Athabasca Minerals, Inc. (OTCPK:ABCAF) Q3 2022 Earnings Conference Call November 29, 2022 11:30 AM ET
Company Participants
Cheryl Grue – Director, Corporate Affairs
David Churchill – CFO
Dana Archibald – CEO
Conference Call Participants
Cheryl Grue
Good morning to all of you who have joined us on today’s call. My name is Cheryl Grue, and I am the Director of Corporate Affairs for Athabasca Minerals, Inc. Today’s call will be addressing the 2022 third quarter financials that were released last week as well as providing an update on AMI’s current activities and our continued refocusing of the company as part of our commitment to corporate growth and shareholder value.
David Churchill, our CFO, will begin by addressing the Q3 financial results, providing some more information on the numbers and focusing on some of the highlights of the last quarter. Following that, we will have Dana Archibald, our CEO, provide an update on corporate operations, specifically our U.S. sand operations, which have become the cornerstone to our growth. We will have a Q&A period after Dana and David have spoken. So please feel free to submit questions during the call or in the Q&A session. All questions can be submitted through the Q&A function on this platform.
Before we start, I would also like to reference that this investor call contains certain statements or disclosures relating to Athabasca that are based on the expectations of its management as well as assumptions made by and information currently available to Athabasca, which may constitute forward-looking statements or information under applicable securities laws. Please reference the forward-looking statements posted on the corporation’s website on November 23, 2022, under the news release titled Athabasca Minerals announces Q3 2022 financial results and upcoming Investor Call.
I will now hand it over to David Churchill to speak to our 2022 Q3 financial results.
David Churchill
Good morning, everyone, and thank you for joining the call. I’m David Churchill, and I’m the Chief Financial Officer for AMI. I will be speaking to you about AMI’s third quarter results for the 3 and 9 months ended September 30, 2022. I’ll be making reference to the information contained in the November 23, 2022 press release, the third quarter unaudited financial statements and the third quarter MD&A that are posted on SEDAR and on the AMI website. Please note that all figures mentioned today are in Canadian dollars.
Revenue net of royalties for the 3 months ended September 30, 2022, was $11.5 million, an increase of $7.2 million or 166% compared to Q3 2021 revenue net of royalties, which was $4.3 million. This increase was due to frac sand sales from our 50% interest in the Hixton, Wisconsin industrial sand operations, which we acquired in March 2022 and increased sales in RockChain. When looking at the year-to-date revenue net of royalties for the 9 months ended September 30, 2022, we have earned $25.8 million versus $8.6 million for 2021. This is an increase of $17.2 million and is due mainly to increased aggregate sales in AMI aggregate and RockChain and the sand sales from our Hixton, Wisconsin sand mine through our 50% interest in AMI Silica LLC.
Again, the purchase of the Wisconsin sand facility was closed in March 2022, during which time the corporation assumed operations. For the 3-month period ending September 30, 2022, AMI reported a gross loss of $0.8 million versus a gross profit of $0.4 million in the comparable 3-month period ending September 30, 2021. The main reason for the gross loss in the current period was noncash depreciation, depletion and amortization expense of over $1.1 million compared to $0.1 million in 2021 and $0.3 million of increased mobilization, transload and stockpiling expenses in AMI Silica LLC. The increased noncash expense is due to the Hixton, Wisconsin sand mine assets acquired in March 2022.
As we mentioned in our earnings call on August 30 of this year, depreciation expenses will be higher in 2022 than in 2021 given the dollar value of the depreciable assets in our Silica LLC division. Excluding noncash depreciation, depletion and amortization expense, the corporation shows a gross profit of $0.3 million for the quarter ending September 30, 2022. For the 9-month period ending September 30, 2022, we reported a gross loss of over $18,000 versus a gross profit of $1 million in the comparable 9-month period in 2021.
The 9 months ended September 30, 2022, includes a noncash depreciation, depletion and amortization expense of $2.2 million versus $0.3 million in the comparable 9-month period in 2021. Excluding the noncash depreciation, depletion and amortization expense, AMI shows a gross profit of $2.1 million for the 9 months ending September 30, 2022. This year-to-date gross profit fall slightly below our anticipated numbers due to several factors from our Hixton operation, including rail disruptions and increased operational costs due to the stockpiling of sand. Dana Archibald will speak to these factors later in this call.
