Let’s put the swoon in Athabasca Minerals’ stock in context: It’s never fun to watch a stock get cut in half in a matter of a few weeks (from its intraday high) but we have to remember a few things: first, the junior market has been a catastrophe lately, thanks largely to the marijuana space. Second, news from the oil patch has been devastating, including the announcement that Encana will abandon Canada (where it was formed almost 150 years ago) for the U.S., and a handful of other negative announcements, including bankruptcies, in the energy sector. And of course, we have a bunch of fools running things in Ottawa.

So it’s not that surprising that ABM shares got roughed up.

That said, management missteps haven’t helped, notably the lack of news for a long period of time, the constant telegraphing of a financing and the flip-flopping on spinning out aggregates marketing. The company needs someone with junior market experience on its board, that much is clear.

Still, this is a stock that can explode in a good way, as we saw with the announcement of the NI 43101 technical report on the White Rabbit frac sand deposit.

That was a very welcome and very good report. The highlight is that the authors, Stantec geologists, estimate that the company could sell sand from the mine gate for $55-80/tonne and produce it for between $40-50 all in (that is, including the cost of building the plant). That suggests mid-point profit margins of about $22/tonne. With a measured and indicated resource of 30 million tonnes, the economics are very attractive at $660 million of undiscounted gross profit.

Of course, the company will need to strike a deal with a joint venture partner, raise money and secure off-take agreements to get there.

We know that they are in advanced discussions with an industry player, and we assume that management’s sloppy haste in trying to organize a financing suggests they’re close to an agreement. The company says it’s a complex negotiation with many moving parts but they remain confident.

Our bet as to the likely JV partner is Turnkey Processing Solutions Sand Laboratory (TPS), which is mentioned often in the NI 43-101 as they were one of four labs hired to examine the sand. They’re more than a lab; they also build frac sand (and other) plants and projects. They also have what they call an “aligned equity partner” unit that co-invests in projects. You can read more here, it’s impressive.

Cormark’s note on the release of the technical report was positive, saying that the economics support it’s $1.40 one-year price target.

The main question now is can this management team and board finance this project in an intelligent way that minimizes dilution. The company has talked about debt funding from the Business Development Bank of Canada and that, should it happen, would likely be on attractive terms.

As for the macro scene, with separatism on the rise in Alberta, Ottawa will, if anything, become more supportive of the oil patch. The government doesn’t have a choice. The LNG projects are underway and demand for frac sand will be growing for a long time. Keep in mind that the company is working on the Montney deposit as well, and the gravel and Aggregates Marketing divisions probably have enough value to support the current valuation.

We remain very bullish on this opportunity given the upside, and, given where the stock is, limited downside. We think an announcement on a joint venture could move the stock sharply higher, and we expect it before Christmas.


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