Emerge Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.13.14 | About: Emerge Energy (EMES)

Emerge Energy Services (NYSE:EMES)

Q4 2013 Earnings Conference Call

March 13, 2014 4:00 PM ET

Executives

Robert Lane - CFO

Ted Beneski - Chairman

Rick Shearer - CEO

Warren Bonham - VP

Analysts

Matt Conlan - Wells Fargo

Brandon Dobell - William Blair

Selman Akyol - Stifel Nicolaus

Ethan Bellamy - Robert W. Baird

Dennis Ward - Southwest Sand

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2013 Emerge Energy Services Earnings Conference Call. My name is Katina and I will be your coordinator today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call Mr. Robert Lane, Chief Financial Officer of Emerge Energy Services. Please proceed.

Robert Lane

Thank you, operator. Just a quick note before we start. Our discussion today may contain forward-looking statements. These statements may include, but are not limited to our estimates of future volumes, operating expenses and capital expenditures and they may also include statements concerning anticipated cash flow, liquidity, business strategy, distributions, and other plans and objectives for future capital expenditures and operations. These statements are based on management's beliefs and assumptions.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurances that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties. If one or more of these risks materialize or should the underlying assumptions prove incorrect, our actual results may vary materially from those expected. These risks are discussed in greater detail in our prospectus on file with Securities and Exchange Commission.

Please also note, that on this call we may use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our earnings release published this morning.

And now I would like to turn the call over to our Chairman, Ted Beneski.

Ted Beneski

Thanks, Rob, and good afternoon and thanks to all of you who are listening in. The fourth quarter for Emerge was a strong one and our first year as a public company exceeded most everyone's expectations.

For the year ended December 31, 2013, Emerge Energy generated $85.2 million of adjusted EBITDA compared to $38.6 million for 2012, an increase of 121% year-over-year. We've been able to significantly increase our operating cash flow by listening to and responding to our customers’ needs, broadening and deepening our customer base and expanding the suite of services we provide.

Our sand segment benefited from several factors: Number one, strong growth in demand; number two, increased plant utilization; number three, our enclosed processing facilities in Wisconsin which allowed us to produce sand even in the coldest of weather; number four, our positioning on two class 1 railroads; number five, our expanding network of logistics options which allowed us to deliver frac sands in nearly every major basin in North America and also gave us the flexibility with the railroads to maximize when incoming railcars were harder to come by.

In the fuel segment, strong margins in the wholesale fuel market and focused deployment of capital allowed our two fuel operations to generate an adjusted EBITDA well in excess of budget and plan.

Turning now to the public market performance. Our strong operating performance allowed us to end the year with the distribution of $1 per unit, which included $0.05 per unit of cash flow we had reserved in the third quarter. And we exited the year with the top-performing unit price of any energy MLP for 2013.

Regarding new initiatives, we are also well down the road in permitting two new frac sand complexes, including new mines, wet plants and dry plants that we expect to be operational as early as the fourth quarter of this year. Although we cannot disclose further details at this time, we can confirm that it is our intention that each complex will be at or near the size of our current Barron facility, and that we expect these facilities to put us on two additional class 1 railroads, both the CP and BNSF and as you know we’re already on the UP and CN.

I would now like to turn the call over to Rick Shearer, our CEO, who will discuss the results of operations in our sand segment.

Rick Shearer

Thank you, Ted. We are pleased to present another record-setting quarter for Emerge Energy. For the three months ended December 31, we sold 765,000 tons of sand, including 364,000 tons from our new Auburn facility, roughly the same as last quarter, and a record 384,000 tons from our Barron plant.

For the year we sold 2.65 million tons and ended the year at a run rate of over 3 million tons per year, well in excess of the 2 million tons we projected in our prospectus for the 12 months ending March 31, 2014. Our two Wisconsin facilities are currently operating very near their theoretical production capacity.

Our segment adjusted EBITDA was $20.6 million for the fourth quarter, more than double the 8.5 million we generated for the same period last year and an 8% improvement over the third quarter of this year. Frankly, our fourth quarter outperformed our internal projections on the back of stronger than anticipated sales.

