Session III: The Economics of Frac Sand Overseas Markets: Is Sand a Viable Export Product? A Case Study from the Vaca Muerta Shale Play, Argentina Richard Spencer President & CEO, South American Silica Corp
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, 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. 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
World Hydrocarbon Shale Basins: Markets for N. America proppant producers? Map of basins with assessed shale oil & shale gas formations (May 2013) Mexico Vaca Muerta Assessed basins with resource estimate Assessed basins without a resource estimate Argentina 3
Questions Posed What are the challenges of moving sand over long distances? Is it viable? What are the opportunities for exporting to Mexico and Argentina? Projected demand growth in Argentine and Mexican markets Illustrated with a case study How would a rise in demand from foreign markets impact USA production? 4
Moving Sand: Is it viable? Bottlenecks in infrastructure system eg rail capacity in north-central USA Up to 15,000 tonnes (75 rail cars) of frac sand required per well; Handling efficiency (minimize handling): Specialized containers - mine-site to well-head: same container for rail, road, sea transport Health risk posed by respirable crystalline silica (RCS) Viability depends on: The right product (grain size, K value, specialized proppants etc); Health minimize handling; Transport cost; Delivery time. Overseas markets require multiple modes of transport (containerized systems) 5
Questions Posed What are the challenges of moving sand over long distances? Is it viable? What are the opportunities for exporting to Mexico and Argentina? Projected demand growth in Argentine and Mexican markets Illustrated with a case study How would a rise in demand from foreign markets impact USA production? 6
There is market potential: Argentina: 3 rd in gas, 4 th in oil Mexico: 6 th in gas, 8 th in oil 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, Argentina A guess at frac sand market size Los Toldos American Petrogas - ExxonMobil Bajo del Choique ExxonMobil Orejano Dow Aguada Federal Wintershall La Amarga Chica Petronas Loma Campana YPF- Chevron Aquila Mora Shell- Medanito Chihuido de la Sierra Negra YPF- Chevron Rincon de Aranda Petrobras-Total 2011 Aug ExxonMobil JV with Americas Petrogas Nov YPF announced 1 st shale oil discovery 2012 May YPF nationalized from Repsol Re-Entry of Foreign Oil Companies: 2012 Dec Pan American Energy (BP) JV with YPF 2013 Apr 2013 May Shell-Medanito-Province reports discovery on Aquila Mora Chevron JV Loma Campana with YPF $1.24B initial investment commitment: 132 wells planned, drilled 198 by Jun 9/14 $1.6B follow-on investment commitment: 170 more wells planned 2013 Sep Dow Chemical JV with YPF 2013 Sep Petrobras JV with Province Loma La Lata YPF- Chevron Foreign Oil Companies in the Vaca Muerta Sierras Blancas Shell- Medonito 2014 Feb Petronas JV with YPF 2014 Apr Repsol compensated for YPF nationalization 2014 May ExxonMobil reports discovery on Bajo del Choique concession 8
Thousand bbls/d Vaca Muerta, Argentina: A guess at frac sand market size Actual and Projected Consumption of Frac Sand, Argentina 100 90 80 70 60 50 40 30 20 10 0 YPF Unconventional Oil Production (bbls/d) YPF unconventional oil production YPF discovery of unconventional HC 2014: YPF frac sand imports 650K tonnes 10 5 0 Frac sand demand (Mt) YPF reportedly required 0.65Mt of frac sand in 2014. 168 wells in production from unconventional = 3,800t of sand per well Chevron-YPF: Loma Campaña field plan to drill 1,500 wells in 5 years assume 3,800t = 5.7Mt (~1Mt per year) from one part of the basin only Lag of 4 years between discovery & 1 st significant production of frac sand = export opportunity from USA Loma Campana Loma Lata field 9
Regional Transport Cost Guidelines: Parana Chubut (Argentina) properties are within 1-day trucking distance from: Vaca Muerta (550 mi x $0.16/t/mi) = $90/t by road; Chaco Vaca Muerta San Jorge Austral - Magellanes San Antonio del Oeste deepwater port Puerto Madryn deepwater port Argentine sands Uruguay sands San Jorge basin (300 mi x $0.16/t/mi) = $50/t by road; Uruguay properties to Vaca Muerta: Container by sea ~1,000 mi (1,500Km): $25/t Road transport (300 mi x $0.16/t/mi) $50/t Total transport / tonne $75/t Comparison: China - Puerto Madryn $2,500 - $3,000 per container of 25t = $100/t ~55 day delivery 10
Crush Strength (Kpsi) Target Summary: Crush Test Results from Sands in vicinity of Vaca Muerta 0 2 4 Mesh Size 16/30 20/40 30/50 40/70 70/140 0 0.2 0.4 0.6 0.8 1 Target criteria: Transport cost to Vaca Muerta <$100 per tonne; Potential for >50 million tonnes; Preference for hydro-mining potential; Spread of jurisdictions 6 8 10 12 Chubut 1 Chubut 3 Uruguay 2 Other 2 ISO 13503-02 11
