Frac sand developments for the Argentinean shale oil/gas market Richard Spencer, CEO, South American Silica Corp. March 31, 2015 U3O8 Corp. Investee TSX: UWE OTCQX: UWEFF SSE: UWE www.u3o8corp.com www.samsilica.com
Forward-Looking Statements & Disclaimer Certain statements and concepts contained herein constitute forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the control of South American Silica Corp. ( SAS ), including, but not limited to, the impact of general economic conditions, industry conditions, geopolitical risks, volatility of commodity prices, risks associated with the uncertainty of exploration results and estimates and that a resource will be achieved on exploration projects, that the Carina property will be developed as anticipated and frac sand potential is realized, that resource size estimates, production and timing of development will be achieved on any target area, currency fluctuations, the uncertainty of obtaining additional financing and exploration risk, and dependence upon regulatory approvals. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Potential size estimates are conceptual in nature. There has been insufficient exploration to define a resource on the specified targets. It is uncertain if further exploration will result in resources being delineated on those targets. These forward-looking statements are made as of the date hereof and SAS. assumes no obligation to update or revise them to reflect new events or circumstances. Comparisons of SAS properties and exploration targets with other frac sand projects are conceptual in nature, and have not been independently verified by SAS and information regarding these peer deposits are drawn from publicly available information. Information on SAS and its projects are available on the company s web site at www.samsilicacorp.com. Industry and peer information has been drawn from publicly available sources and have not been independently verified by SAS. 2
Outline Strategic importance of the Vaca Muerta to Argentina Potential for Argentina to become a regional energy powerhouse Sustained, increasing production from the Vaca Muerta Argentina getting it s fiscal house in order Subsidizing the oil production below price-specific thresholds 2015 presidential election What is the Vaca Muerta? Short-term market growth potential & required proppant quality Logistics in Argentina infrastructure developed over 100 years of conventional oil & gas production Conclusions & Opportunities 3
1-Jul-10 1-Nov-10 1-Mar-11 1-Jul-11 1-Nov-11 1-Mar-12 1-Jul-12 1-Nov-12 1-Mar-13 1-Jul-13 1-Nov-13 1-Mar-14 1-Jul-14 1-Nov-14 1-Mar-15 Oil production (boepd) (Barrels per day millions) Vaca Muerta set to emulate USA oil & gas from shale success Crude Oil Production 1970 1980 1990 2000 2010 Vaca Muerta: Strategic Importance to Argentina: could replicate USA shale oil & gas boom Weekly US Crude Oil Production Jan. 1983 to Nov. 2014 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Vaca Muerta production Vaca Muerta at this stage declining crude production being reversed by shale oil Sources: SIPG - AIPG 4
Vaca Muerta: Fundamental Strategic Imprortance to Argentina Argentina s oil imports $7B/year; Foreign currency reserves $34B; 20% of total foreign currency reserves spent on oil imports per year Vaca Muerta production cost ~$58/bbl drive to reduce costs 90% of Argentina s oil, 71% of its gas, from Patagonia - economic driver for semi-desert region in which there are few economic alternatives Argentina needs the Vaca Muerta oil production OPEC Budget Breakeven Costs compsred with Shale Production Cost Sources: WSJ, IEA *Vaca Muerta Shale in Argentina; Eagle Ford & Bakken Shale in the USA 5
Vaca Muerta: Strategic Importance to Argentina: Oil production in economically challenged area Vaca Muesrta is in an economically stressed area Permitting farm sizes are typically 25,000 acres 6
Vaca Muerta: Strategic Importance to Argentina: Could drive Argentine Economy for Decades Shale Oil Rankings by Country Technically Recoverable Shale Oil Resources (billions of barrels) Shale Gas Rankings by Country Technically Recoverable Shale Gas (trillions of cubic feet) Russia 75 USA 1,161 USA 48 China 1,115 China 32 Argentina 802 Argentina 27 Algeria 707 Libya 26 Canada 573 Australia 18 Mexico 545 Venezuela 13 Australia 437 Mexico 13 South Africa 390 Pakistan 9 Russia 285 Canada 9 Source: US DOE Brazil 245 Source: US DOE 7
