TSX-V listed
Prime Meridian Resources Corp. is in the process of
acquiring a majority interest in a ceramic
proppants producer in India, Hallmark Minerals Pvt Ltd.
The Canadian company signed two binding letters
of intent (LOI) with Hallmark, which is located 200km southeast
of Mumbai in Pune. It has its own range of ceramic proppants
which it has patented, developed, produced and sold in
India.
The deal forms part of Prime’s
strategic plan to build a globally integrated proppants
company, and Michael Dehn, Prime’s president, told
IM that the company feels India and the
surrounding regions represent some of the best growth
opportunities over the next five to 10 years.
"It’s got a booming oil and gas
industry, the fracking side of its industry is quite immature
and will require tremendous expansion," Dehn said.
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Hallmark is already an established ceramic
proppants supplier in India.
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"We’re coming into a sector where
it’s not commonplace to be fracking and much of
the equipment is not up to North American standards. Hallmark
has proven itself to a have a superior proppant product already
in production in India, so we’re buying into an
established and well respected business in an industry
that’s growing very rapidly," he added.
Under the terms of the agreement, the first LOI allows Prime
to acquire a 10% share of the Indian Company for Canadian
dollar (C$) 500,000 ($440,700*). The second LOI allows it to
acquire a further 50% interest by either expanding the
production of Hallmark by an extra 25,000 tpa, or by completing
maximum capital expenditure of C$7m.
Dominating the region
Prime’s global strategy is to integrate the
elements of the proppant value chain with a focus on which type
of proppant best serves the needs of each region.
Hallmark’s current proppant capacity is at
10,000 tpa including lightweight, intermediate strength and
high strength. The first phase of expansion will be to grow the
existing plant by 5,000 tonnes, while the second phase will
include the building of a new plant with a production capacity
of 20,000 tpa.
"The reason we are doing this transaction is because we feel
there is increasing demand in the region and frac sand is not
so plentiful as it is in North America, otherwise we
wouldn’t be carrying out this aggressive
expansion," Dehn told IM.
"Our goal will really be to dominate the Indian Ocean region
because there are all sorts of new projects coming on stream in
the Middle East, East Africa as well as in the Eastern
Mediterranean, markets which India is very well located to
service," he added.
Dehn said the company has plans to transplant the existing
Indian technology into Africa, the Middle East and Australia,
which will enable Prime to gain a strategic foothold for the
future.
Working together with Hallmark, Prime will
have a competitive advantage in the region, as Hallmark is the
only existing ceramic proppants producer in India, currently
sourcing the bauxite and kaolin used in its product
locally.
According to Dehn, production from the rest of the region is
limited, which will enable Prime and Hallmark to meet local
demand in the region from strategic locations. He explained
that China has around 30 ceramic proppants producers, a few in
Russia and one expected to come on stream in Poland.
"Hopefully you’ll see us with production of
over 100,000 tonnes in India, and then from that beachhead
expanding to places where the market is expected to grow very
quickly but not yet be big enough for the likes of Carbo or
Fairmont to get into." Dehn told IM.
"If we can get into those markets early with 20-50,000
tonnes, for example Kenya will probably need a lot of supply
for the next five or 10 years to meet the local demand, so if
we can keep doing that in strategic locations then we will be
ahead of everyone else," he added.
Cooking up new recipes
Prime is also in the process of testing frac sand and
advanced materials for proppant suitability from three
projects: frac sand from the Peace River Frac Sand joint
venture (JV) in Western Canada; titanium/iron from the
Dissimieux Lake JV in Quebec; and silica from the Chambord JV,
also in Quebec (all under options from Phoenix Metals.
Dehn told IM that testing was progressing
well, and that Prime’s main focus will be deep
wells, which it sees as an opportunity as it says there are not
many other companies targeting this area.
"Development of the projects will be market driven more than
technology driven, as the technology seems to be going very
well," Dehn outlined. "We will really cater to what the market
expectation is for material – we have to know that the
customers want a specific product and that’s what
the next plant will be, as opposed to what we think is the best
product for the market."
Proppant market expected to almost
double
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North American proppant
forecast
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Owing to the expected growth in unconventional gas
production, according to Markets and Markets the proppant
market is expected to grow at a CAGR of 10.7% from 2014 to
2019.
In 2013, the size of the proppant market was estimated at
around 45.12m tonnes and is projected to reach 84.2m tonnes by
2019, an estimated value of $19.02bn.
An increase in hydraulic fracturing (fracking) worldwide has
driven up demand for frac sand, sintered bauxite and kaolin,
the main components of oilfield
proppants, which are used to literally prop open fractures
blasted into shale rock formations.
As a result of its shale gale, the US’
requirement for
frac sand, ceramic proppants and resin-coated versions of
each has grown from around 5m tonnes in 2007 to 34.7m tonnes in
2013, according to IM’s
China’s Proppants market report.
At present, according the IM
Research report, frac sand takes up
approximately 80-85% of the market share by volume, with
ceramic proppants and resin-coated versions taking 10-15%. By
value, however, ceramic proppants take a 50% share of the
market.
According to Dehn, increased activity in the Bakken Shale
Play in North Dakota js driving demand for ceramic proppants
and as companies move on to deeper wells, demand is expected to
grow further.
"The overall figure in North America historically is that
the ceramic proppants account for around 10% of the proppants
market. I think this year the Bakken might keep it at that
figure, otherwise it might be less than 10% if it
wasn’t for the Bakken," Dehn told
IM.
"But we definitely expect that to go up in the future
– the North East is going deeper and in Pennsylvania
and Ohio and everyone’s been going after the cheap
and easy wells which are the shallow wells, so now the next
targets will all be intermediate and deep, which means that
frac sand will not have the same effect," Dehn explained.
"You’re looking at resin coated sands for being a
potential intermediate solution and then ceramic proppant for
deep."
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Source: EIA, LUKOIL estimates
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Logistical challenges
In the current market, one of the biggest challenges for
Prime Meridian has been project financing.
"Stock market conditions for junior mining companies is the
biggest headache because everything else, raw materials have
been easy to source for us, energy prices have come down so are
costs are looking even lower," Dehn told
IM.
"Logistics I guess would be the other challenge and maybe
not as much in India as it would be in North America, and this
is more applicable to the frac sand industry even more than it
is in ceramics," Dehn added.
Tightness in the frac sand market throughout 2014 occurred
mainly due to
logistical constraints, as frac sand supply in general was
not problematic at frac sand mines, but rather at the wells
where it was needed.
"Waiting time now for new railcars to come to market is
long, and the storage along the rail lines is not very complete
or very well matured except in certain regions," Dehn told
IM.
"This means the production is coming right from the plant in
a dump truck and right to the well head which is not an ideal
situation except for the manufacturer, but the guy who is
drilling is always waiting for product to show up at the well
and that causes all sorts of standby costs for the drilling
companies and the finishing companies," he added.
As a result, Prime is looking at different solutions to
overcome logistical constraints in the future.
"These solutions are not really portable but
they’re able to be moved to a different well
location and that’s going to based on market
demand – where you’re going to have to
have your storage – because we can’t
count on sending 50 or 100 dump trucks to a well head. We have
to basically have a warehousing solution for the proppant near
where the customers are," Dehn said.