The Road to Muskeg Valley

With more than a few mud-splattered four-by-fours sporting flashy 24-inch rims and their youthful occupants shod in $200 Nikes, Fort McMurray abounds with glaring signs of reckless prosperity that mistakenly leads outsiders to believe the streets are paved with gold. They are not, and even Franklin Avenue, the major downtown thoroughfare, bears potholes that prove even with sweet crude’s spot price north of $60 US, not everything is perfect in Canada’s modern-day New Jerusalem.

Whatever local politicians say, the stretch marks on Fort McMurray’s streets don’t stem from the Alberta government treating the city like a glorified automatic teller machine, withdrawing royalty revenues while neglecting to make deposits to pay for infrastructure. It’s the poor quality of local gravel, combined with an annual freeze-thaw cycle that sees the temperature swing between -40 C to 35 C, that has created pockmarked roads, driveways and sidewalks. “The gravel in the region contains clay and iron, which means the quality of the concrete isn’t great. When it thaws in the spring, the water reacts with the clay, which pops out,” explains Bill Almdal, a retired Syncrude executive who now works as a consultant. “That’s how the holes develop and they are everywhere.”

Almdal’s newest client, Birch Mountain Resources Ltd. believes limestone aggregate mined in its new quarry will fix the longstanding problem in the region by providing a better feedstock for the concrete mixer. The Calgary-based company received regulatory approval earlier this year to open its Muskeg Valley Quarry about 60 kilometres north of Fort McMurray. As part of the development, Birch Mountain also intends to build a $125-million plant to produce quicklime, a substance used by oilsands producers to treat water used for industrial processes in their plants and to remove sulphur from emissions from their smokestacks. “We have done the studies and are confident the markets are there,” said Doug Rowe, Birch Mountain’s president and CEO.

It may not be sexy, and a long way from Birch Mountain’s origins as a junior precious metals miner, but Muskeg Valley and the Hammerstone quicklime plant represent (apart from the oilsands themselves, which most consider an energy play) the largest new mining development going on in the province. On the plus side, Birch Mountain doesn’t have to explore for the mineral (limestone is abundant throughout the region) or even sell customers on the idea. “The industry is concerned with the supply of gravel in the region and its quality,” says Mike Glennon, executive director of the Athabasca Regional Issues Working Group, which acts as the oil companies’ voice on most key issues. “The Birch Mountain find makes it much less of concern.” Moreover the mere mention of the oilsands connection seems enough to attract investment.

Instead, the firm’s challenges appear to be similar to the ones facing the oilsands developers that it intends to serve: trying to find skilled workers in a labour market where fast-food restaurants advertise jobs for burger flippers at $14 per hour and carefully navigating through the sometimes Byzantine channels of regulatory approvals.

Unlike the oilsands developers, which fall under the auspices of the Alberta Energy and Utilities Board, Birch Mountain reports to the Natural Resources Conservation Board (NRCB). After the project passed an environmental impact assessment, the NRCB gave its blessing to Muskeg River on June 15, 2005, before the provincial cabinet granted final approval in July.

Rowe immediately farmed out the actual operation of the $5-million quarry to Stony Valley Contracting, a local company with the heavy equipment and personnel to conduct the drilling, blasting, crushing and stockpiling of the aggregate. Production is slated to begin this month. Contracting out the quarry- operations on a production-based rate will free up Birch Mountain to concentrate on developing and building the Hammerstone plant near its quarry. The company expects to file an application for Hammerstone to the NRCB in the first quarter of 2006, with the plant slated to begin operating by late 2008. The facility will produce quicklime, a substance produced by roasting limestone in kilns. Industry uses quicklime produced in southern Alberta to treat water used in industrial processes in its plants and to “scrub” sulphur from smokestack emissions.

Birch Mountain decided to move forward after commissioning the Canadian Energy Research Institute to develop models on the potential quicklime market based on projected bitumen production in the region. Given that emission controls will only get tighter and the number of oilsands plants planned for construction in the region, Rowe’s eyes light up at the project’s prospects. “We expect a pretty large market for these products down the road,” he says. “And because we control the rights to limestone in the region, it provides a barrier to entry for other companies who want to enter the market locally.”

That quasi-monopoly and potential market impressed Acumen Capital Partners enough to participate in Birch Mountain’s most recent round of financing, a $36-million equity offering led by RBC Capital Markets that closed in early September. The Calgary-based energy boutique is better known for its financing deals with junior oil companies and income trusts, but president Brian Parker has a firsthand appreciation of both Birch Mountain and the potential of the oilsands. “I spent some time up in Fort McMurray while I was growing up because my father worked for Syncrude so I have pretty good understanding of what is going on in Fort McMurray,” said Parker, whose sister currently works for the oilsands giant. “Birch Mountain is a good group of guys with an interesting project. There’s a lot of capital looking for a good home, particularly for flow-through shares.” All told, Birch Mountain plans to finance its projected $130-million investment in the area 50/50 between debt and equity.

Such sunny forecasts have, however, been undone by skyrocketing costs to construct major projects in the region, with several having undergone Bolivian-style hyperinflation. And even once the plant is built, Birch Mountain will face recruitment headaches in Canada’s toughest labour market.

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