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HEEMSKIRK CONSOLIDATED LIMITED (HSK)
UPDATE
HEEMSKIRK BANKS ON LETHBRIDGE SALE TO FINANCE MOBERLY
DIRECTORS & MANAGEMENT
Graham Lenzner, Non-Executive Chairman
Peter Bird, Managing Director
Garry Cameron, Non-Executive Director
William Hansen, Non-Executive Director
John Taylor, Non-Executive Director
Stephen Gray, Company Secretary
Mark Flook, EGM Investments
Alan Minty, President - Heemskirk Canada
MARKET DATA
ASX Code:
Current Price
52 wk Range:
Market Capitalisation:
HSK
$0.07
$0.06 - $0.17
~$10.9 million
CAPITAL STRUCTURE (as at 31/01/14)
Shares on Issue:
Convertible Notes
154.1 million
1.889 million
MAJOR SHAREHOLDERS (as at 19/12/13)
First Samuel Limited
Taurus Funds Management
16.5%
7.0%
SHARE PRICE CHART
0.16
0.14
0.12
0.10
0.08
0.06
0.04
Stuart Glazebrook
+61 402 216 835
February 2014
Gordon Capital Pty Ltd
Heemskirk Consolidated Limited (ASX: HSK) has signed an
agreement for the sale of its Lethbridge processing facility
and current inventory in Alberta Canada.
The sale – yet to be approved by shareholders – will net
Heemskirk around A$12 million (pre-tax) inclusive of a
cash advance of CAD$250,000. The transaction price was
done on a 4x historic EBITDA multiple.
Proceeds of the sale, along with Heemskirk’s current A$13
million in liquid assets, puts the company closer to selffunding the CAD$26 million redevelopment of its flagship
Moberly Project in Golden, British Columbia, which the
company estimates has an NPV of CAD$65 million.
The sale of Lethbridge significantly de-risks the financing
options for the Moberly Project and is a materially
transformative transaction for the company. A successful
sale will allow Heemskirk to advance its development and
commissioning of Moberly. With a capitalisation of
almost A$11 million, Heemskirk will have a cash and
liquids war chest of over A$25 million or 2.3x its current
market value.
Moberly’s attractiveness as a future high-purity hydraulic
frac sand producer remains underpinned by sustained
strong proppant demand growth from likely end users,
industry peer capacity expansion and the rapid
acceleration of frac sand as a key cost-effective
component of lateral well completions in unconventional
energy exploration drilling and production.
Source: ASX
SENIOR ANALYST
KEY POINTS
Moberly is expected to produce 300,000 tonnes per year
(at current design capacity) from a 32 million tonne
resource and with scalable production capacity leveraging
off its geographic position adjacent to the Western
Canadian Sedimentary Basin and to key road and rail
infrastructure.
Page 1 of 11
RECENT EVENTS
Heemskirk signs Sale Agreement for Lethbridge
On January 21 2014 Heemskirk Consolidated (ASX:HSK) announced it had signed a
Binding Sale Agreement with Canadian drilling services company Marquis Alliance
Energy Group Inc. (a wholly owned subsidiary of TSX-listed Secure Energy Services Inc.
[TSX:SES]) for the company’s Lethbridge mineral processing plant in Alberta province
Canada.
Heemskirk signs
agreement to sell
Lethbridge for a total
consideration of CAD$12
million
Total consideration for the sale is CAD$12 million (before tax) with an initial cash
payment of CAD$8.44 million plus CAD$3.56 million for the plant’s current inventory of
barite, gypsum and zeolite. This transaction is being completed at an historic EBITDA
multiple of around 4 times.
Included in the sale is the optioned Monitor barite exploration interest in Nevada in the
United States.
Following an advance of CAD$250,000 from Marquis Alliance, Heemskirk will also be
liable to pay a break fee of CAD$500,000 should a superior competing offer from a third
party be forthcoming and accepted and Marquis Alliance has not exercised its preemptive right to match any offer.
Heemskirk December 2013 Quarterly Report
December 2013 quarter
industrial minerals
production up 51%
Industrial minerals
revenue up 71%
On January 30 Heemskirk Consolidated (ASX: HSK) delivered its December quarter 2013
results. Canadian industrial minerals production up 51% to 27,314 tonnes on the
previous corresponding period and up 11% on the September quarter. These were inline with normal seasonal variations and growing demand.
Canadian division revenue was up 71% on the December 2012 quarter to CAD$8.9
million and up 12% on the September 2013 quarter, in-line with the seasonal changes
and increasing customer demand.
