Explosive Growth In Frac Sand And Lithium - Lessons To Be Learned?

SME, Colorado MPD 67th Annual ConferenceColorado Springs, Colorado

Joel Schneyer – Managing Director

jschneyer@headwatersmb.com303.619.4211May 4, 2017

Lithium:

- Available Resources- Recent Market Behavior- Industry’s Position to Evolve

Frac Sand:

- Available Resources- Recent Market Behavior- Industry’s Position to Respond to Change

Agenda

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Page | 2

Major Sand Basins Sit Between Lower 48 Shale Plays

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Source: U.S. EIA based on data from various published studies as of April 2015 & US Department of Interior Open-File Report 2015-1107

Shale Basins Frac Sand Sources

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Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921

Sand Supply - No Shortage of Frac Sand Deposits

40/70 & 100 mesh: Southern White

20/40, 40/70 & 100 mesh: Northern White

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Completion Trends Create New Proppant Demand Drivers

Page | 5

Lon

ger

Late

rals

Mo

re S

tage

s

Ove

rpac

kin

g

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015

Average Sand per Well (Permian/ Bakken/ Eagle

Ford)

Clo

ser

Wel

l Sp

acin

g

> 2

x in

crea

se

20

16

to

20

18

0

5,000

10,000

15,000

20,000

25,000

2014 2016 2017 2018

# Horizontal Wells

0

200

400

600

800

1,000

1,200

1,400

2014 2016 2017 2018

# Active Horizontal Rigs

• Increase in frac sizes per stage

• Increased interest in utilizing finer mesh sand (40/70 & 100 mesh) & CRC

Source: Goldman Sachs Global Investment Research (July 2016), Bloomberg Intelligence 0

500

1,000

1,500

2,000

Permian Williston EagleFord

Pounds Sand Per Lateral Foot

2012 2016

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US Proppant Demand Is Projected To Increase

• Projected proppant rebound to ~ 55 MM tons in 2017, followed by ~ 73 MM tons in 2018

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$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

-

10

20

30

40

50

60

70

80

90

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Oil

Pri

ce (

WTI

, USD

/bar

rel)

Pro

pp

ant

(MM

to

ns)

Energent - actuals Superior Silica - Consensus Smart Sand S/1

"Tudor Pickering & Holt" Jeffries Goldman Sachs

Wells Fargo RBC Oil Price - EIA

Sources: • Smart Sand Inc. S/1 dated September 16, 2016 filed on Edgar • Rich Shearer (President & CEO) Superior Silica Sand presentation at the Industrial Minerals 4th Frac Frac Sand Conference in Minneapolis Sept 13, 2016• Wells Fargo, Oil Service Statistics and Valuation Handbook, January 6, 2017• RBC Capital, Frac Sand Supply Demand Update, December 5, 2016• Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices

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Source: Company Reports

Industry Concentration Indicates Surviving Oligopoly

• Top 4 public sand producers saw growing market share by surviving market downturn (e.g. controlled 59% of the 2016 North American market)

• New producers enter the market, few barriers to entry

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i

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2016201520142013

Pro

pp

ant

Sold

–M

illio

n T

on

s

US Silica Fairmont Santrol

Hi-Crush Emerge

Source Energy Services Smart Sand

Mammoth Energy Services Eagle Materials (estimated from 9 months)

Carbo Ceramics Non-Public Companies

Strong Regional Variation in Proppant Demand Exists

• Proppant demand fell 17% between 2014 (52 mm tons) and 2015 (43 mm tons) and current run rate for 2016 was 32 million tons, 24% less than 2015

• Permian Basin forecast to be most active…because it has the best economics

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Source: Energent Frac Report, data as of January 2017

-

1

2

3

4

5

6

Pro

pp

ant

(MM

to

ns)

Other Fayetteville Granite Wash Mississippian Woodford (Total) Williston

Utica DJ-Niobrara Barnett Marcellus Permian Eagle Ford

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Shifting Sand Marketplace Favors Local Sources

Page | 9

Sources: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014)

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$210 million : July 2016

U.S. Silica purchased brown-sand miner NBR Sand in July 2016 with plans to double output near Texas oilfields to 2 million tons/year

$275 million : Feb 2017

Hi-Crush purchased Permian Basin brown-sand deposit in Feb 2017 with plans to produce 3 million tons/year

REGIONAL SANDS

SOUTHERN WHITE

NORTHERN WHITE

Regional Sand Market Share

• Trend toward “In-Basin” sales versus FOB Mine

• Use of finer grain sizes• Acceptance of lower quality

“Brown” or “Regional Sand”