As many of you know, this past winter was one of the harshest we've seen in two decades, especially in Wisconsin. Thanks to the fact that both of our dry plant facilities are fully enclosed, we did not have a single down production day even during the coldest days of the polar vortex. We did, however, have a tough time getting in enough railcars, a problem that was shared by our competition. Because we have the ability to operate our two Wisconsin dry plants as a single operation, we effectively gives [ph] Barron and new Auburn access to two class 1 railroads and the fantastic efforts of our operations and logistics teams, we were able to minimize the negative impact of the poor rail service by transloading our frac sand on to the rail carrier that offered our customers the best shipping option each day.

As you may have heard from some of our competitors, the top suppliers continued to draw business away from the tier 2 sand suppliers because of superior quality and service, and Emerge Energy is certainly able to capitalize on those opportunities.

We continue to add major customer accounts and we have brought on our total number of significant returning customers to 25. When we went public in May, we had two customers accounting for 83% of our sand segment sales. I am proud to say that while both of those customers have significantly increased their sales volumes, they now account for less than 50% of our total sand segment sales.

Our logistics operation is poised for a great 2014. We continue to focus on placing transload sites in strategic locations where we can ensure that we can maximize our regional opportunity and return on our investment. We ended 2013 with 12 transload facilities in our network and expect to continue to grow that network with additional sites this year.

Even as we speak, we are bringing online three new transload sites – a 4000 ton facility serving the Bakken shale play, a 30,000 ton facility to serve the Eagle Ford and a 28,000 metric ton supercenter in the heart of the Western Canadian sedimentary basin.

Our railcar fleet, which ended 2013 at 2800 cars, is nearly 3500 cars today. Within the next year we expect to take delivery of an additional 2300 leased railcars, bringing our total fleet to nearly 5800 railcars. Between new Auburn and Barron, we already have storage capacity for 840 railcars at our plants, which allows us to stage multiple unit trains and manifest trains, and we are adding additional track this year to grow that number as well. This advantage is becoming more important as more transload and delivery locations are now capable of receiving unit trains. So we find ourselves shipping more unit trains than ever.

On the cost side, we continue to move forward with our two new mines and wet plants. We expect to have our LP mine which is adjacent to the [RON] [ph] mine up and serving our Barron dry plant by mid-year. Our Thomson Hills mine, which we had referred to in the past as our Sioux Creek mine, should be up and running later this year as well and can source sand to both our new Auburn and Barron facilities. The takeaway here is that this should lower our production costs as we phase out most of the sand that we purchased from our other contractors in 2013 with sand we mine and process ourselves.

As we have said before, we believe that our high quality assets, our logistics services and rail options are focused on delivering the best possible quality and service to the customer and the people that run our sales, services and operations are the competitive advantages that will position Emerge Energy extremely well for 2014 and beyond.

I would now like to turn the call over to Warren Bonham for a discussion of our fuel segment.

Warren Bonham

Thank you, Rick. Once again our fuel division turned in a solid quarter with segment adjusted EBITDA at $5.7 million as compared to $458,000 for the same quarter last year. This extraordinary improvement was because of a number of factors, including the addition of Direct Fuels, improved wholesale margins and improved RIN pricing for the same period last year.

For the quarter ended December 31, we sold a total of 63 million gallons of refined product and had an additional 56 million gallons of throughput by our terminal customers. This compares to 49 million gallons sold and 42 million gallons of throughput for the same period in 2012. We refined and sold 32 million gallons of transmix in the most recent quarter and 6 million gallons for the same quarter the prior year.

As a quick reminder, our fuel segment year-over-year results are not comparable because we acquired Direct Fuels at the IPO on May 14 and Direct Fuels’ pre-IPO results are not included in the predecessor results. Were we to include Direct Fuels, the sales and throughput volumes would be lower in the most recent quarter compared to the same period in the prior year, the transmix volumes would have been higher.

We have begun nominating shipments on the Colonial Pipeline and have taken delivery of several shipments to date. While by no means a majority of our refined product sales, these shipments allow us to capture additional margin when the pipeline is on allocation and there is an additional market premiums with the product.