For the 3-month period ending September 30, 2022, general and administrative expenses were $1.2 million versus $0.5 million in the comparable 3-month period ending September 30, 2021. This increase was due mainly to increased head count in the RockChain division. In August 2022, we made decisions related to reducing G&A in the noncore businesses and — noncore assets and businesses, which included the phasing out of TerraShift Engineering as part of the corporation’s stage plan to create a sustainable and resilient business model. We will continue to evaluate additional cost-saving measures as AMI prioritizes becoming a leading frac sand provider in Western Canada and the United States.
For the 3-month period ending September 30, 2022, the corporation reported a net loss of $2.2 million compared to a net loss of $0.4 million in the comparable 3-month period ending September 30, 2021. The net loss in Q3 2022 was due to increased mobilization and transload expenses of $0.3 million in AMI Silica LLC, the increased depreciation expense of $1 million resulting from the Wisconsin assets and increased general and administrative expenses of $0.6 million due to the increased personnel expenses.
I would like to thank you again for attending our call this morning, and I will now pass it over to Dana Archibald to provide an update on our corporate operations over the last quarter.
Dana Archibald
Thank you, David, and good morning to all of you joining us on today’s call. Since taking over the permanent CEO position on August 29 of this year, we have seen a significant number of changes in our company, some incredibly exciting and some a little more challenging. Everything that we are focused on as an executive team is based on a clear message that we received from our shareholders at this year’s AGM, emphasizing the need to reset and refocus the business. The focal point of our company has become AMI Silica, which is and will continue to be a key contributor of Athabasca’s revenue generation and growth strategy into the future.
Since our purchase of the Wisconsin facility back in March of this year, we have dried over 1 million tonnes of sand and mined and washed over 2 million tonnes. As we mentioned in the August earnings call, logistics continues to be one of our key challenges, and we have been actively pursuing opportunities that would allow us to expand our rail capacity. Through the leasing of additional railcars, expanding capacity at our Wisconsin transload facility and securing exclusive agreements with transloads in Western Canada, in turn, increasing our ability to move and sell product.
As per our press release last Thursday, we have made progress on this initiative with the signing of a transload agreement with CRL transload services, this agreement will allow us greater accessibility to our current and potential customer base in the growing market of the Montney Basin. This is the first step in a multistep strategy to increase our services and capacity into the Canadian Western Basins.
As announced on September 27, the press release, another highlight of Q3 for our sand division was our ability to secure USD 2.7 million in nondilutive financing for further expansion initiatives and growth. Funds from this financing will help support capacity expansion initiatives at our Wisconsin transload, which will allow us to increase the throughput of railcars and ultimately, sand sales. As David mentioned earlier in the call, there were several factors that contributed to a lower gross profit than initially anticipated. I’d like to touch on the seasonality of our production. So in Q3, we focused on increasing our wet sand stockpiles prior to the end of the mining and washing season that generally runs from April and this year ended in November 10. Because of this, we incurred higher-than-usual operating costs for the quarter.
Another major factor and one that could not have been anticipated was that during September and October, we experienced unplanned rail disruptions on both the Union Pacific and the Canadian National Railway line. These disruptions had a major impact on both our sales volumes and our revenue for Q3 and early Q4. Moving to RockChain and aggregates. In December of this year, AMI RockChain announced the award of a contract with a major construction company valued at over $8 million to supply, test and deliver aggregate for a large Saskatchewan-based project. We continue to successfully execute on this project, and we will be providing services well into 2023.
In October, RockChain also launched Version 3.0 of their platform designed to provide a more user-friendly supplier portal for quoting. Throughout the third quarter of 2022, our RockChain team has been over $70 million in aggregate projects. Many of these bids are for projects that will be executed in 2023. This is an increase of more than 56% over the same quarter in 2021, where we bid on approximately $45 million in orders. Our Vice President of AMI RockChain, Phillip Schuman, has done an outstanding job in focusing and growing our RockChain division as well as identifying and meeting new customers with a goal to turbocharge our growth.
