May 1, 2012
California operator upgrades plant to create higher-margin products for the specialty sand market.
By Therese Dunphy, Editor-in-Chief
In today’s market, many operators are looking for ways to upgrade their operations, buy out partners, or simply tap into some of the business’ equity without losing control of their asset. But bank lending conditions continue to be tight, and it takes a creative approach to make these goals a reality. Oroville, Calif.-based Sierra Silica Resources leveraged just such creativity to transform a former construction sand and gravel site into a state-of-the-art silica sand production facility.
Several years ago, Chris VanVeldhuizen, owner and president of Sierra Silica Resources, was working with Clearwater Investments, an investment company that had owned the 1,200-acre reserve for approximately 12 years. Construction sand and gravel was being produced, but the deposit had a high-quality silica content that could be processed for higher-margin products.
Extensive drilling of the deposit showed that the reserves had tremendous potential. “Our markets are very concerned about the chemistry content, including silica level, iron levels, alumina levels, titanium, and all the oxides,” says Travis Hoiseth, general manager. “They want to know everything that’s in the sand because it affects their process on the other end.”
Test results showed that the reserves contained more than 60,000,000 tons of sand, with a silica content of approximately 99 percent. Only one other permitted reserve in California had similar qualities in its deposit: Unimin Corp.’s operation in Ione. “Unimin was basically serving the entire California market,” VanVeldhuizen says. “We thought there was an opportunity for an independent, local producer to come in and take a part of that market share.”
But first, the plant had to go through extensive upgrades. “What was there before was basically an old wash plant. Essentially, they were taking steak and making hamburger out of it; that’s the best way to describe it,” VanVeldhuizen says. “To get this silica to a higher production volume and a higher-margin state, we had to not only wash it and scrub it more than they were currently doing, we also had to build a drying and sizing facility. This allowed us to get into the glass market, as well as other specialty industrial sand markets.”
Sierra Silica put together a business plan and spec’d the equipment upgrades needed to produce the quality and quantity of material they needed. “Our current permit allows us to remove 500,000 tons per year from our deposit,” VanVeldhuizen explains. “We built our dry plant facility with that in mind.”
Once the business plan was developed, the venture’s next step was to seek capital to fund the equipment purchases. For this aspect of the site development, Sierra Silica turned to Houston-based Natural Resource Partners, L.P. (NRP).
“The owner had let it run as a small sand and gravel business,” recalls Dennis Coker, NRP’s vice president, aggregates. “It was not making a lot of money, especially in the down market over the last two to three years, but they knew they had a very high-quality silica deposit that would be good for glass sand and other specialty uses, but it would take a significant investment in equipment to rebuild the wet plant, as well as the dry plant.”
After Sierra Silica reviewed various financial vehicles for the plant upgrade, such as adding debt to the business or bringing in additional equity partners, it opted for a sale/leaseback mechanism. Once NRP conducted its own due diligence on the reserves and reviewed Sierra Silica’s strategic plan, it agreed to a deal with the operator.
NRP bought the deposit, but leases it back to Sierra Silica. In turn, the operator pays a royalty for every ton that’s sold, just like many other operators who lease their sites. The sale of the deposit provided the money needed to make the capital expenditures, but allowed Sierra Silica to retain control of the operation.
“Our deal had a start-up element to it that — in today’s banking environment — they just wouldn’t do or, at a minimum, would have been very difficult to get done,” Hoiseth says. “When we started working with NRP, they were constantly ahead of us and pushing us. It was absolutely rare in the finance world these days.”
NRP’s industry knowledge and experience was a valuable asset to Sierra Silica as it finalized its plans, he adds. “They brought in a lot of experts to get a level of comfort very quickly. They proved up our reserves by bringing in an expert who had done all of the reserve analysis for U.S. Silica, which gave us a lot of additional confidence in the reserves.”
With the financial end of the upgrade secure, Sierra Silica spent two years constructing the plant, tweaking certain aspects along the way. Modern Builders, owned by Gage Chrysler, served as the general contractor of the project. Todd Carol, Chrysler’s right-hand man, was also heavily involved in the construction. John Martin, of Martin Crane, served as the mechanical contractor. “There’s no way we would have gotten this plant done without their help,” Hoiseth says.
Construction on the project took nearly two years, and the new plant debuted on Dec. 31, 2011. “The really neat thing about our plant is that the entire operation is controlled by our PLC controls,” Hoiseth says. “It’s a smart system that all talks to each other. For all practical purposes, our entire plant could be run from the seat of a chair in the control room.”
The plant is extremely flexible. “We make five core products off of our screen decks, but we also have the ability to blend any of those back together in different ratios, which is really unique,” VanVeldhuizen says. A set of 15 vortex infinite control valves allow the plant to create a virtually unlimited number of custom blends.
Once material is dried, everything in the plant is enclosed. The four separate baghouses that contain the materials produced in California’s highly scrutinized market were among the tweaks made to the upgraded plant during its construction.
A new lab facility ensures that the material meets strict specifications. “We have to know, beyond a shadow of a doubt, what we’re producing and what goes into the truck,” Hoiseth stresses. “We don’t have a margin for error, so we’re continually testing our product, on the hour, every hour.”
Over the next five to six years, VanVeldhuizen says the site will continue to ramp up its production to meet its permit limits, but for now, Sierra Silica has a safe, state-of-the-art plant that matches the quality of the deposit on which it sits.
A Capital Idea
As operators look for ways to upgrade plants and profit margins, they often turn an eye toward potential sources of financing. Sierra Silica Resources utilized a sale/leaseback mechanism with Natural Resource Partners, L.P. to fund its capital expenditures, but this is only one of a number of options available, says Dennis Coker, NRP’s vice president, aggregates.
“NRP’s typical business model has been to own the land, and the deal has been for the life of the reserve,” Coker says. “But no two deals we’ve done have ever been identical.”
For example, another operator was working on a property that was already leased, but wanted to upgrade the plant to produce a higher-margin calcium carbonate. In that case, NRP purchased the plant and leased it to the operator. They then worked out a deal for a partial surface assignment with the operator paying a processing fee for each ton sold.
The terms of each capital event depend on the operator’s particular situation. “We do financial due diligence such as reviewing P&Ls and balance sheets as well as an operational analysis,” Coker says. “It’s almost like buying an operating business. You need an understanding of the strength of the group you’re dealing with.”
Despite the unique circumstances of these deals, one common element is for each party to have a mutually acceptable level of risk and reward. For example, there is generally a capital contribution from the operator or owner, and there is usually a minimum annual royalty or minimum per ton processing or royalty fee included in the agreement. “On new operations, we look some level of investment from the operators. We look for them to have some level of skin in the game and want to be partners with the company,” Coker says. “Everybody has to make money or it doesn’t make sense.”
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