RIN pricing has reduced from the recent extraordinary highs but still remains higher than its pre-2013 levels. As we stated in the past, our budget continues to anticipate sub $0.10 RIN pricing and while RINs are currently trading above that level we continue to anticipate a modestly positive impact from RINs at best. Please keep in mind that RINs are treated as a cost of doing business, so any impact will be felt in our cost of goods sold line rather than in the revenue line.

Looking forward we believe that stronger per gallon margins, increased sales and throughput -- terminal throughput volumes as well as opportunities on the Colonial Pipeline will allow the fuel segment to continue to produce a strong base of cash flow to the partnership.

I’ll now turn the call over to Rob Lane, our Chief Financial Officer.

Robert Lane

Thank you, Warren. Emerge Energy reported net income of $14 million or $0.58 per diluted common unit for the three months ended December 31, 2013. This compares to net income of $2.9 million for the three months ended December 31, 2012.

For the full year, Emerge Energy reported net income of $35.2 million, including $22 million or $0.92 per common unit, following the close of our IPO, compared to a net income of $17.2 million in 2012. For the same period, Emerge reported adjusted EBITDA of $24.6 million compared to $8.9 million for the same quarter last year.

For the year ended 2013 -- December 31, 2013 Emerge Energy generated $85.2 million of adjusted EBITDA compared to $38.6 million for 2012. The improvement in both periods is primarily because of the significant year-over-year increase in sand sales, the contribution of our sands logistics efforts, the acquisition of Direct Fuels and improved wholesale margins in the fuel segment.

For the three months ended December 31, 2013 Emerge Energy generated $22.1 million in distributable cash flow. Our Board of Directors released approximately $1.2 million of the $3.5 million reserve established for capital expenditures in the third quarter. After adding back this part of the reserve, our cash available for distribution is $23.2 million. Our total distributable cash flow since the close of our IPO on May 14 20 13 was $54.1 million.

Our total SG&A increased to $9.4 million from $2.6 million because of additional expenses we now incur as a public company, incremental cash and non-cash bonus accrual and the SG&A associated with Direct Fuels.

Our interest expense for the quarter was $1.5 million compared to $2.8 million for the prior year period. While our debt increased load was a key factor, we also enjoyed lower weighted average interest rates compared to 2012 because of a LIBOR-based interest rate and our strong credit statistics which now allow us to pay at the lowest applicable rate under our credit facility.

We ended the quarter with $97.5 million of debt outstanding, including our capital leases and $2.2 million of cash in the balance sheet. We’re also pleased to add two new banks as lenders under our credit facility in the past quarter which brings our total facility size from $150 million to $200 million. At the end of the quarter, we had $83.3 million of availability under our credit facility.

Our capital expenditures for the quarter were $2.8 million, which includes $887,000 of maintenance capital expenditures. We declared our fourth quarter cash distribution of $1 on January 23 which was paid on February 14 to investors who are holders of record on February 6. This distribution included $0.05 per unit of previously reserved cash flow from the third quarter and was in line with our previous 2014 guidance of $3.80 to $4 per unit.

I would now like to turn the call back over to Ted to discuss our outlook and some of our capital initiatives.

Ted Beneski

Thanks, Rob. Getting the right sand to the right sites at the right time is a complex process. Emerge has had a great year because our unique mix of high quality sand, state of the art plants, deep industry experience and relentless commitment to improved logistics and high customer satisfaction is clearly being well received, and this unique mix of strengths opens the door for significant future growth opportunities.

2013 was a great year for Emerge Energy. But if there is one thought we want to leave you with, it is this: we are not done yet. We believe that 2014 holds a great number of opportunities, some of which is detailed above, we are already capitalizing on, and others of which we will be focusing on in the weeks and months to come.

We thank each of you for your continued interest in Emerge Energy. Operator, I think we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Matt Conlan representing Wells Fargo.

