The Frac Sand Frisbee

NOTE: Please take a look at the very end of this post for the latest versions of the documents on file for this mine. Last update 2-April, 2014.

There’s a new application for a mine that you might want to learn about.  Here are some highlights from the application:

• 100 loads, 160 truck-trips a day running on Schoepp’s Valley Road to 88
• Hauling Monday through Saturday
• All the “primary” haul routes go through the 88/35 intersection by CFC School
• Trucks will most likely go through Alma, since Winona is closed to new sand

Given the distance to rail (minimum 20 miles, most likely closer to 30) and the small volume of the operation (600,000 tons/year max given the truck/day count) this mine is  classified as a “small, high-cost operation” by industry analysts.  So it’s likely future is that it will produce sand in boom times only, and will be idled the rest — a classic case of the commodity “flicker” effect where the jobs will be temporary and the damage will be permanent.

Here’s a map that I made of the site, based on their application – click on the map (or HERE) to visit the Google map which allows you to zoom in, look at haul route lengths, change to satellite view, etc.

Here’s a similar map, from their application — click on the map for a larger version.

Here’s a close-up, showing the mine straddling Schoepps Valley Road, crossing the hill and ripping off a bluff facing on to Oak Valley Road.

Here’s a more detailed view (turned sideways — again, click on the picture to download a bigger version).

Click HERE to read the meat of the application.

Click HERE to download the whole thing, including all these maps and more (it’s pretty big, about 100 mBytes, so give it a while to download)

UPDATE – 22-January: here is a complete set of the latest materials about the mine

App Complete – Aug 2013

Reclamation Plan Set

Rec Plan — Landowner Leases

Rec Plan — Figures

Rec Plan — Site Photos

Rec Plan — Soil Info and Soil Boring Data

Rec Plan — Natural Heritage Inventory

Rec Plan — Groundwater elevations and well logs

Rec Plan — Traffic and road info

Rec Plan — Wetland inventory

Rec Plan — Sieve results

Rec Plan — WI Historical Society Records

Rec Plan — Hi Cap Well Application

Rec Plan — Tech Specs

Rec Plan — Site Plans

Rec Plan — Soil Data

Rec Plan — Plan Body

Rec Plan — Figures

WES-Badger Bluff Sands NMM 11-25-13

WES-Badger Bluff Sands-NMM Revisions 12-4-13

Additional Update: Here are additions filed in late March, 2014

Ambient Air Monitoring – AAMP air monitoring program

Ambient Air Monitoring – Air monitoring sites

Ambient Air Monitoring – TS ADR1500 air monitors

Flocculant Data – Biostar information

Flocculant Data – Biostar Material Data Sheet Q&A

Property Value Guarantee

Well Monitoring – Final

We’ve mentioned this before.  Frac sand is all about rail.  If your mine is right on a railroad spur, transportation costs are lower.  A lot lower.  Now there’s a credible article that puts a number on how much lower.

Up to $10/ton.

So you farmers who are being pulled into frac sand deals by truckers (like the folks in the River Valley Sands deal) might want to think again about the motivations of your new good friends who want to help you make lots of money.  While they’re offering you $1/ton for your sand, they are going to make up to $10/ton trucking that sand of yours to a rail spur.  Oh, and their revenue will be inflation-adjusted, while yours won’t.  So the deal works better for them in 20 years, while it’s a lot worse for you.

And for you people who think Glacier Sands is going to give up on that project by the CFC School, this is also the reason they’re not.   They want to turn that piece of land into something that can compete with the port of Winona for frac sand traffic.  I’m still puzzled by all the long/expensive trucking runs from the mines they want to feed that plant with — maybe they’re hoping they can flip the package deal of sand mines and processing plant to a a greater fool who doesn’t understand the impact of trucking costs on the price competitiveness of this commodity product.

Click HERE to read the article.  And here’s the tasty bit that I’m using to come up with the $10/ton figure:

Christianson said many of the richest sand deposits in southeastern Minnesota fall too far away from existing rail lines to be readily developed. While frac sand companies in Wisconsin sometimes truck their product as far as 60 miles to reach rail or barge terminals, shipping directly by rail can save frac sand producers as much as $10 per ton, according to a Sept. 14, 2012, Raymond James report.

That gives frac sand producers in rail-connected cities like Shakopee, Minn., or Taylor, Wis., a competitive advantage.

“You can only truck sand a certain distance before it’s not cost effective,” said Martin Lehman, a spokesman for Berlin, Wis.-based Badger Mining Corp., which has operations on a Canadian National rail line in Taylor.

By the way, Raymond James is the real deal — a great big Wall Street firm that pays attention to the details.  So that $10/ton number is one that I would tend to trust.

