Commentary: Is a diesel supply shock coming?

New ocean shipping regulations could have a big impact this year.

Under International Maritime Organization (IMO) rules that came into effect on Jan. 1, emissions from fuel used in ocean carriers cannot exceed a sulphur content of 0.5%.

With current sulphur content at about 3.5%, the coming switch to low-sulphur fuel is enormous, both as an undertaking and in its far-reaching effects. It is certainly unprecedented, and few understand what impacts are coming while many others are unaware that the switch is imminent. The diesel supply side will be exposed, the timeline is short, users and consumers are unaware and unprepared for the event, which may exaggerate the impact when it happens.

The conversion of ocean carriers from heavy or residual fuel oil (also known as bunker fuel) with a higher sulphur content to low-sulphur fuel could seriously impact the supply and/or the price of distillate fuels. The overall effects are unpredictable and knowledge of this change is primarily limited to the transportation industry. The mandate cannot be delayed because it was set by IMO treaty 10 years ago. However, Indonesia’s government announced in July that the country will not enforce the IMO low-sulphur standard for domestic fleets due to the high cost. It is the first country to abandon the IMO2020 mandate.

Emissions of sulphur and nitrogen oxides released into the atmosphere are known to adversely affect health. Goldman Sachs estimates that the 15 largest ocean vessels emit more sulphur from high-sulphur bunker fuel than all of the world’s gasoline or diesel fueled automobiles, combined.

According to the International Energy Agency (IEA), the global fuel demand for ocean shipping is small and amounts to just 4% of total global demand, about 4.3 million barrels per day. Bunker fuels represent 3% of total transportation energy use. About 80% of U.S. residual fuel is for marine bunker fuels mixed with distillate fuels. The question remains as to how large will be the impact outside ocean shippers. Because bunker fuels represent the sole important use of this product, to comply with the IMO 2020 sulphur limits will have major economic implications for the use of residual oils for marine fuels. The effects will reach other parties up and down the supply chain, from customers that sustain the market, to both the refineries and the producers that find and pump the crude. This includes the mining sector, as Capesize ships are commonly used in transportation of coal, iron ore and commodity raw materials.

Shipper options

Shippers can meet the new standard on Jan. 1, 2020, by adding scrubbers to reduce the sulphur from emissions of high-sulphur fuels, switch to low-sulphur diesel fuel, or convert engines to natural gas. DNV GL reports that at least 225 cruise lines and freight shippers have converted or ordered LNG conversions. RBEnergy.com contends the scrubber conversions may be more economical than purchasing the IMO2020-compliant fuel or the LNG conversions. Vessels failing to meet the standard will be declared “unseaworthy,” lose insurance coverage, and face steep penalties and fines. Freight contracts made in 2019 also cannot escape the low-sulphur fuel mandate.

Price and supply implications

According to trade publication Transport Topics, demand for maritime distillate fuel after the rule takes effect is anticipated to rise by 3 to 4 million gallons per day for ocean freight and cruise lines, and any tweaking of supply and demand by refiners would be limited. But fuel-switching, the change in refinery output from high-sulphur to low-sulphur fuels or distillates, combined with the transport and market of the compliant fuels, involves a much larger change because the high to low-sulphur fuel transition involves from 84 million to 168 million gallons/day.

Svelland Capital says it’s the largest-ever regulatory change in the oil industry and it will have massive effects that extend far outside of shipping, to trucking, railroads, farms, and industry users. Estimates of the IMO global impact range from $240 billion in total to more than $5 trillion over five years. Denmark’s Maersk and the Swiss MSC estimate added costs of fuels at $2 billion for each company. The impact is not limited to diesel, but the ruling will also impact the availability and cost of home heating fuel, jet fuel and gasoline as refiners devote more attention to the low-sulphur bunker fuel market, says Daniel Yergin, IHS Market vice-chairman.

Fuel use by ocean transport, a very large industry, uses more fuel than land transport, another factor that may exaggerate the impact, says Daniel Yergin in his address at the TPM 2019 shipping container conference. Yergin adds that the “change is big and will not go smoothly.” The “transformative” change creates risks, opportunities, winners, and losers, Yergin said, warning of an IMO scramble because “industries are not prepared.”

Small companies or low-volume users — farmers, airlines, truckers, mines and others — will be hit hardest and will not receive favoured terms compared with crude oil supertankers, containerships, Panamax or Capesize ships.

The big question is what will be the impact on availability and price to trucking, rail transport and the demand by industry that already uses low-sulphur diesel fuels. At this time, magnitude of the effect is impossible to predict.