16%

2014

Northern White Regional Sands

34%

2016E

Sand Proppant EBITDA Margins Are Rebounding

$ P

er

Ton

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-$60

-$50

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

2016Q42016Q32016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q42013Q32013Q22013Q1

Adjusted EBITDA US $ / Ton Sold

Hi-Crush P Emerge P US Silica P Fairmount Santrol P

_____

Sources: SEC, Edgar, Yahoo Finance, Headwaters MB research

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Key Point: Sand Overcapacity & Loss of Pricing Discipline

Industry can produce in the range of 108 million tons of frac sand annually. The industry built big, efficient mines and distribution hubs in WI, IL, and MN to meet this growing demand …

… but in 2016 sand consumption was in the range of 32 million tons with a rebound to 55 million tons projected in 2017.

Therefore sand production utilization in 2016 was a very low 30% …

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But there are headwinds. More in-basin sales, acceptance of finer grained sand, & lower quality regional sands have put pressure on pricing and market structure.

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Global Lithium Resources Suggest No Scarcity Exists

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Source: Lithium X Investor Presentation November 2016 and US Geological Survey, Mineral Commodity Summaries February 2014

Most lithium manufactures have produced lithium through the natural evaporation process, which takes 12-18 months, but with POSCO`s new technology, it takes as short as 8 hours and as long as 1 month to extract lithium through chemical reaction. The lithium collection rate is remarkably improved from 30% to 80%.

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Lithium Demand Largely Driven by EV Growth

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Source: Deutsche Bank Market Research May 2016; Albemarle March 2016 Goldman Sachs HCID Conference

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-

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Lith

ium

De

man

d i

n L

ith

ium

Car

bo

n E

qu

ival

en

t (L

CE)

, kt

Non-Battery Battery E-Bike Electric Vehicle Energy Storage

Application LCE Amount Demanded

Cell Phone 3 g – 0.1 oz

Notebook 30 g – 1 oz

Power Tool 30 g - 40 g to .4 oz - 1 oz

Hybrid (HEV) 3kWh 3.5 lbs

Plug-in Hybrid (PHEV) 15 kWh 26 lbs

Electrical Vehicle (BEV) 25 kWh 44 lbs

Tesla 85 kWh 112 lbs

Energy Storage to increase further with high variable renewables (solar, wind)

• 12 advancing megafactories and expansions will add 98 GWh production capacity in the lithium ion battery industry: orders of magnitude increase by 2020

• Tesla is only major US operation: approx. 65% of new capacity in East Asia (China, Korea) near established supply chains

Lithium-Ion Battery Cell Mega Factories Are Here

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Source: Benchmark Mineral Intelligence

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0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018 2019 2020 2021

Lith

ium

Bat

tery

Pro

du

ctio

n C

apac

ity

(GW

h)

Current LG Chem Tesla Foxconn BYD Boston Power

Takeaway: Battery manufacturing will not be bottleneck to meeting market demand

Lithium Resource Development is Not Easy and Takes Time

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Source: SRK Consulting May 2016; Albemarle March 2016 Goldman Sachs HCID Conference

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Time

Investment % of $$

Exploration Feasibility

Pilo

t

Desig

n

Constr. Production

SimbolBrineBankrupt at Pilot

Canada LithiumSpodumeneBankrupt at Production

Capital Intensive: 4 projects in

Feasibility have$120 M spent &

< 20 M cash reserves

Time Intensive: Min. 5 years in best case

(without delays)

Lithium Supply Determined Currently By An Oligopoly

Page | 16

Source: Albemarle March 2016 Goldman Sachs HCID Conference, Orocobre Ltd April 2016 Investor Update, CapIQ (as of April 6, 2017)

Market Share Production Capabilities

Market Cap (USD) 11.65 9.01 9.62

% Lithium Revenue 36.1% 24.7% 8.0%

EV / TTM EBITDA 15.6 13.1 16.1

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Tech-Focused Newcomers Push Direct Extraction Processes (DEP)

Page | 17

Source: Company press releasesNotes: “LCE” = Lithium Carbonate Equivalent

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Company w/ Proprietary DEP

DEP Target

Enirgi Group (Sentient)Salar del Rincon, Argentina

50,000 tpa LCE

POSCOPozuelos Salta, Argentina

40,000 tpa LCE by end of 2017, and 135,000 tpa of LCE by 2020

Tenova Bateman TechnologiesClayton Valley, Nevada, USA

Mini-pilot

Eramet S.A.Centenario-Ratones Salar, Argentina

20,000 tpa LCE before 2020

Alger Alternative Energy (Simbol Energy)Salton Sea, California, USA

Pilot plant separated high temperature, corrosive brine

Global Lithium Projects In Development

Page | 18Source: SNL Metals & Mining, Company press releases, Headwaters MB research