We’ve got a new sand mine application, River Valley Sands, and their filing includes a copy of the lease deal that they’ve signed with the slickster mine promoter.  So we can take a look at a real deal and see how good it is.  Click HERE for a copy of the application document if you want to read along.  I’ll be talking about the first lease, the one with Deland and Patricia Powers (which starts on page 27 of the application document), but more fun can be had by reading them all if you want.

A couple disclaimers.  I’m not a lawyer, I don’t even play one on TV, so this isn’t legal advice.  I’m just a guy that’s signed a lot of deals, and these points are like the ones I would write up for my lawyer to go research if I were presented with a stinker like this one.  I’m also biased.  I don’t like what these outsider promoters are doing to our County, the residents like me who are going to have to put up with the impacts of these mines for decades, or the farmers that they’re screwing with these deals.

The price is lousy — $1/ton.  Can’t say this for sure, but if you look at all the “whited out” royalty-payment sections of these leases, a buck a ton is the only one that seems to fit.  That’s on the low end of the prices we’ve heard.  But that’s not the worst of it…

There’s no adjustment for inflation.   Which means that 10 or 20 or 50 years from now the promoter, or whoever they transfer this lease to (see below) will still only have to pay a buck a ton.  What does that mean?  Let’s use historical inflation rates (click HERE for the calculator I used) and see.

First the 20-year scenario.  $1/ton in 1990 would fetch $1.65/ton in 2010 if they had an inflation clause in their contract.   Putting it the other way, the $1/ton they’ll get paid today will only be equivalent to $.59/ton in 20 years if the inflation rate matches the period from 1990 to 2010.

But wait, there’s more!  Since these leases run forever (see below), let’s try those numbers in 50 years.  $1/ton in 1960 would fetch $7.28/ton in 2010 if this contract had included an adjustment for inflation — doing it the other way, $1/ton in 1960 is the same as $.14/ton today.

The monthly draw.  I don’t think the monthly advance these people are getting is very big.  The language in the Royalty section is pretty weird and the white-outs don’t help.  But here’s the way i figure it — and arrive at the princely sum of $500/month.

The lease has this completely weird sentence in there that says “meaning that additional monthly payments to the farmer will begin to accrue once the promoter hauls 500 tons from the premises.”  Now, that language is a bit ambiguous — but i think they mean 500 tons in a month (since they’re talking about a monthly payments), which means the draw is $500/month if the price is $1/ton.  That’s the only way I can make sense out of that part of the deal.  A guarantee of $500/month is a far cry from the $1million/year that land-owners have been telling us they’re going to get.  That’s so far away that we need to ask another question.

What happens if there are excess monthly draw payments and things go bad?  Let’s go another way with this.  Suppose that my interpretation of that paragraph is way off and the monthly draw is something more interesting — let’s say $10k/month.

The land owner starts drawing $120k/year against future sand.  10 years pass — the land owner has drawn $1.2million — not too bad!  Suppose the promoter goes broke, or just decides not to renew the lease.  Let’s also assume that the promoter didn’t pull 1.2million tons of sand out of the mine over that 10 years.  Now the farmer has been paid for more sand than has been removed.

The question I’d have asked my lawyer is “what happens?”  Does the land owner have to pay those excess dollars back?  My guess is “probably,” since the word “draw” usually is talking about some form of a loan against future performance.  There’s no language in here that describes what happens when there is more draw than sand, so if I were in this deal I’d be keeping those excess payments in a rainy-day fund and not spending them.

The promoter can assign this lease to somebody else.  We’ve been saying for a long time that the people doing these deals are really putting them together so that they can sell the package to somebody else, make a quick killing and walk away.  So of course this contract has language that lets them do that.  The land owner has absolutely no say over when that happens, who the buyer is, nothing.  And the land owners certainly don’t get paid anything when that happens.

The promoter can renew this lease forever.  The lease comes up for renewal every 10 years and there’s no limit on the number of times it gets renewed before it gets renegotiated.  So all those royalty payment rates?  They’re forever as well.

The promoter can renew this lease for free.  There’s a payment that’s been made at the beginning of this lease.  But there aren’t any payments when the lease renews.  So why would they ever let the lease expire, ever?  It’s free to keep rolling it over.  Oh, did I mention that there’s no requirement for the promoter to take out a minimum amount of sand per year?  So the promoter could just keep this lease in their pocket (or sell it to somebody else) for a couple decades and fire this thing up when market conditions are right.  Good luck trying to sell this land with a lease like that.

Would a buyer of this land see any benefit from the lease?  I don’t see any corresponding mechanism for the transfer of the lease for the land owner.  Suppose they want to sell their land (and the promoter doesn’t bite on the one-sided right of first refusal deal)?  Does the new buyer become a party to the lease?   Presumably they’re stuck with the obligations, but do they get any of the money?  How is the value of the lease calculated into the sale price of the land?  Makes my head hurt.