Matt Conlan - Wells Fargo

Hey guys, nice quarter. I wanted to focus in on the metrics that you reported. You stopped reporting the difference between revenue from sand sales and other revenue in the sand business, which I guess is the pass-through of the transportation and other logistics. Is that going to be a permanent change and what informs that change in the disclosures?

Robert Lane

Sure Matt. Thanks for the question. And the answer is yes, that is going to be a permanent change. As part of our year-end audit we concluded it was appropriate to report a single line item instead of the two line approach that we had separately identified other revenue items. Most of our revenues are point-of-sale and a single line approach clears potential confusion about ASP by not unfairly discounting revenues that are properly derived from transload sites and in some cases are quite distant from our sand processing facilities. The decision to simplify our revenue disclosure makes comparisons to our peers and competitors much easier to make.

Matt Conlan - Wells Fargo

Okay, in that, so your total revenue per ton increased by about $5 a ton. Can you help us break down whether any of that was real apples to apples pricing increase or was it all just additional logistics and transportation pass-through?

Rick Shearer

Matt, this is Rick and I think one comment certainly to emphasize is with the dynamics in the market seeing such strong demand now for our sand and sand in general, frac sand, we’re clearly seeing our average selling price going up. We will continue to see that I think in the near-term at least. So certainly a factor in this is that again the average selling price, we’re pleased to say with the demand in the market, is moving up, and certainly that will be reflected in the coming months.

Matt Conlan - Wells Fargo

Okay, that's terrific. And just an unrelated follow-up, the G&A of $9.5 million this quarter, should we continue to put that for all four quarters, or is that kind of a fourth quarter spike that we should expect due to end of the year bonuses?

Robert Lane

No, there was quite a little bit of fourth quarter spike in there but there were also some one-time charges as we’re sort of getting our SOX in a row, being Sarbanes-Oxley, and implementing a new ERP system, that should – they give us a lot more visibility on some of our metrics. So there’s some stuff in there that won’t be repeated but I would say the majority of that probably – just maybe about 1 million in there and it's not going to be repeated because of one times and then bonus is probably little bit more in there.

Ted Beneski

Yes, the one thing I'd add to that, Matt, would be obviously we’re growing and as revenue grows and our organization grows, we definitely will need more people resources. And if our performance continue to increase, the amount of bonus that we actually include in that SG&A number will increase. We just think that overall SG&A, if it does increase over the next several quarters, it will increase more slowly than revenue.

Matt Conlan - Wells Fargo

Okay. Can we get any guidance for G&A for 2014 as a whole?

Robert Lane

I would say that we’re probably looking in about – let’s see this, let’s hold up on guidance for now. We don’t want to get too specific on our guidance at this point. But we will try to provide some in the coming weeks.

Operator

Your next question comes from the line of Brandon Dobell representing William Blair.

Brandon Dobell - William Blair

Want to focus on I guess capital needs this year with the two new complexes getting up and running, and what kind of CapEx should we anticipate? And I guess as a part two of that question, given the expansion of the transload networks – or network that you guys are putting out there, any capital is going to be allocated for that or is that all partnering with other people who are putting the money up?

Robert Lane

Brand, this is Rob. As far as the two new complexes that Ted said, we are trying to keep our comments there to a minimum at least at this point, as while we’re trying to flush the remaining stuff on the permitting out. So until that point we don't really want to give any guidance on CapEx but I think if you take a look at sort of what we spent in the past and go back to and look at that, that’s probably a good guide or at least a decent ballpark. On the transload sites, we've been able to really build our transload site with minimal capital investment, that's really been our model as a partnering model. And so that's the kind of thing that we anticipate trying to look for in the future, not to say that we wouldn’t make a major capital expenditure in that area but at least for the three facilities that are going in, right now we expect to have minimal capital expenditures for those facilities.

Brandon Dobell - William Blair

Okay. And as you guys finished out the year, or as you think about 14 on the frac sand side, how much do you expect to sell kind of FOB mine as opposed to FOB elsewhere and the kind of mix of contract versus spot exposure given, obviously you’ve brought on a whole lot of new customers this year. So should we expect you guys to have the same and kind of minimal spot exposure in the market, as you bring more customers or do you want a little more spot exposure given Rick’s comments about the pricing momentum for frac sand?