Historic price shocks

A look back to the ultra-low-sulphur diesel mandate in 2005 may be helpful because the ultra-low sulphur diesel (ULSD) rule caused diesel prices to spike above those of gasoline. Before the ULSD phase-in, according to Forbes.com, gasoline traded at a premium to diesel, then diesel prices traded US4 cents above gasoline, but after implementing the ULSD standard, diesel prices surged to average 23 cents above the price of gasoline. Also, the purchase price of high-sulphur, or sour crude oils also fell (because it was less favored for refinery feedstock) compared to lower sulphur or sweet crude oil. Refineries which processed only sour crude oils have since closed, stranding some high-sulphur supplies but the Energy Information Administration (EIA) predicts some of these facilities may re-open in the future to satisfy demand under the new IMO rules.

Diesel prices rose in the 2006–2010 period after low-sulphur fuels were mandated in North America and Europe. Diesel prices rose to $4.25 per gallon on May 1, 2008. The increase cost truckers $140 billion for diesel in 2008, $30 billion more than in 2007. By election day, prices fell to $2.07 per gallon when Barack Obama was elected U.S. President.

Wider impacts of the IMO ruling

Although not directly involved in the transition, customers of traditional fuels for autos, home heating, truck and rail shipping will also feel the impact. This is because the overall rise in demand for distillate fuels will reach 88.2 billion gallons annually. Furthermore, because new blend specifications remain non-standard, no one knows what types of fuels will be available, or their supply and cost.

Logistics Management magazine says the fuel cost may double in a short time following the Jan. 1 deadline. Forecasts by McKinsey and International Energy Agency also expect distillate fuel costs like diesel and jet fuel to double but then soften after a period of adjustment. At the same time, the cost of motor gasoline will be unchanged but then eventually fall by 20 cents per gallon.

The IMO2020 rule will also impact sourcing of products and timing of shipments from overseas or ultimate sourcing from new or alternate sources. Slow-steaming was one strategy used by ocean ships to lower costs. Slowed ship speeds can save 10% on the cost of fuel, but delayed arrival time impacted logistical planning and customer’s lead times. Slowed arrival times and cost of fuel will require examination of near-shoring or on-shoring of suppliers versus goods shipped long distance by ocean ships.

It seems clear that the mandated change from high-sulphur to low-sulphur fuels by ocean shipping will impact ocean shipping. The impact on ocean shipping will be most marked, while the impact of the IMO ruling on fuel users outside ocean shipping are quite uncertain.

(By David Boleneus)

This article first appeared in our sister publication, Canadian Mining Journal. David Boleneus is a senior cost analyst/geologist with CostMine (costs.infomine.com), part of the Glacier Resource Innovation Group, based in Spokane, WA. 

Sphinx unfazed by sinking zinc

Zinc prices have fallen 32% from a high of US$1.63 per lb. in early 2018 to US$1.15 per lb. today. But Jeremie Ryan, CEO of Sphinx Resources (TSXV: SFX), is rolling with the punches.

“Price fluctuations are part of our business,” he says. “If you want to operate in this industry you need to work around them.”

Sphinx Resources is leveraging several plays in the Pontiac region of southwestern Quebec, but its most promising zinc property is Calumet-Sud, a joint venture with SOQUEM, a subsidiary of Investissement Québec and a leading player in mineral exploration in the province.

Calumet-Sud is adjacent to the site of the former New Calumet mine, which produced 3.8 million tonnes at a grade of 5.8% zinc, 1.6% lead, and 65 grams silver per tonne between 1944 and 1968.

All 29 holes along a 1,500-metre zone in the company’s early 2019 drill program returned zinc mineralization. Highlights included 4.9% zinc over 2 metres from 70 metres downhole, including 8.5% zinc over 1 metre in drill hole 1926. Drill hole 1905 cut 2.63% zinc over 1 metre starting from 5 metres’ depth, while drill hole 1917 returned 1.36% zinc over 6 metres from 73 metres, and drill hole 1911 cut 12.75% zinc over 1 metre from 41 metres.

While promising, Ryan admits the initial drill results suggest that Calumet-Sud would not be economic at today’s metal price. Nevertheless, he plans to “drill for bulk” near the initial drill holes to keep his options open in case the zinc market changes.

Ryan’s priority is to get government approval for more drilling. “We have approvals from the farmers that own the properties, but we need permission from the [Commission de protection du territoire agricole du Québec], as well,” hesays. “We filed a revised claim in June, and are currently waiting for an answer.”

Michel Gilbert, who recently took over as president of SOQUEM, Sphinx Resources’ joint-venture partner, isn’t phased by current low zinc prices, either. “It’s always better to do exploration when prices are low, because there is less competition,” he says. “The mining industry operates on very long cycles, so short-term fluctuations are less of a concern than they would be in other industries.”

Quebec Premier François Legault, whose Coalition Avenir Québec government took office in October 2018, has made the development of the province’s mining sector a priority. SOQUEM, a division of Ressources Québec, which invested in more than 20 projects last year, should be a beneficiary.

“We are looking to foster diversification of Quebec’s mining base outside of the Abitibi region,” SOQUEM’s Gilbert says. “We have been investing a lot in the James Bay area. But the Pontiac region, where Calumet-Sub is located, is also promising, as there used to be considerable mining done there in the 1940s and 1950s.”

