TORONTO (ResourceInvestor.com) -- With robust crude prices continuing to draw investor attention to Alberta’s oil sands, shares of Birch Mountain Resources [TSX-V, AMEX: BMD] offer an intriguing play on the sector – as a supplier of quicklime and aggregate.
Birch Mountain holds the metallic and industrial mineral rights to almost 1 million acres of land in the Athabasca oil sands region of northern Alberta.
The company’s focus is the Hammerstone limestone project, located approximately 60 kilometres north of Fort McMurray, from which it plans to produce both aggregate and quicklime (CaO).
Birch Mountain plans to quarry, crush, screen and wash limestone to produce aggregate for use in road construction, railway bedding and concrete. High-grade limestone would be quarried and calcined (heated to over 1,000oC) to produce quicklime for use in purifying air and water emissions at oil sands processing facilities (e.g., scrubbing sulphur dioxide). It would also be used to soften water used in steam-assisted gravity drainage operations, a process in which steam is injected into the ground to soften viscous bitumen so that it can be easily pumped to surface.
The potential for growth in the region is immense. The Athabasca oil sands resource is estimated at 300 billion barrels, second only in size to Saudi Arabia. Current development has tapped less than 5%, with approximately 1 million barrels of bitumen per day (bpd) currently produced. This is expected to increase to 3 million bpd in the next 10-12 years, ultimately climbing to over 5 million bpd. As production increases, so too will demand for aggregate and quicklime.
Not only is the current local supply of aggregate in decline, with less than 5 years of known supply, but also additional demand will come from a planned railroad linking the heart of the oil sands to Nisku, just outside Edmonton, the provincial capital. As well, there’s talk of construction of a pipeline to the British Columbia coast for shipment of oil to Asia.
Quicklime is currently trucked more than 800 kilometres from southern Alberta whereas Birch Mountain’s plant is only minutes away from many oil sand facilities. As well as giving the company a major cost advantage, the close proximity would improve delivery reliability, an important factor given that quicklime has a limited storage life.
A National Instrument 43-101 compliant report released in late February estimated 571 million tonnes (Mt) of proven limestone reserves and 620 Mt of probable limestone reserves at Hammerstone, enough for a quarry life greater than 70 years. The report calculated a pre-tax net value for both aggregate and quicklime of $698 million using a 7.5% discount rate.
This week Birch Mountain received regulatory approval to begin operations at the aggregate-only Muskeg Valley Quarry. Production is slated to start later this summer, with start-up and initial operations being performed by a contract operator to minimize capital costs. Quicklime production is slated for 2008, a year before Syncrude’s $400 million retrofit of flue gas scrubbers to reduce sulphur dioxide emissions commences operations.
Combined production of aggregate and quicklime is planned to grow from less than 1 Mt per year in 2005 to more than 10 Mt per year by 2016 and 15 Mt per year by 2031.
Given the benefits of Hammerstone’s size and proximity, Birch Mountain could become a possible target of one of the big oil sands developers, or alternatively, an industrial minerals firm (e.g., a cement company). Once Hammerstone is fully operational, the steady cash flow would make Birch Mountain a candidate for conversion into an income trust, a high-yielding equity structure that has proved immensely popular among Canadian investors over the past few years.
Needless to say there is no sure bet investment, especially among natural resources firms, and a number of factors could derail the stock. A prolonged decline in crude oil prices would likely curtail investment in the oil sands and its infrastructure. A left-leaning government could come into power and refuse, or retroactively deny, the necessary permits. Alternative sources of limestone might be discovered in the area; although this is unlikely given the company controls most of the surface-accessible limestone in the Fort McMurray region.
The size of the project will require Birch Mountain to seek additional funding, thereby creating the risk of further equity dilution - the capital estimate for initial aggregate and quicklime production totals $130 million and future increases in quicklime plant capacity will require $70 million in 2011 and $91 million in 2021.
Another factor is the use of natural gas in quicklime production, which exposes the company to the risk of escalating gas prices. However, price hedges could be initiated. In addition, the use of coke, produced as a by-product in the upgrading of oil sands, to fire the kilns somewhat lessens the dependence on natural gas.
Also, part of the Hammerstone property overlaps rights to oil sands owned by Shell Canada. Though no legal risks are known, development of both resources will require careful planning.
Despite these risks, Birch Mountain’s market cap of approximately $225 million appears low compared to Hammerstone’s NPV. The company’s shares were listed on the AMEX in April, which should give the stock more visibility along with additional liquidity. As of May 31, 76,500 shares were shorted.