Looking briefly at our AMI aggregates division, we are seeing increasing opportunities in 2023 in the Wood Buffalo region for deliveries of aggregates to existing and new clients, also due to increased industrial activities, specifically near our Coffee Lake Public Pit, Pelican Pit and Kearl Pit. We’re anticipating increase in demand for aggregates as we enter into 2023.
Athabasca’s long-term vision is to become the leading provider of premium sand for Western Canada and the Northwest United States supporting the growing oil and natural gas markets. By strategically growing our network of transloads and customers, we are well positioned for future development of our portfolio of silica sand assets, both in Canada and the U.S. I want to thank our shareholders for their continued commitment and support of AMI and reaffirmed our leadership team is dedicated to long-term growth and sustainability in the business.
With that, I’ll pass things back to Cheryl Grue to lead the Q&A session for our call.
Question-and-Answer Session
A – Cheryl Grue
Thank you, Dana and David. I also did want to remind our listeners that this call has been recorded, and it will be posted on our website later today. You can check on it there afterwards, if you miss anything or want to refresh what you heard. At this point, I’m just going to see if there’s any questions that pop up, feel free to send them forward. If you feel like to — we’re not able to ask a question during the call or you think of something after the call, please feel free to direct your questions directly to me by e-mail or telephone call, and I’d be happy to try and answer them as best we can. So we do have one question here. I think I’m going to probably post this one to Dana. What are you seeing for pricing in Western Canada for frac sand?
Dana Archibald
Yes, that’s a very good question. What we’re seeing is — actually, since we started in March there, we’ve seen continued quarter-over-quarter upward pressure on the pricing. And we sort of see that continuing on here. We’ve seen that trend continue on in Q4 and looking the same here in Q1 next year.
Cheryl Grue
So Dana, I’m going to pass another one on to you here. How much can you increase the Wisconsin transload capacity by?
Dana Archibald
Another good question. So with regards to our Wisconsin transload, currently, we can move around the 80,000 to 90,000 tonnes a month with some of the work that we’re looking at doing out there, that should increase it up to 120,000 to 130,000 a month.
Cheryl Grue
I believe this one’s going to go to David. David, it sounds like there was some significant write-offs and onetime expenses largely but not exclusively related to Wisconsin acquisition. Is everything now in order? And can we assume that going forward, we’ll have a clean P&L that accurately reflects the current business performance.
David Churchill
I think on the significant write-offs, I’d say there were no write-offs in the third quarter relating to the Wisconsin acquisition. I think there were — I direct you back to in the second quarter, and there’s a lot more detail in the financial statements in the MD&A. There were some write-downs related to a take-or-pay on the Prosvita Sand Project that we weren’t going to be able to finish off in time to meet the contract conditions. So there were some write-offs there. The onetime expenses that we talked about earlier in Wisconsin, I think to say everything now in order. I think on the one on the Wisconsin side of things, as Dana mentioned, we can’t predict rail disruption. In the third and fourth quarter, there was some — there was the threat of a strike. In the fourth quarter, there was a bridge fire. So those things are unplanned and unrelated to the business.
So I think we — on those ones, those are hard to predict. So I think those ones I can’t say that with such certainty that they’re not going to happen. So the idea would be to get ahead of those and make sure they’re actually reported in the statements. I think in the write-offs, I don’t expect — the Wisconsin acquisition, the purchase price equation, we addressed that in the second quarter — the first quarter when we acquired the asset. We’re still subject to audit. So there may be some changes to the purchase price in there, but I would view those to be noncash as they relate to the gain. So I don’t expect anything significant to come out of the Wisconsin acquisition.
Cheryl Grue
We have one more question here. I’m going to pose this one to Dana. What is the average revenue per tonne of silica selling at the mine site versus the range of revenue per tonne selling through the transload strategy? Not sure how much you can answer that, but give it a…
Dana Archibald
Yes, maybe just answer this sort of generally here. With regards to the revenue per tonne, selling at the mine site versus the transload is that when we’re selling it at the transload, we’re picking up fees on freight as well as transloads. So it is higher going through the transloads versus selling that one.