Rick Shearer

Yeah, I think Brandon, this is Rick. First of all, if you look at where we are at the moment, about 60% of our business is FOB are plants and of course then 40% is shipped out to our storage and transload sites throughout North America. If anything I think that percentage will creep up during the course of the year as we ship more and more product out to the field, that's a good thing for us because that's going to increase our [district profit center] [ph] and allow us a stronger cash stream there on the logistics side.

If you look at the contracts and we are in a range at the moment when we look at total volume of about 45% contracted. As we’ve talked before though the amount of business we’re doing with those contracted customers is well in excess of the contracted amounts. So those same population of contracted customers are actually consuming about 70% to 75% of our total volume. Frankly what we would like to do and we are working on this and expect to have success here in the coming few months, we’re looking to sign up more contracts giving us more stability long-term and building our relationships with the customer base that we have and others. So we see a number of contracts and the amount of tonnage moving up as far as the tons that we sell being contracted. There will be a certain amount of head space for spot business. We will take advantage of that all we can but we’re certainly committed to long-term relationships with our customers and that would include having them in long-term contracts.

Brandon Dobell - William Blair

Okay, and one final one, just a little clarification on pricing of revenue per ton. It sounds like your comments were more about apple to apples price but I guess I want to get a sense of, are you seeing a mix shift at all that's a headwind or a tailwind? Obviously your peers have talked about just the strong growth in 100 mesh the past couple of quarters and I know that it’s not as big of an item for you guys. Maybe some comment around mix dynamics, including 100 mesh, and whether your comments were apple to apples price or it’s just average revenue per ton given the mix shift?

Rick Shearer

Well in general across-the-board, our five product lines, the ASP is going up. So that's a good thing in every dimension. There is a growing demand of course with gas prices firming up as they are. There is a growing demand for finer grade products, 40, 70, 100 mesh. But I think it's important to note that the demand for coarse sand, the 20/40, the 16/30, to some degree 30/50 has never wavered. The demand has remained strong, we’re selling all we can make of our coarser products and that's really our forte, that’s a competitive advantage that we’re going to continue to build on. So yes, we will sell the hundred mesh that we have, that's great. That's of course a lesser price per ton. So we're not really driven by that product at all similarly for 40/70 but the nice thing is we’re able to sell the whole product ratio, the whole mix what comes out of the plant is readily sold and being readily sold at higher prices.

Operator

Your next question comes from the line of Selman Akyol representing Stifel.

Selman Akyol - Stifel Nicolaus

So just start off with -- 25 customers at the end of the year, how many customers did you add in the quarter?

Rick Shearer

Did we add in the quarter? I believe we added three.

Selman Akyol - Stifel Nicolaus

And then, I think you may have already answered this but – so is the goal to add more customers or are you looking do more volume with each customer?

Rick Shearer

All the above. We are still talking to about broadening, Selman, our customer base but more importantly we’re dealing with the leading service companies. We've got a blue-chip list of customers we’re very proud of, as you may be aware, Selman. So we want to build those relationships and we are doing that and we are adding tons and continuing to move forward to not only grow with those customers but continue to penetrate market share because of the competitive advantages and the value we can bring them.

Ted Beneski

One thing I would add there, Selman, is in the very beginning we had very strong relationships with two out of the top three oilfield service providers because we had those very strong relationships with Schlumberger and Baker Hughes. But if you kind of expanded it to the top we were more like 4 out of 10. Now we are doing business with 10 out of the top 11 oilfield service providers. So we feel like we've got a lot more depth and sustainability to our customer base.

Selman Akyol - Stifel Nicolaus

And then previously you talked about -- you may have been able to maintain preferred pricing for one of your two largest customers and I was wondering, I presume that’s resolved? Any commentary around that?

Rick Shearer

I can tell you with the preferred pricing even, we’re certainly going to recognize them the role they play in our business. But we have moved the pricing up with them as well.