Projects in Chubut Province, Argentina Potential for near-term production Chubut Project 1 within Trucking Distance of the Vaca Muerta & San Jorge Basin Outcropping, friable sand at Chubut Project 1 Vaca Muerta Port San Antonio Oeste San Jorge Basin Argentine sands Puerto Madryn Chubut Project 1 is trucking distance from: Vaca Muerta (550 mi x $0.16/t/mi) = $90/t by road; San Jorge basin (300 mi x $0.16/t/mi) = $50/t by road; 12
Chubut Province: Project 1 Characteristic ISO 13503/2 Chubut Project 1 Sample 14528 Sample # 146 147 148 GEL 1101 Fraction 20/40 30/50 40/70 20/40 40/70 % of sand in that fraction 42% 73% 52% 45% 48% Sphericity 0.6 0.61 0.63 0.57 0.6 0.6 JV with local operator progressing towards initial production at no cost to us Estimated transport cost to the Vaca Muerta: ~US$90/t Roundness 0.6 0.44 0.44 0.38 0.8 0.7 Acid consumption 2% 1.7% 2.0% 2.5% 3% 2.1% 3.9% Turbidity 250 FTU 102 78 166 193 140 Crush test ISO requirement: 14% @ 4K 10% @ 4K 8% @ 5K 14% @ 4K 4KPsi 8.8% 3% 5.3% 8% @ 5K 5Kpsi 10.1% 6.4% 6Kpsi 9.4% 9.0% 8Kpsi 7.2% K Value 8K 5K 9K 13
Chubut Project 3: Characteristic ISO 13503/2 Test Results - Sample # Estimated transport cost to the Vaca Muerta = US$100/t by road Fraction 30/50 % of sand in that fraction 77% Sphericity 0.6 0.7 Roundness 0.6 0.6 Acid consumption 2% 1.9% Turbidity 250 FTU 23 Crush test ISO requirement: 4KPsi 10% 3.7% 5Kpsi 8% K Value 6K 14
Uruguay Project 2: Characteristic ISO 13503-02 Requirement Test Results (SAS- 042) Fraction 40/70 70/140 % of sand in that fraction 46% 52% Sphericity 0.6 0.8 0.7 Roundness 0.6 0.7 0.6 Acid consumption 3% 3.5% 4.5% Turbidity 250 FTU 71 95 Crush test (% fines) at 5Kpsi Permissible 8% 6% Test Result 6% 3.3% Total frac fraction is >95% of bulk sand Location 290km by road to port Hydro-mining Estimated transport cost to the Vaca Muerta: US$95/t 40/70 (46%) 70/140 (52%) 15
Other 2 Different jurisdiction Characteristic ISO Requirement GEL1100 / FS-BG- D1 Fraction 20/40 30/50 % of sand in that fraction 72% 89% Sphericity 0.6 0.8 0.8 Roundness 0.6 0.8 0.6 Acid consumption 2% 0.6 1.5 Turbidity 250 FTU 6 4 Crush test (% fines at 4Kpsi) 20/40:14% @ 4K 30/50: 10% @ 4K 35# 2.5% 4.1% % fines at 6Kpsi 9.5% 6.7% K Value 6K 7K 30# Total frac fraction is >90% of bulk sand Hydro-mining Estimated transport cost to the Vaca Muerta: US$120/t 16
Argentina as a Jurisdiction Improving investment climate Vaca Muerta Good Network of Roads, Pipelines & Deep Water Ports in Argentina Argentina spends US$9B / year in energy imports Govt sees Vaca Muerta as means of attaining energy independence & being an economic driver Reversed course on YPF nationalization paid $5B in compensation to Repsol (April 2014) Settled 2001 bond default with Paris Club (May 2014) New oil & gas law aims to attract foreign capital need $200-$300B to fully develop the Vaca Muerta Infrastructure generally very good: Very good road system & deepwater ports Good oil & gas pipeline network Vaca Muerta in production (conventional oil) for 100 years High inflation likely to continue into 2015 Manage currency devaluation by buying local where possible & price product in US$ Frac sand is an essential component for development of the Vaca Muerta 17
Argentina s frac sand requirements: Can potentially be met from local production - with appropriate corporate strategy Uruguay Minimize transport cost: Target cost ~$100/t How unique is frac sand in proximity to the Vaca Muerta? Potential tonnage >50Mt Range of potential products: 20/40 30/50 40/70 70/140 Health risk silicosis mitigated by Hydro-mining potential in Uruguay Spread political risk: Argentina & Uruguay 18
Is South America an export opportunity for frac sands from USA? In initial development of these fields, yes, but during start-up only. It is an export market for specialized proppants. Vaca Muerta (Argentina): From start-up - imported frac sand from USA, China and Brazil. Export opportunity until local frac sand supply established Illinois Texas $125/t China Argentina ~$100/t - 55 days Vaca Muerta 19
Questions Posed What are the challenges of moving sand over long distances? Is it viable? What are the opportunities for exporting to Mexico and Argentina? Projected demand growth in Argentine and Mexican markets Illustrated with a case study How would a rise in demand from foreign markets impact USA production? Short-term stress on the international market until local resources brought into production in those new markets; Specialized proppants likely to be a strong market for USA production. The bigger opportunity is to establish / invest in the local frac sand industry in jurisdictions of interest export the expertise not the product 20
Dr. Richard Spencer, President & CEO richard@samsilica.com Nancy Chan-Palmateer, VP IR nancy@samsilica.com (416) 868-1491 www.samsilica.com U3O8 Corp. Investee TSX: UWE OTCQX: UWEFF www.u3o8corp.com 21