Yes, I’ll just roll into that next question. With regards to rail freight inflation and fuel surcharges. So yes, we are seeing that. Traditional — yes, so we’ve seen increases on freight pricing throughout 2022. And during Q1, there’s always a surcharge due to the cold weather in Northern U.S. and into Canada. So we are seeing the freight going up as well as the fuel surcharge. The fuel surcharges have increased significantly in 2022. Now these are pass-through costs that we pass through to our customers, but we worked very closely with the railways to make sure that we’re getting a fair deal when it comes to the freight and fuel surcharges.
Cheryl Grue
There is another one as well that I think I’ll direct it to you, Dana. What percentage of sand sales are to the U.S. versus to Canada?
Dana Archibald
Yes. So we’re seeing a bit of a shift in this. At the beginning of the year, we were probably closer to 50-50 Canada and the U.S. We’re seeing that change as we move forward here to more towards Canada. So now we’ve gone sort of 50-50 probably to like an 80-20 scenario, but I also see that maybe even out a little bit more as we move forward.
Cheryl Grue
So there is another question here, Dana. What percentage of sand sales are contract versus spot sales?
Dana Archibald
Yes. So we’re very early in the contract side of things there. A lot of our sales right now are spot sales. We do — we are working on commitments with our key customers there. And so we are looking at contracting some volumes as we move forward.
David Churchill
I think maybe if I could jump in on that, Dana, too. I think for the benefit of the listeners is that what we’re looking at are volume commitments, committing volumes to people, not the pricing. Pricing typically runs 90 days out. Prices are set, I believe, $490. Is that right, Dana?
Dana Archibald
That’s correct. That’s correct.
David Churchill
Yes. So I think, again, we’d be looking for volume commitments as opposed to price commitments.
Dana Archibald
Yes, I see the next question there just with regards to how do we count the shift from the U.S. to Canadian sales. So really, when we’re selling into the U.S. and on the [indiscernible], we pay actually a fairly large differential. And so what we’re looking at doing is moving a lot of those sand sales towards Canada because we do better on the margin and on the pricing.
Cheryl Grue
Dana, there’s another one here that I think you could probably answer. How many railcars is AMI looking to add to its fleet?
Dana Archibald
Yes, that’s a great question. So currently, we are running 900 railcars on our CM fleet, and we are working with our customers to make sure that we understand the cycle time on our railcars because that really is what affects how many more railcars we bring into the fleet. But notionally, we’re looking at adding probably up to another 100 here in the next 90 days and past that, probably another 100 in Q2.
Cheryl Grue
So one last question here. What do you see for demand in Western Canada in 2023?
Dana Archibald
Yes, that’s a great question. I think all of us are trying to figure that out. Notionally, what we’re seeing here is, I think that in 2020 or 2022 here, we will be in that 6 million to 7 million tonne range is what we’re hearing from the market, our customers, other suppliers in the industry. I think as we look towards next year, probably in the 7 million to 8 million. And beyond that, we’ve heard projections staying in that sort of 8 million tonne range all the way up to 11 million plus.
So what we are seeing is a sustained growth in the demand here, at least over the next couple of years as LNG Canada comes online in 2025, and then some of these other LNG projects that are looking at to move online here as well. We’re seeing this add demand increase significantly, especially up in that more on the Montney and Duvernay basins.
David Churchill
And I think maybe to add to that, too, Dana, is that these — where we see the demand for 2023, this is based, again, as Dana mentioned, on discussions with our customers, internal projections. This would be our own view of what we see demand for 2023 and forward.
Dana Archibald
Yes. Correct.
Cheryl Grue
Thank you, gentlemen. And with that, we are going to wrap up our call for this morning. I want to thank everybody again for joining us. Just a reminder that it is — has been recorded and will be posted on our website later today. If there’s any other questions you think of, please feel free to reach out to me directly by e-mail or phone, and we will try and respond as quickly as possible. Thank you again for your time, and I wish everybody a wonderful day.
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