Gilbert, a mining geologist, says SOQUEM encourages the exploration of sedimentary exhalative deposit zinc opportunities, such as those in Calumet-Sud, which are relatively underexplored in a province better known for volcanogenic massive sulphide-type deposits, such as those in the Matagami Camp.

Ryan took over as CEO of Sphinx Resources in December 2018. He has been investing in mining companies for more than three decades. Today, he is a major shareholder in the company, where zinc properties are concentrated along a 40 km long, northwest-trending corridor in the Pontiac municipal regional county. “I have lived in the area and done business here for many years,” Ryan says. “That gives me several advantages, particularly on the social-licencing front.”

There are plenty of people cheering Ryan on in his efforts. The Pontiac region has seen a paper mill and associated sawmills close during the last couple of years, and jobs are scarce. “Locals want us to do business here,” Ryan says. “I met with the city council and they were highly enthusiastic.”

Ryan’s connections paid off recently when he was able to recruit Lawrence Cannon — a retired federal cabinet minister, ambassador to France and longtime friend — to sit on Sphinx’s board. Cannon, who has connections in the province dating back to his time as former prime minister Stephen Harper’s Quebec lieutenant, has taken on the chairman’s role at the company, as well.

“Quebec is a great place to do business,” Ryan says. “It always does well on the Fraser Institute [mining jurisdiction study] and offers significant advantages, including tax credits and low after-tax costs for flow-through shares.”

The big question though remains low zinc prices, which show few signs of a short-term bounce back, he says.

Recent data from the International Lead and Zinc Study Group show output currently exceeds demand, with the global zinc market registering a deficit of 134,000 tonnes during the first half of 2019.

Unless that trend reverses, Ryan says, things are unlikely to bounce back anytime soon.

Ever the entrepreneur, he has been finding ways to keep busy while he awaits developments on the zinc front.

In June, Sphinx Resources bought 42 claims in Calumet North from Ressources Tranchemontagne, and Ryan got to work, commissioning flyovers, soil sampling, mapping and induced polarization.

Initial results look promising from 56 grab samples collected in September on the latest stripped exposure of the Shae zone. In October the company announced it traced a 10-metre-wide, copper-gold zone grading up to 3.8 grams gold per tonne and 11.8% copper.

“We will know a lot more once our drilling campaign gets underway next year,” Ryan says. “But we are quite hopeful.”

(This story first appeared in The Northern Miner)

Poor market conditions derail Triple Flag IPO

Royalty and streaming company Triple Flag Precious Metals has cancelled a planned initial public offering due to poor market conditions.

“While the company has been encouraged by investor interest in its proposed initial public offering,” Triple Flag said in a statement, “the market environment for share offerings, particularly near year-end, continues to be challenging.”

The company had planned to issue 20 million common shares at an offer price of between $15 and $18 per share. At a mid-point price of $16.50 per share, the IPO would have raised about $330 million—which would have made it the biggest mining IPO in Canada in more than 24 months.

The proceeds would have been used to acquire royalty, stream, and other interests, and to repay debt.

Triple Flag founder and CEO Shaun Usmar

The company, which has royalties on Kirkland Lake Gold’s (TSX: KL; NYSE: KL) Fosterville mine in Australia and Alamos Gold’s (TSX: AGI; NYSE: AGI) Young-Davidson mine in Ontario, among others, was founded by Shaun Usmar, a former executive at Barrick Gold (TSX: ABX; NYSE: GOLD) from 2014 to 2016, and is backed by hedge fund Elliot Management.

Usmar noted in the company’s Nov. 22 IPO prospectus, that since the company was created in 2016, the management team had reviewed more than 400 opportunities and completed 15 transactions.

“We believe our thoroughness has paid off in building a portfolio of 37 assets, with geographic and asset diversification, as well as a mix of cash-generating and near-term production assets that we believe will continue cash flow growth in the coming years,” wrote Usmar, who joined Xstrata in 2006 as an early senior executive member of the management team that grew the company into one of the world’s largest diversified miners at the time of its acquisition by Glencore in 2013.

Of the 37 assets, eight are metals streams and 29 are royalties. The portfolio includes nine producing mines, five projects in construction, and 23 development and exploration-stage projects.

“We didn’t invent the streaming and royalty business model, but we have embraced it for its record of superior performance relative to bullion and gold mining company equities, whether prices are rising, declining, or stable, as evidenced by the equity performance of our peer companies,” the South Africa native outlined in a letter to prospective investors in the prospectus.

“The foundational concept of Triple Flag was born out of the idea that the streaming and royalty business model is a compelling way for investors to gain exposure to precious metals, and my belief that a gap in the competitive landscape existed,” he said. “I believed there was room for a capable new entrant to distinguish itself through hard work and effective execution.”

Triple Flag declined to comment on the cancelled IPO due to Ontario Securities Commission rules on public communications.

(By Trish Saywell)

(This article first appeared in The Northern Miner)