7%
Serbia 2,124,000 2,124,000 3.4%
USA 153,150 1,972,391 2,834,473 316,000 5,276,014 8.5%
Rest of World 3,368,083 82,245 1,194,270 328,400 4,972,998 8.0%
Tonnes 8,430,532 4,180,553 25,571,448 3,295,872 10,858,650 9,532,200 494,000 62,363,255 100.0%
% of World Supply 13.5% 6.7% 41.0% 5.3% 17.4% 15.3% 0.8% 100.0%
• ALB (Feb 2016) in Chile
24,000 tpy to 70,000 tpy
• FMC (May 2016) in
Argentina 14,000 tpy to
30,000 tpy
• ORL in Argentina 17,500
tpy to 40,000 tpy
• RTZ (June 2016) in
Serbia “strategically
important and very
attractive project”
• BCN (March 2016) in
Mexico “positive PFS
of 35,000 tpy from
clay”
Reserves&Resources
Annual
Production
News
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• Enigri (March 2017) on track to
test brine DEP in Q2 2017:
50,000 tpa
• LAC / SQM JV (Feb 2017) brine
project near 1st half: 50,000 tpa
• K-UTEC (August 2016) 30,000
tpy brine DEP pilot delayed to
Q1 2017 due to process design
19. 0 100 200 300 400 500 600 700 800
By 2020 DEP will lower marginal costs – higher quality product, higher yield
High-Quality Brine Already On the Low End of Cost Curve
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Source: Lithium Americas Investor Presentation March 2017
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Brine – Chinese
Hard Rock – Chinese
Hard Rock – ROW
Hard Rock – N. America
Brine – N. America
Cumulative Production (ktpa LCE)
20. 0
100
200
300
400
500
600
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
ktLCE
Supply Demand
Global Supply – Demand Balance
New DEP Technology Will Commoditize Lithium Market
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No long-term
pricing power:
$10k / tonne after
2020 as brine
supply outstrips
demand
0
5,000
10,000
15,000
20,000
2017 2018 2019 2020 2021 2022 2023 2024 2025
LithiumCarbonate(USD/t)
Expected Lithium Carbonate Price
HSBC Cormack Deutsche Bank Morgan Stanley
Canaccord Dundee Average
Large hard rock
assets bring market
into balance
Source: Deutsche Bank Market Research May 2016
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Market
Deficit
Oversupply from
brine projects
21. Key Point: Lithium Resources Are Abundant
The lithium oligopoly is fighting to maintain
control and market share, but there is no
shortage of lithium deposits that can be
“potentially” extracted…
Deep pocketed newcomers and technology
providers are expanding the potential number
of new lithium producers…
Lithium-ion mega factories are coming and
driving lithium mine development.
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But as new entrants enter the market, pricing
discipline will disappeared and margins will
contract.
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22. Closing Thoughts
Frac sand and lithium industries have a number of common themes . . .
. . . with few barriers to entry, over-investment is a potential problem
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•Resources not scarce
•Few barriers to entry
Available
Resources
•Winter operations in upper-
mid West
•Storms and evaporation
rates in the Andes
Weather
Interference
•Unit Trains carrying sand
•Developing mines at 10,000
feet in the Andes
Problematic
Logistics
•Utilization of finer grain and
lower quality regional sands
•Commercialization of DEP
for lithium extraction
Adoption of
Technology
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