Selman Akyol - Stifel Nicolaus

And then I guess just in terms of thinking about overall sand usage and you alluded to in terms of the pickup in the 100, but was trying to see more sand go down the hole but I mean coarse sand as well as well as fine sand, you’re seeing that as well with your customers or do you not get that kind of granularity?

Rick Shearer

Oh no, we’re certainly seeing that. I mean the dynamics are very much positive in several dimensions. As you know, Selman, the technology has changed, more stages are being added as these wells are being drilled and they are using more sand per stage, more sand per well. We’re certainly seeing the uptick of the positive effect of that. And that's for again all sands, it's not just for a particular product. So that's very much a strong dynamic and then with the economics in play and the efficiency now with the rigs, they are drilling -- there's more drilling going on in total. So that makes for a very strong demand and the need for us to increase capacity as Ted alluded to earlier.

Ted Beneski

As far as the mix between coarse and fine sand, the demand for our coarse sands has never been higher. It's as strong as ever and the pricing on those coarser sands are continuing to increase. But we also have the ability in our sand plant operations to shift the mix between say 30/50 and 40/70. We’ve got operating people that have been in the industrial minerals business processing sand for 30+ years and they can tweak the yield on the sand that we’re mining from our sand sources in a way that actually matches where most of the market demand is from quarter to quarter, because it does move around a little bit coarse to fine, finer to coarse. But as far as the coarser sands, which is our signature point of differentiation they have never been in higher demand than they are now.

Selman Akyol - Stifel Nicolaus

I guess just one final question, if I may, because it just occurred to me as you were talking. So when you deliver a unit train, is it all one site sand or would you be willing to mix sizes within the unit train?

Rick Shearer

Generally because of the product mix, we’ve done both I guess is the simple answer. We have to sell as everyone does in this industry the full product mix as it’s produced because of the different needs and the difference shale plays and so forth, we will give the customer of course what they want. And we’re all about that but if you look at the customer demand and you look at our unit trains I guess the best answer is, Selman, it's a mix of one product unit train as well as dispersed various products.

Operator

Your next question comes from the line of Ethan Bellamy representing Baird.

Ethan Bellamy - Robert W. Baird

Gentlemen, release talks about per unit production costs coming down. Can you quantify that at all and are you seeing any offsetting cost inflation of labor?

Rick Shearer

We can give you some numbers, Ethan, sure with us starting up these two new mines and as you heard in the preamble the fact that we’re actually mining more of our feed self-sufficient at this point, we expect that our cost will come down on a $1.50 to $1.75 a ton because of this issue of us not buying third-party feed.

As far as labor goes and so forth, sure I mean I think we will see some escalation in labor, and nothing much beyond inflationary numbers and our intent is to cover those inflationary costs and more with our price increases as the market roll out.

Ethan Bellamy - Robert W. Baird

Okay. Other than the customer diversification which seems to be pretty solid, has anything else changed in terms of revenue visibility since your last update in terms of contract length or relationships? I am just trying to get a sense for how you feel like the duration your book looks?

Rick Shearer

Well I think it hasn't changed markedly in the sense that we’ve got more contracts and we will continue to add more contracts, Ethan. But these contracts range from 3 to 10 years and that's the duration of the book that's -- that was there early on. And now on a more diversified customer base that’s still the duration, the horizon if you will that we have on paper.

Ted Beneski

The other thing I would add is that the supply and demand dynamics have definitely swung in favor of us as a supplier. I would say that there was a slight downtick in pricing throughout 2013. But beginning – at about the beginning of November December timeframe, it started moving in the other direction. A lot of supply had come on but now there are many restrictions to that supply getting the proper permitting and peoples, facilities are not coming on stream at nearly the same pace they were. And the demand has escalated considerably. So with that increased pressure to see prices start to move up, it has also improved our negotiating leverage in terms of longer-term contracts and more years of contractual volume, whether it's take or pay or fixed volume or best efforts. The trend line is definitely in favor of more contractual type relationships given this latest swing in the supply demand dynamic.

Ethan Bellamy - Robert W. Baird

Okay and I hate to be the Debbie Downer when everything seems to be going so well. But what happens if we see $70 or $75 crude for a month and the rig count comes down and the bottom falls out of the spot market? What is that really going to mean to you guys for a quarter?