Canadian Industrial Minerals
Production
Revenue
Revenue per tonne sold
Cost of Sales
Cost of Sales per tonne sold
Margin
Source: Heemskirk
Gordon Capital Pty Ltd
Tonnes
CAD$M
CAD$/t
CAD$M
CAD$/t
%
DecQ
2013
27,314
8.88
320
8.10
292
9%
SepQ
2013
24,580
7.90
311
6.76
266
14%
YTD*
2014
27,314
8.88
320
8.10
292
9%
YTD*
2013
18,104
5.20
298
4.71
270
9%
*September year end
Page 2 of 11
Industrial Minerals Product Sales (Tonnes) - 3-Year Historical Track + Current
Source: Heemskirk
ANALYSIS AND COMMENT
Moberly Financing Moves Closer
Lethbridge sale de-risks
Moberly Project
financing
The pending sale of Lethbridge is another key milestone toward financing the upgrade
and development of Heemskirk’s 100%-owned Moberly Sand Operation in Golden,
British Columbia.
Redevelopment of the processing facilities at Moberly has been costed at CAD$26
million with expected production of 300,000 tonnes of high purity silica “frac” sand per
year (at current steady state design capacity) and is scheduled to take between 9 to 12
months to complete. Since inception Heemskirk has spent CAD$ 4.908 million on
exploration and evaluation at Moberly.
Moberly project NPV of
CAD$65 million
On company estimates the redeveloped Moberly project has a net present value of
CAD$65 million, post-tax IRR of 32% and a payback period of less than 3 years. The
project is expected to generate free cash flow (undiscounted) after tax and capital of
~CAD$180 million over 20 years at current frac sand prices.
The project is well sited adjacent to major road & rail networks with the potential to be
a key supplier to Chevron:Apache’s Kitimat joint venture LNG project on British
Columbia’s western coast which has feeder pipeline networks extending east into areas
to the north of Moberly.
The company believes that overall demand in the WCSB region remains positive, with
estimated frac sand consumption now at 2.5 million tonnes per annum.
Gordon Capital Pty Ltd
Page 3 of 11
Sales Agreement Timeline
Completion of the transaction will be subject to the satisfaction of a number of
conditions, including, but not limited to:
1. Marquis Alliance being satisfied with the results of their respective Lethbridge
due diligence investigations;
Lethbridge sale requires
shareholder approval
2. Final Heemskirk Board approvals;
3. Receipt of approval from Heemskirk’s shareholders; and
4. Receipt of all regulatory approvals including the approval of the Australian
Securities Exchange (ASX).
Heemskirk’s Cash Box Grows
Prior to the Lethbridge transaction, Heemskirk had cash and investments of A$13
million or around 120% of its current market capitalisation.
Heemskirk's 2013 Cash & Liquid Assets
$’000
25,000
20,000
15,000
10,000
5,000
0
2013 Cash and Liquids
Project Development
Plant & Equipment
Finance
Core working capital
Other working capital
Portfolio EBIDTA
Corporate EBIDTA
Canada EBIDTA
2012 Cash and Liquids
Source: Heemskirk 2013 Annual Report
Increased cash makes
Heemskirk vulnerable to
corporate activity
Gordon Capital Pty Ltd
Whilst the sale of Lethbridge is pivotal to the company in advancing the development
of the Moberly Project, it also underscores the vulnerability of the company to
corporate predation.
Page 4 of 11
Proceeds of the sale of Lethbridge will boost the company’s available liquid assets to
more than A$25 million (before tax consideration of Lethbridge sale).
Source: Heemskirk reports
On current pricing and assumed sale completion Heemskirk will trade at around a 40%
discount to its cash backing.
Post-transaction, HSK to
trade at around 40%
discount to cash backing
Frac sand peer companies US Silica and Hi-Crush Partners have each highlighted the
desire to expand organically and strategically as the demand for frac sand proppants
continues to grow across North America.
The makes Heemskirk’s war chest extremely attractive to any corporate as they pursue
increased market share through acquisition.
OUTLOOK
Amidst sustained demand for unconventional energy sources proppant demand
remains strong, with attractive sales margins driven by logistical proximity dominating
corporate transaction opportunities, as oil and gas prices remain low and favour natural
frac sand sources over higher cost synthetic alternatives.
Proppant demand
remains strong and
strategic organic growth
opportunities dominate
corporate activity
Heemskirk is well-positioned to capitalise on the sustained interest in strategic frac
sand supply sources from the major players and its proximity to end user markets.