As I said at the top — I’m a biased guy and not a lawyer.  But this deal doesn’t look all that good to me from the land-owner’s point of view.  Pretty good for the promoter though.

Of course I’m biased.  I don’t like what frac sand mining is doing to Buffalo County.  I don’t like the way people are being bullied by frac sand promoters.  But I also don’t like the way local farmers are getting ripped off.  So this is another in the series of wake-up calls I’ve written, aimed mostly at farmers trying to make deals with frac-sand promoters.

Keep your hand on your wallet, and keep an eye on the economics, that’s my drumbeat message that I’ve been hammering away on for 18 months now.  This is just the latest installment.

You’ve heard of Forbes Magazine?  You know; the mainstream, conservative magazine that rich people read?  Well, here’s a link to an article that does a pretty good job of demolishing the notion that people are going to get rich quick.  Before handing you off to Forbes, I’ll just note that hardly anybody in Buffalo County has actually gotten rich (quick or otherwise) off of frac sand.  This is part of the reason why.  And this is why our leaders (Del D. Twidt this means you) [yes this really is the name our County Board Chair prefers to go by, not something made up out of the Simpsons] are being irresponsible leading the County over a cliff on this one.

Here’s the link to the article in Forbes:

“Why America’s Shale Oil Boom Could End Sooner Than You Think”

You farmers who are signing (awful) contracts with promoters really ought to take the time to understand what this guy is saying.  Here’s a little chunk that really caught my eye.  Note his use of the term “marginal players” — this means you.

I think the American Oil Boom is at a crossroads. Growth has been remarkable; we now produce more oil than we import. But contrary to wishful thinking we will not become independent in oil by the end of the decade. There’s just not enough available capital to both combat hyperbolic decline rates and add meaningful incremental volumes. The returns on investment just aren’t good enough for players late to the game. (A well in the Bakken does 500,000 barrels; the average well in Alaska’s Prudhoe Bay produced 10 million.)

And looming always in the background is OPEC. According to the Energy Information Administration the average cost of a barrel of oil from the Middle East is just under $20. It would be entirely reasonable for OPEC to open its spigots, drive down the price of oil to $75 (which is not really that low at all) and wipe out all the marginal players in the United States.

Some prognosticators assume that OPEC will reduce its output to make room in the market for North American oil. But if you were the low-cost supplier of a commodity product would you go easy on your competitors? Of course not.

Good news this morning from Trempealeau County where last night the Whitehall City Council unanimously denied the annexation request for the Whitehall Rail and Sand project.  In addition they passed a resolution for the 226 acres to be placed into extra territorial zoning so that the towns of Lincoln and Whitehall can take up to 2 years to come up with a land use plan.

This is part of an emerging theme that we’re seeing in recent frac sand news.  The tricky bit (aside from coming up with sand instead of dirt) seems to be getting the sand to market.  Here’s a snippet from a recent article that acknowledges that this is a puzzler that’s not going away any time soon.  And also explains why the Glacier people are sniffing around the Town of Milton to take another run at their previously-denied Starkey transload project.  Here’s a snippet from the article:

Logistics priority

You can mine a frac sand deposit, but can you get it to market?

That’s the $64,000 question – or more like the $64 million question these days for anyone involved in shipping frac sand to drill sites across North America.

Industrial Minerals June 2013 issue features an oilfield special which includes a review of frac sand logistics and projects, but also exclusively profiles Halliburton’s recently opened state-of-the-art 40m lb frac sand transfer terminal at Windsor, Colorado.

Serving the Niobrara Basin, this is world’s largest frac sand facility of its type and signifies the importance oilfield service companies attach to securing adequate logistics infrastructure.

Likewise, in May, US Silica opened its 15,000 tonne silica sand storage and distribution facility in San Antonio, Texas, in partnership with BNSF Railway Co.

And yesterday, Canadian National Railway announced increased investment to the tune of $33m to upgrade its Whitehall subdivision, in Wisconsin, to meet increased demand for car-loading capacity and train velocity for frac sand producers Badger Mining, Preferred Sands, Atlas Resin Proppants, and Taylor Frac.

With frac sand freights costs accounting for as much as 61% of its delivered cost, 2012 saw Baker-Hughes target $100-120m savings with a range of raw material supply initiatives.

So for those of you who helped defeat the Glacier project, get ready for another round because the stakes are rising.  Winona is full.  Whitehall is resisting expansion.  Wabasha is a long way away.  Putting a major transload facility right across from the school would make Buffalo County segment of the Great River Road the transportation hub for the region.  First stop?  Town of Milton — where they’re calling Board members to tee up support for an application to the County to rezone the Starkey land from Ag to Industrial.