Rick Shearer

Well, I think one thing, Ethan, should that scenario occur, that’s another reason to have solid customer relationships and have the majority of those tons contracted. The other thing that comes to mind is it’s very important to be certainly among the low-cost producers and should the things soften and you're certainly able to be competitive and to move forward in the market with anyone. And I think we position ourselves well to handle that type of a scenario for those two reasons among others.

Operator

Your next question comes from line of Dennis Ward representing Southwest Sand.

Dennis Ward - Southwest Sand

Hey good afternoon guys. Congratulations on a great quarter and congratulations on seeing that Emerge stock trade above 50 bucks this week. That’s fantastic. Puts a warm fuzzy in all our hearts out here. Rick, the question is for you, addresses really capacity. If I understand correctly you’re bringing on a couple of sand sources there with the LP mine and Sue Creek mine. So first question is I suppose you're going to feed new Auburn and Barron with those new mines and are you going to increase your capacity there because I think you said earlier that now your run rate is about 3 million tons –

Rick Shearer

Dennis, yes, just to maybe a little more clear, our intent is to actually open up four new mines… additional feed for the two existing…and Barron, we will have 110 million tons of high quality reserves now to feed both of those plants for the long term. So we really short ourselves up now with the two existing major production plants in Wisconsin, then the reason to go and add two more mines is that the plant right now and the expectation is that as Ted alluded that we would add two more dry plants, two more production facilities that would more than double our current capacity. We’re doing that because of the strong demand for our products and services and the expectation this market is going to continue to be robust beyond 2014.

So we're excited about this. It's a wonderful issue to have, we’re moving as quickly as we can with the hope that, that additional capacity will be in place and we will be adding additional product as a result of that capacity expansion by the end of this year.

Dennis Ward - Southwest Sand

Sure, and when that happens then, would your total production capacity then be pushing somewhere around what, 6 million tons a year?

Rick Shearer

Well, it would actually be more than that. It’s probably going to be between 8 million to 9 million tons should both of those new plants materialize and become reality.

Dennis Ward - Southwest Sand

Okay. While, if that happens then, that's going to make you capacity wise about the largest producer in the industry, is it not?

Rick Shearer

I think we’re going to rank right up there, Dennis. A lot of the numbers get fuzzy for who has what capability but we will certainly be right at near the top of the list if not at the top of the list by the end of the year would be our hope.

Dennis Ward - Southwest Sand

Sure, and so – but the goal is to have those two other complexes running by year-end and I realize the permitting process is somewhat tenuous at times but that’s the path you’re tracking on right now?

Rick Shearer

Yes, it is. That's correct.

Operator

(Operator Instructions) Your next question comes from the line of Eric Crowe [ph] representing Coal Capital.

Unidentified Analyst

Two questions. First off, for industry capacity supply growth, there are numbers out there, sadly the quality is not very good. I am wondering if you’ve been able to provide your own estimates for how much tonnage was actually supplied in the white coarse sand market in 2013 and your best guess as for how much more capacity will be added in 2014 or ’15? This is for the whole industry in the U.S.

Rick Shearer

Boy, I will tell you that’s very difficult to break it down by Northern White sand. We -- it would be very difficult to get too specific. I can tell you because this is open data that the recent prop tester report just came out for 2014 saying that the natural sand proppant demand for 2013 increased 28% versus 2012. The total demand exceeded just over 45 million tons. So that's a significant increase and double-digit demand beyond the 2013 number is expected this year. Clearly one thing that is happening is supply and demand is getting more and more imbalanced. There was a lot of speculation a year and a half, two years ago that there would be grossly more capacity than demand but with the demand as strong as it's been that gap is certainly and quickly narrowing. I think it narrows even more when you look at the fact that as we said in our opening statements that customers are gravitating back to the leading frac sand suppliers. They have understood that the leading companies, if you’re one of the top whatever six or eight suppliers that you have the capability and the wherewithal to give the better service and the most consistent quality. So that puts even more demand and more opportunity in the laps of some of the leading companies like Emerge Energy.