Growth in drilling activity in the Western Canadian Sedimentary Basin continues along
with the development of the Kitimat LNG Project along the coast of British Columbia
underpinning the long-term viability and prospectivity of the Moberly Frac Sand
Project.
Moberly Frac Sand Project
Capital expenditure
C$M
26.0
Production Rate (Yr 3+)
000t
300.0
Avg Sale Price+
C$/t
140-210
C$M
180.0
IRR
%
33.0
Payback Period
Yrs
3.0
Mths
9-12
Project Cash flow
#
Construction Time
*
+ based on current pricing levels in Western
Canada
# based on initial 20 year mine life at
current prices
* from development decision
Source: Heemskirk
Gordon Capital Pty Ltd
Page 5 of 11
Resources & Reserves
In-situ Identified Mineral Resources of silica suitable for 20-140 mesh frac sand
(estimated 64% yield) at 30 June 2013:
In-Situ Silica (Frac) Sand
Dry tonnes (Mt)
Resource Category
2011
2012
2013
Measured
10.8
10.8
10.8
Indicated
21.6
21.6
21.6
Total Measured + Indicated*
32.4
32.4
32.4
*Mineral Resources include that proportion modified to produce Ore Reserves of frac sand.
Ore Reserves of silica suitable for 20-140 mesh frac sand, at 30 June 2013:
In-Situ Silica (Frac) Sand
Reserve Category
Dry tonnes (Mt)
2011
2012
2013
Proven
8.9
8.9
8.9
Probable
4.6
4.6
4.6
13.5
13.5
13.5
Total Proven + Probable
*
*Mineral Resources for frac sand include that proportion modified to produce Ore Reserves.
INVESTMENT PROPOSITION
Heemskirk is an independent industrial minerals producer. The company’s two 100%
controlled operations, Lethbridge and Moberly are located adjacent to some of the
world’s biggest and richest shale oil and gas basins in the heart of the Western
Canadian Sedimentary Basin and close to vital transport infrastructure.
Historically, the company has focussed on raw material production for traditional silica
sand usages such as glass making in addition to processing other important minerals
such as barite, gypsum and zeolite.
The company is now looking to become a major supplier of vital consumable products
in the resurgent unconventional oil & gas industry in North America, and in particular
western Canada, moving the bulk of its existing silica sand production into the
manufacture of hydraulic fracturing “frac” sand which it believes is the key driver in its
future development.
Low cost redevelopment
and easy logistics
ensures high margin
product capability for
Moberly frac sand
products
Gordon Capital Pty Ltd
Through a low cost redevelopment of its existing silica sand plant at Moberly, an
unconstrained resource and proximity to critical transport infrastructure, Heemskirk is
well placed to capitalise on the sustained strong growth in demand for frac sand
products and on its closeness to some of North America’s largest shale gas basins.
Page 6 of 11
BUSINESS OVERVIEW & GROWTH PROFILE
All of Heemskirk’s current operations are based in Canada and operated by the
company’s wholly owned subsidiary Heemskirk Canada which has a regional
administrative office in Calgary, supported by a corporate head office located in
Melbourne, Australia. The Canadian subsidiary operates the mines and two processing
facilities. It has been a producer of industrial mineral products for over 50 years with
operations in Lethbridge, Alberta and Golden, British Columbia. Lethbridge was
acquired by Heemskirk in 2005 and has been operating for over 60 years. In January
2014, company announced it had entered into an agreement to sell the Lethbridge
facility for CAD$12 million.
Established in 2005, the Moberly silica sand mine and processing facility near Golden
uses ore from a sandy deposit that is 99.5 % pure silica. It produces flint grade silica,
silica flour, and other silica products for the oil & gas, oil sands, recreational and
landscaping industries.
The Moberly operation has a mineral processing facility supplied with raw material
from the 100%-owned Moberly Silica Deposit, located adjacent to the Trans-Canada
Highway and Canadian Pacific Rail main line. It is also within 12 hours trucking to target
market areas extending from southern Saskatchewan (Bakken Basin) to northeast
British Columbia (Horn River Basin).
The deposit occurs on the flank of Mount Moberly within a near vertical, massive
quartzite unit which is at least 200 metres in thickness and has a strike extent of several
kilometres. The deposit consists of approximately 1,000 metre strike length of variably
altered, friable ('sandy') horizons within the quartzite and has been quarried and
processed for over 30 years. Mining has occurred over an approximately 800 metre
strike length, 150 metre vertical extent and 200 metres across the deposit.