Vaca Muerta: Strategic Importance to Argentina: The infrastructure is already in place Export pipelines to Chile Oil production started from the Nuequen Basin in 1918; Extensive infrastructure; Support & service industries based in local cities; Export pipelines to Chile: Imports 97% of its oil; Imports 77% of its gas; A consistently strong economy; Strong & consistent demand for fuel 8
1-Jul-10 1-Jan-11 1-Jul-11 1-Jan-12 1-Jul-12 1-Jan-13 1-Jul-13 1-Jan-14 1-Jul-14 1-Jan-15 Oil production (boepd) Vaca Muerta: Strategic Importance to Argentina: It s getting it s house in order May 2012: Nationalized 51% Repsol ownership of YPF; $200B - $300B required to develop the Vaca Muerta; Reversal of policy: December 2012: 1 st new deal with foreign oil company (Pan American Energy (a BP subsidiary)): 50,000 40,000 30,000 20,000 10,000 0 Followed by JV s with Exxon, Chevron-Mobil, Dow, Total, Wintershal, China National Oil, Petronas, Petrobras, BP, among others; 2014, April: Repsol accepted compensation for YPF (US$5B); 2014: $15B foreign investment in the Vaca Muerta; 2014: May: Settled with Paris Club of Lenders opened up French capital market; 2014, July: Selective default because Argentina could not settle with bond holdouts; 2014, July: $11B currency swap with China; 2015, March: US Chamber of Commerce president says US companies will invest $20B/y in Vaca Muerta 2015, April: Obama administration supports $2B Argentine loan from World Bank 1 st such support since 2011. 9
Argentina: A bad reputation 2014 Debt-to-GDP Ratios Germany UK France Belgium USA Singapore Portugal Italy Greece Japan Argentina Economic challenges: High inflation rate expected to be 21% in 2015, currently 18%; Foreign currency restrictions; Sovereign debt default; Economic positives: Debt-to-GDP not as bad as it is perceived to be; Oil producers are being subsidized; Vaca Muerta development seen as economic driver; October 2015 elections candidates have pro-business platforms 10
Vaca Muerta: Strategic Importance to Argentina: Stimulus for oil producers Subsidy of up to $6/bl to prevent drop in output due to lower international oil prices: $3/lb to companies that maintain or increase output relative to 2014; $2/lb to exporters for oil sold abroad - $3/lb for exporters that maintain or increase exports from 2014 levels; Subsidies apply while: 34 API Medanito prices are <$84/bl (including the subsidy); 24 API Escalante prices are <$70/bl. Most of Escalante-grade is exported local refineries can t handle the heavy crude. Reduced royalties: While Brent is <$79/bl, export duties decreased on a sliding scale to 1% from 13% 11
Argentina: A bad reputation - but stocks are doing OK Up ~60% in 2014 Up 32% so far in 2015 12
Argentine Election: Leading Contenders: Presidential election: October, 2015 The job:.. leading a country mired in default, hemmed in by litigating hedge funds and ravaged by economic stagnation and double-digit inflation. Bloomberg Current poll Scioli 32.2+/-2.5% Macri 29.9%+/-2.5% Massa 13.6%+/-2.5% 13
58 Argentine Election: Scioli: Governor of Buenos Aires province (38% of national population), same political party as current Pres. Kirchner Family owned electrical appliance business Former world speedboat champion Vice President under Nestor Kirchner for 4 years Political platform gradual change: Would not devalue the Peso Would not settle with holdout bond holders related with Argentina s selective default in mid-2014. Indications: he would settle for 70% of the $1.6B awarded to the holdouts Track record in Buenos Aires province that accounts for ~1/2 Argentina s GDP Changed tax code Province went to budget surplus in 2013, 2014 Legislate to protect savings so as to attract $200B held offshore by Argentineans 14