Reserves Development

Prefeasibility Scoping

Feasibility Construction Operating Expansion Closed totals% World Supply

Number of Projects 29 6 10 3 13 4 2 67

Argentina 132,400 4,159,000 1,573,000 2,059,000 7,923,400 12.7%

Australia 8,784 983,000 322,872 2,883,600 178,000 4,376,256 7.0%

Bolivia 18,001,000 18,001,000 28.9%

Canada 1,077,415 455,917 1,234,178 573,860 3,341,370 5.4%

Chile 217,500 1,400,000 1,590,622 5,300,000 8,508,122 13.6%

China 1,133,200 3,639,168 1,397,727 6,170,095 9.9%

Mexico 1,670,000 1,670,000 2.7%

Serbia 2,124,000 2,124,000 3.4%

USA 153,150 1,972,391 2,834,473 316,000 5,276,014 8.5%

Rest of World 3,368,083 82,245 1,194,270 328,400 4,972,998 8.0%

Tonnes 8,430,532 4,180,553 25,571,448 3,295,872 10,858,650 9,532,200 494,000 62,363,255 100.0%

% of World Supply 13.5% 6.7% 41.0% 5.3% 17.4% 15.3% 0.8% 100.0%

• ALB (Feb 2016) in Chile 24,000 tpy to 70,000 tpy

• FMC (May 2016) in Argentina 14,000 tpy to 30,000 tpy

• ORL in Argentina 17,500 tpy to 40,000 tpy

• RTZ (June 2016) in Serbia “strategically important and very attractive project”

• BCN (March 2016) in Mexico “positive PFS of 35,000 tpy from clay”

Re

serv

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& R

eso

urc

es

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nu

al

Pro

du

ctio

nN

ews

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• Enigri (March 2017) on track to test brine DEP in Q2 2017: 50,000 tpa

• LAC / SQM JV (Feb 2017) brine project near 1st half: 50,000 tpa

• K-UTEC (August 2016) 30,000 tpy brine DEP pilot delayed to Q1 2017 due to process design

0 100 200 300 400 500 600 700 800

By 2020 DEP will lower marginal costs – higher quality product, higher yield

High-Quality Brine Already On the Low End of Cost Curve

Page | 19

Source: Lithium Americas Investor Presentation March 2017

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usi

ne

ss C

ost

s (U

SD /

t L

CE)

Brine – Chinese

Hard Rock – Chinese

Hard Rock – ROW

Hard Rock – N. America

Brine – N. America

Cumulative Production (ktpa LCE)

0

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

kt L

CE

Supply Demand

Global Supply – Demand Balance

New DEP Technology Will Commoditize Lithium Market

Page | 20

No long-term pricing power:

$10k / tonne after 2020 as brine

supply outstrips demand

0

5,000

10,000

15,000

20,000

2017 2018 2019 2020 2021 2022 2023 2024 2025

Lith

ium

Car

bo

nat

e (

USD

/t) Expected Lithium Carbonate Price

HSBC Cormack Deutsche Bank Morgan Stanley

Canaccord Dundee Average

Large hard rock assets bring market into balance

Source: Deutsche Bank Market Research May 2016

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Market Deficit

Oversupply from brine projects

Key Point: Lithium Resources Are Abundant

The lithium oligopoly is fighting to maintain control and market share, but there is no shortage of lithium deposits that can be “potentially” extracted…

Deep pocketed newcomers and technology providers are expanding the potential number of new lithium producers…

Lithium-ion mega factories are coming and driving lithium mine development.

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But as new entrants enter the market, pricing discipline will disappeared and margins will contract.

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Closing Thoughts

Frac sand and lithium industries have a number of common themes . . .

. . . with few barriers to entry, over-investment is a potential problem

Page | 22

• Resources not scarce

• Few barriers to entry

Available Resources

• Winter operations in upper-mid West

• Storms and evaporation rates in the Andes

WeatherInterference

• Unit Trains carrying sand

• Developing mines at 10,000 feet in the Andes

Problematic Logistics

• Utilization of finer grain and lower quality regional sands

• Commercialization of DEP for lithium extraction

Adoption of Technology

Headwaters MB named Investment Bank of the Year from multiple

industry groups