Moberly to produce
300,000 tonnes of
product per annum over
a current 20 year mine
life
Amidst the growing market for frac sand use in the unconventional shale gas & oil
exploration and production industry, in late 2011 the company concluded an
assessment of the Moberly Deposit sand for the production of frac sand following a
nominally costed upgrade of the existing facility. The redeveloped plant aims to
produce 300,000 tonnes of product per annum from a 32 million tonne resource over a
current 20 year mine life plan.
Qualititative testing of the Moberly Frac Sand product outlined a suitable medium for
hydraulic fracturing purposes with samples produced from the design flowsheet
exceeding the technical requirements for frac sand crush strength and chemical
conductivity performance for all the likely potential and existing customers with whom
Heemskirk has held preliminary discussions.
Gordon Capital Pty Ltd
Page 7 of 11
Moberly Frac Sand Product
Frac sand produced from Moberly will be suitable for the use in oil and gas wells at
pressures up to 6,000 psi and well depths greater than 2,500 metres which meets or
exceeds the performance characteristics of material from other current domestic
producers. Although there are ISO and API standards for the various frac sand
properties, there is no overall benchmark for frac sand.
Extensive mineralogical and metallurgical test work has indicated that the sands have
consistently met or exceeded customer requirements for frac sand: in the 20 mesh to
140 mesh size ranges (0.85mm to 0.106mm) and customer feed-back to date has been
positive. The company anticipates production of 20/40; 30/50; 40/70 and 100 mesh
products that can be economically and competitively delivered by rail or truck from the
plant.
Growth market for
premium frac sand
product
The quality of the Moberly product and location make the project competitive in the
frac sand market in Western Canada. The large resource and plant site provide scope
to expand the operation should market conditions remain supportive.
Recent initiatives by major oil and gas companies to develop LNG export facilities on
the west coast of Canada to service rapidly growing Asian markets should further
support the future of shale gas development in the region.
The projects proximity to rail also facilitates easy access to frac sand users in the
burgeoning United States market.
KEY POINTS
• Well Established Operations: Heemskirk Canada has been a producer of industrial
mineral products for over 50 years, with operations in Lethbridge, Alberta and
Golden, British Columbia.
• Excellent Location: The Moberly Silica Sand plant is located on the Trans-Canada
Highway and Canadian Pacific Rail Mainline near Golden, British Columbia is within
12 hours trucking to targeted market areas which extend from southern
Saskatchewan (Bakken Basin) to northeast British Columbia (Horn River Basin).
• High Quality Resource: At the Moberly deposit extensive mineralogical and
metallurgical test work has indicated that the silica sand has consistently met or
exceeded API RP 56 for “frac sand” and would be suitable for hydraulic extraction
use in oil and gas wells at pressures up to 6000 psi and well depths greater than
2,500m. Potential customer feed-back has been positive.
• Substantial Resources: As at June 30 2013, the Moberly deposit has an
undeveloped resource of more than 30 million tonnes which will sustain the
operation significantly beyond its current 20 year production plan. The silica sand
meets or exceeds the performance characteristics of material from other current
domestic producers.
Gordon Capital Pty Ltd
Page 8 of 11
• Low Capex: Heemskirk has re-confirmed the C$26 million construction costs for
the upgrade to the Moberly for frac sand production.
• Strong Cash Position: As at 31 December 2013, the Company had cash and cash
equivalents of $7.3 million with a further $6.0 million in equity investments. Total
liquid assets of the Company were $13.3 million. Debt (convertible note) was
$2.74 million.
• Timely Expansion: With the North American (Canada included) oil and gas forecast
as accounting for over 50% of domestic energy supply for years to come. The
decision to commence the Moberly Frac Sand Project appears well timed and is on
plan to provide year-round processing of feedstock and the provision of a
complete range of frac sand products.
PROFILE
Heemskirk Consolidated Limited (ASX: HSK) is an ASX listed, independent industrial
minerals producer. The company’s two 100%- owned operations, Lethbridge and
Moberly, are located in the heart of the Western Canadian Sedimentary Basin adjacent
to some of the world’s biggest and richest shale oil and gas basins.
Historically, the company has focussed on raw material production for traditional silica
sand usages such as glass making in addition to processing other important minerals
such as barite, gypsum and zeolite.
The company is now looking to become a major supplier of vital consumable products
in the growing unconventional oil & gas industry in North America - and in particular
western Canada - moving the bulk of its existing silica sand production at its Moberly
project into the manufacture of hydraulic fracturing “frac” sand which it believes is the
key driver in its future development.