Argentine Election: Macri: 56 Mayor of Buenos Aires city (35% of country s population) Civil engineer Family construction company, credit analyst at Citibank, president of Boca Juniors football club (12 years) club won 16 tropies under his leadership Entered politics in 2005, elected mayor of Buenos Aires in 2007, re-elected in 2011 Political platform: Agent of change : End currency controls End import restrictions & export tariffs to entice foreign investment & offest capital outflows Would settle with holdout bond holders related with Argentina s selective default in mid-2014 15
Vaca Muerta Shale Gas and Shale Oil Prospective Areas, Neuquen Basin Agrio 25-450m Vaca Muerta 100-800m Los Molles 16
Comparison of Vaca Muerta with Shales in the US. Source YFP Presentation, 2013 Vaca Muerta Shale Oil 17
Depth Comparison Vaca Muerta compared with shale plays in the US Area Comparison VM thickness = high proportion of vertical wells Small footprint = infrastructure is concentrated, and mostly already in place because of 100 years of conventional production Requires high K-value proppant Thickness Source: Credit Suisse Report, 2013 Based on YPF, SPE, WoodMackenzie, UG Harts Reports 18
D-129 Formation: mainly gas-prone, deep Argentina: Other Prospective Areas, San Jorge Basin D-129: 100-2,000m Los Molles 19
Demand (kt) Oportunity 2 Vaca Muerta: Rough estimate of Supply/Demand for Proppant and Frac Sand 900 800 700 600 500 400 300 200 100 0 Vaca Muerta - proppant supply/demand 2015 2016 2017 Frac sand production (kt) Total proppant demand (kt) Total frac sand demand (kt) Oportunity 1 Estimated total proppant requirement in 2017 ~ 800kT ~50% (~400kT) of requirement is for frac sand (oportunity 1) ~50% is for ceramic proppants, but a 9 or 10K (good quality) frac sand is very likely to substitute for some of the ceramic proppant requirement, increasing the potential market share for sands of exceptional quality. Need for very high quality frac sand 20
Local Frac Sand: 560mi by road from the Vaca Muerta Moderate quality Characteristic API* Requirem t Original Test Results Sample 14528 Results Sample # 146 147 148 GEL 1101 Fraction 20/40 30/50 40/70 20/40 40/70 Conform to API % of sand in that fraction 42% 73% 52% 45% 48% ~93% Sphericity 0.6 0.61 0.63 0.57 0.6 0.6 Meet Frac sand ~93% of bulk sand Mainly divided between 20/40 & 40/70 grain sizes Local Frac Sand Roundness 0.6 0.44 0.44 0.38 0.8 0.7 Exceed Acid consumption 2% 1.7% 2% 2.5% Meet / marginal 3% 2.1% 3.9% failure Turbidity 250 FTU 102 78 166 193 140 Exceed Crush test API Requirement 14% @ 4K 10% @ 4K 8% @ 5K 14% @ 4K 8% @ 5K 4Kpsi 8.8% 3% 5.3% Exceed 5Kpsi 6.4% Exceed 6Kpsi 9.4% 9% Meet 8Kpsi 7.2% Meet K Value 8K 5K 6K *API (American Petroleum Institute) specifications for frac sand 21
Vaca Muerta: Current & proposed infrastructure YPF s planned Anelo frac sand plant Vaca Muerta Existing road Defunct rail Bahia Blanca YPF s Caning frac sand plant Operating rail system Infrastructure is challenging 5-8K sand deposit San Antonio By road from port - 300mi Proposed rail unlikely to be built Existing road Puerto Madryn Existing narrowgauge rail could be upgraded 22
Chile Vaca Muerta: In-country logistics & transport cost guidance Vaca Muerta San Jorge Brazil Uruguay Rio Grande Palmira Bahia Blanca San Antonio Puerto Madryn Comodoro Rivadavia Estimated Port Costs: Brazil - Rio Grande Port: US$5.24/ tonne Uruguay Palmira Port: US$7/tonne Argentina: Bahia Blanca Port: US$28/tonne Sea freight (US$/tonne): Rio Grande port to Bahia Blanca: US$20/t (container); Puerto Madryn to Bahia Blanca: US$12/t (bulk) 23
Uruguay & Brazil sands: Good quality Full grain-size range tailor product to each client s requirements Safety silica dust is carcinogenic hydromining/dredging and initial wet-screening no dust! 250mi from deepwater ports 24
Conclusion: Competitive advantages 5-8K frac sands are available locally (20/40, 30/50, 40/70#) moderate quality Opportunity: Argentina needs (and wants) oil production fracking accepted Vaca Muerta & especially San Jorge basin (gas), needs higher K sands Logistics are problematic for supply from local source: Road transport is most viable option (900km / 560mi); Planned rail unlikely to be built; Sea freight and east-to-west transport by existing rail / road network is attractive option. Opens the door for imported sand; Health effects of dust dredging is an attractive alternative that is likely to be more socially acceptable 25