So we’re pleased about that. I will tell you what you asked the question, how much more capacity is coming on, I can tell you from first hand experience that the barriers to entry have gone up dramatically.it is much more difficult for someone to now open up a new mine and get a dry plant permit and get in this business than it was even two years ago. So as a result of that, the increased capacity that's coming into the market, while there’s some additional capacity besides our own of course, the amount of new plants opening and new mines opening has dropped off dramatically from what it was just even two years ago.

Unidentified Analyst

And just to follow up regarding the two facilities you are hoping to get the permit approval for, are these facilities where you’re going to be able to directly load sand from your facility onto rail, or will they require transportation by truck?

Rick Shearer

The answer frankly would be both, if we were to – if we get this all finalized as we hope.

Unidentified Analyst

Okay, and the one final thing just to clarify from before, based on your current production, to clarify, it sounds like 25% of your sand volumes are being sold on spot price, is that right?

Rick Shearer

Between 20% and 25%, yes.

Operator

Your next question comes as a follow up from the line of Brandon Dobell representing William Blair.

Brandon Dobell - William Blair

Just to follow up on the capital needs question, on the fuel side of the business expectations there for any kind of significant application of capital and now I want to follow up on your comment about the Western Canadian sedimentary basin, how you guys are going to be getting the sand up there, was that a pull from one of your service company or service – yes, service company customers or is there just a big enough hole in the market opportunity just figured, how transload up there in advance of any kind of pick up in activity was a good thing from a market position perspective?

Warren Bonham

This is Warren. I can take on just the fuel question relative to CapEx. This year, coming year we see definitely a little bit of maintenance CapEx sort of very much in line with the prior years. But on the growth CapEx front, at this point there is nothing major on the drawing board that even we are talking about, I’d say being well below sort of 300,000 in growth projects in 2014. Now we’ve got some things on the draw board but nothing that would produce returns commensurate with what we are seeing in the sand world.

Rick Shearer

And then Brandon, just to follow up your comments about our positioning and our growth in the Canadian market, we've done everything that we had hoped for as far as growing and positioning ourselves as a leading frac sand supplier in Canada. That is a very good market for us. We do have some logistics advantages at least at the moment certainly with our capability as you know the Barron plant being on the sea and rail, we have a one line haul up to the vast majority of the market in the Western Canadian shale plays. We will frankly add to that because if we move forward with the expansion that Ted has mentioned that will enhance our CN capability and it will give us Canadian specific rail capability into the market.

So from a freight standpoint we’re positioned probably as well, certainly may be better than anyone to continue our leadership in that market. The other advantage and the other thing that we’re working very hard on is to expand on the transload sites that are there. We’ve added two exclusive transload sites just recently Fox Creek and Sexsmith, Alberta which both have approximately 30,000 tons of storage capacity. So that continues to allow us to offer excellent services to these Canadian customers and to build out that Canadian base and the tonnage that we will grow on this year. So we feel very good about that market.

Brandon Dobell - William Blair

Would you expect the grades of sand you sell up there to mirror what you’re seeing in the U.S. and I have heard some people talk about need for coarser sand up there in some places but also there’s some demand for finer stuff. So how do you expect the mix in Canada look like, the US mix?

Rick Shearer

Well, it’s going to be driven by, as more and more gas is drilled up there, they are putting in LNG export terminals which will mean more and more gas opportunity. Traditionally Canada has been a 20/40 market. They have strayed away from that into some 30/50 material as well. But it plays back to our comments earlier, Canada makes a lot of sense for us not just logistically but even product wise, because they demand a lot of coarse product and nobody's better to serve that coarse product market than Emerge Energy.

Operator

With no further questions at this time, I would now like to turn the call back to Mr. Ted Beneski for closing remarks.

Ted Beneski

Thank you. Just wanted to thank everybody for being on the call today. We hope that you are as excited about we are about the performance in 2013. And we think our growth prospects are very strong for 2014. So with that I will sign off with a big thank you and look forward to talking to all again soon.

Operator

Thank you. Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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