Gordon Capital Pty Ltd
Page 9 of 11
FINANCIAL SUMMARY
INCOME STATEMENT*
FY 11
FY 12
FY 13
Revenue
14.3
18.4
23.6
EBITDA
Deprec/Amort
Finance Cost
PRE TAX PROFIT
Tax
NET PROFIT
-3.3
-0.8
1.6
-10.3
6.9
-3.4
-2.1
-0.8
-0.2
-3.4
1.2
-2.2
-1.9
-0.9
-0.3
-4.3
0.4
-3.9
($’000)
BALANCE SHEET*
2011
($’000)
Current Assets
Cash & Equivalents
Receivables
Inventories
2012
2013
16.7
2.8
4.0
32.4
9.4
1.8
4.5
27.3
8.5
4.0
5.9
25.0
11.7
1.0
9.9
11.2
3.3
10.2
11.7
0.1
11.8
42.3
37.5
36.8
2.8
4.3
1.4
9.1
3.9
5.0
9.6
6.3
5.1
12.2
Shareholders’ Equity
3.0
12.6
29.7
0.2
10.1
27.4
0.0
12.6
24.3
Liabilities & Equity
42.3
37.5
36.8
Non-Current Assets
Plant & Equipment
Goodwill
Other
Total Assets
Current Liabilities
Payables
Debt
Other
Non-Current
Liabilities
Debt
Other
($’000)
Net Cash Flow From
Operations
Net Cash Flow From
Investing
Net Cash Flow From
Financing
Net Change In Cash
CASH FLOW*
FY 11
FY 12
FY 13
-4.3
-0.5
-3.8
39.0
-5.0
2.8
-23.0
-2.0
0.0
11.7
-7.5
-0.9
FY 12
28.7
-36.4
-25.1
60.5
FY 13
28.3
-10.5
-13.2
59.2
KEY RATIOS*
(%)
FY 11
Revenue Growth
-8.9
-92.5
EBITDA Growth
EBITDA Margin
61.2
Net Debt/Equity
Intang./Equity
57.5
Top 20 Shareholders
*September year-end
Gordon Capital Pty Ltd
Page 10 of 11
GENERAL ADVICE WARNING: The information contained in this Report is only of a general nature and does not
constitute personal financial product advice. In preparing the advice no account was taken of the objectives,
financial situation or needs of any particular person. Therefore, before acting on the advice readers should
consider the appropriateness of the advice with regard to their particular objectives, financial situation and
needs. Readers should obtain and consider any relevant Product Disclosure Statements before making any
decisions about the subject matter of this Report and should seek independent professional advice.
DISCLAIMER: Although every attempt has been made to verify the accuracy of information contained in this
Report, Gordon Capital Pty Ltd (Gordon Capital) and Pearce Callahan & Associates Pty Ltd (Pearce) make no
warranties about the accuracy or completeness of any advice or information. The officers, agents, related
affiliates, related body corporate and employees of Gordon Capital and Pearce accept no liability for any loss or
damage whatsoever arising from any investment decisions or use of the information or advice in this Report. All
information and advice contained in the Report are subject to change without notice.
All investment decisions are subject to risks. Past performance should not be taken as an indication of future
performance. Any ‘forward looking statements’ contained in this Report are based on current expectations about
future events. Words such as “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “likely”,
“intend”, “should”, “could”, “may”, “target”, “plan” may identify forward looking statements. Such forward
looking statements are based on views held at the date of publication of this Report and are not guarantees as to
future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the
control of Gordon or Pearce. Therefore, actual results may differ from those referred to in such statements.
DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, AFS Authorised Representative ASIC
No. 338899, as Authorised Representative of Pearce Callahan & Associates, ABN 90 053 868 410, Australian
Financial Services Licence No. 288877. The registered office of Pearce Callahan & Associates Pty Ltd is Level 1, 2
Main St, Greensborough, VIC 3088.
Please note that Gordon Capital has been retained by HEEMSKIRK CONSOLIDATED LIMITED to provide this report
for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any
additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective
analysis in this report.
Stuart Glazebrook, the analyst responsible for this report, does not receive any indirect benefits or assistance
from Heemskirk Consolidated. Our remuneration is not linked to the views expressed in this report.
Please see our Analyst Qualifications and Financial Services Guide, available at www.gordoncapital.com.au or by
calling +613 9607 1371 for further information.
Gordon Capital Pty Ltd
Page 11 of 11
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