Fairmount Santrol Holdings, a major provider of high performance sand and sand based product solutions, announced it has entered into a definitive 40-year lease agreement for approximately 3,250 acres of sand reserves located in Winkler County, Texas, in the Permian basin near Kermit.

The reserves contain approximately 165 million tons of fine-grade 40/70 and 100 mesh sand. The Company intends to build a mine and processing facility on the leased land with approximately 3 million tons of proppant sand production annually. Over the past several months, the Company has ordered equipment and started to prepare the property for construction, which should accelerate the process and support the Company’s plan for sand production by the beginning of the second quarter of 2018.  

Total leasehold interest payments and capital expenditures are estimated at $100 million to $110 million over the next 12 months.  The Company expects to fund this investment through a combination of cash on hand and cash flow generated from operations. An average royalty of less than $3 per ton, which includes water rights, will also be paid over the term of the lease on sand sold from the Kermit facility, with no minimum annual royalty.

“The unique characteristics of this property, which include contiguous reserves of fine mesh sand, water availability and prime access to existing roads, make this an excellent opportunity for Fairmount Santrol to expand our broad product offering by providing a low-cost, in-basin solution to meet the changing requests from some of our customers,” said Jenniffer Deckard, President and Chief Executive Officer. “By leasing the reserves instead of an outright purchase, we will enhance our net return on investment and ensure greater financial flexibility. The ability to expand our capacity to meet growing market demand, while continuing the progress in strengthening our capital structure, creates value for our customers, shareholders and other stakeholders.”

In addition, on June 30, 2017, Fairmount Santrol prepaid $50 million of term loans outstanding under its existing credit agreement. The prepayment was made utilizing existing cash on hand. The $50 million term loan prepayment will reduce annual interest expense by approximately $2 million.

Further, due to increased customer demand, Fairmount Santrol has proceeded to reopen its Shakopee, Minnesota, mine and sand processing plant, which are located on the Union Pacific railroad. Once fully ramped up, the facility will have annual capacity of approximately 700,000 tons. The Company expects that the plant will be operational by the end of the third quarter of 2017. 

For both the Kermit and Shakopee facilities, the Company is in the process of finalizing customer commitments for the majority of the tons that will be mined and processed. The Company also expects to receive prepayments from certain customers who sign long-term volume contracts to secure tonnage. 

Fairmount Santrol is currently in a quiet period. The Company has provided a presentation related to the Kermit transaction on its website and looks forward to providing additional detail during its second-quarter earnings conference call that will be held on August 3, 2017, at 10:00 am Eastern Time.