An Order of Magnitude Improvement in Mining and the Oil Patch
Innovation comes slowly to the oil patch and at an even slower pace to mining. Howard Hughes Sr invented the rotary drill bit for drilling oil wells in 1908. We use a variation of that same drill bit today, 99 years later. The very first bits used by Hughes consisted of two rotating steel cones. A later version consisting of three cones was invented and patented by Hughes engineers in 1933. Through the patent expiration in 1951, the Hughes drill bit market share stood at just below 100%. For something as expensive as drilling for oil there were no better products at any price. The drill bit provided the fortune for Howard Hughes Jr and made him the richest man in the world.
This week I found something better. The stock is selling for about 25% of what it's worth right now and a higher market price would allow them to grow quicker. It's the most brilliant device and technology I've seen in years. I put in my first order to buy before I began to write the piece.
Even industry insiders forget how much mining has changed in the last ten years. In 1997, computers were still expensive and slow. Most geos had them but they were a major expense item. Today they are throw away and fast. In 1997, GPS was still expensive but a real time saver and far more accurate in comparison to map reading. Now you can wander into a sporting goods store and pick one up for the price of a pair of good tennie pumps. I flew 10,000 hours over water with the aid of no more than a compass of dubious accuracy and a Timex and I can't tell you how jealous I am of GPS.
And you can go to mining projects in the more remote areas of the world and still find telephone and internet access via satellite. How bizarre is that? Someone doing drill core logging high in the Andes can pass his results on in real time to a consultant in Vancouver for a decision as to where to spud a hole or how deep to drill.
But no matter how fast we manage to speed up the flow of information, one fundamental problem plagues both mining and searching for oil. When you come up with a dry hole, you have wasted 100% of your investment. In the oil and natural gas business, we all want to find gushers which pay the millions of dollars in drilling costs back in short order. They are few and far between because everyone else wants them just as much as we do.
Barbara just bought a patch of sand [w/condo] in Grand Cayman where she is as happy as a lark. She's content and surrounded by people she enjoys being with. (probably because they drive on the wrong side of the road). That patch of sand is worth every penny we put into it.
A few years back, my brother, the lawyer, invited Barb into a gas deal with a multi-million dollar drilling cost. Barbara might have had a few percentage points of the deal. Based on the very best technology available today, 3-D Seismic, the drillers went right where they aimed. And found a 100 foot section of sand. No oil, no gas. Just sand. It was as if Barbara had taken hundred dollar bills out on the lawn and burned them. One minute they were there. The next minute, she owned a patch of useless sand 11,000 feet deep.
Dry holes really get expensive. And I've had geos tell me 95% of drill core is a waste of both time and money.
The conventional standard in the oil patch for locating prospective structures is 3-D seismic and it's expensive. But it's a lot cheaper than a dry hole. The process actually goes back 40 years to 1967 when Exxon first used the process at an oil project near Houston, Texas. Seismic processing itself can be traced back to a German invention first used in WW I to locate enemy artillery.
The first 3-D seismic test took only a month to acquire the data. The speed of computing back then was so slow that it took over 2 years to process the data. But Exxon had poked enough holes in the project that they could correlate the 3-D data to known underground structures. And 3-D has been around ever since.
Other than a lot lower cost of processing and being far faster, 3-D seismic hasn't advance much in 40 years. A crew consists of as many as 50 people. You poke the sensors into the ground like a stick and they are wired together in series. Believe it or not, crews spend 50% of their time fixing broken wires. Since they are in series, a break anywhere downs the entire circuit. So they have to run around with continuity testers trying to locate the break. It's pretty primitive.
3-D seismic generates an analog signal which must then be converted to digital for processing. That may have worked 40 years ago but with the tiny cost of computing today, it makes no sense.
There is a company called Firstgrowth Capital [FGC-V] using a technology called VectorSeis® Firstgrowth (the first thing to do is change the name of the company, that just doesn't hack it) doesn't make the device, a Texas company named I/O makes a new 3-D seismic sensor which has been updated for today's technology. It doesn't use wiring in series so there are far fewer line breaks. They are currently working on installing wireless capability so there will be no wiring breaks. The new sensor processes both P-Wave or vertical signals just as the older 3-D seismic did but it also processes S-Wave or horizontal signals. This allows far greater accuracy.
The device not only can differenciate oil from water or sand (Anyone out there want to buy a section of beach 11,000 feet deep in Texas? Barbara will make you a real good price.) But even better yet, it can locate coal and even uranium. It's not just a technology for the oil patch, it's an exciting new technology for mining and has been used to map diamondiferous kimberlite pipes and uranium.
The signal quality of this advanced 3-D is up to 300% greater than analog 3-D. It requires only about 15% of the sensors as does standard 3-D and uses only 12 people per crew compared to 30 in analog 3-D. Wire breaks are a non-issue.
Firstgrowth bought an oilfield services company using the technology called Kintex, Inc, based in Calgary, Alberta. The five year old company is profitable and on the way to $17 million dollars in sales for 2007. The Canadian geophysical market is between $500 million and $700 million and Kinetex has about 2% of the market. The worldwide geophysical market is a whopping $5 billion. And currently Kinetex is deriving 30% of their revenue from mining. This is a high growth area because there is currently no 3-D market in mining, so it's virgin ground.
I said earlier that FGC was selling for about 25% of what it's worth. Here's how I figured that out. On September 6, 2006, Northern Securities published a report on Energy Services and they analyzed the purchase by Compagnie Generale de Geophysique (CGG) of Veritas (VTS on the NYSE). Here are the metrics.
CGG paid 3.7 times sales for VTS. If you accept $17 million in sales in 2007 for Kintex (FGC) that gives them a reasonable market cap of $62.9 million. And CGG paid 14.5 times EBITDA for VTS. For 2007, FGC estimates $5.6 million for EBITDA for a reasonable market cap of $81.2 million. CGG paid 29.1 times profit for VTS and that works out to 29.1 times net earnings (based on estimates) of $4.352 million or a reasonable market cap of $126.6 million.
As of today, FGC has a market cap of about $24.46 million. If you were happy with an average of the three methods of determing value, a reasonable market cap for FGC based on 2007 estimates of sales, EBITDA and net profit would indicate a cap of $90.23. Myself, I like the higher figure of $126 million, you have sales and profits growing at 40% a year and that's worth a premium. Today FGC sells for about $24.4 million and it sure looks to me as if anywhere between $90 million and $126 million is a far more reasonable figure.
While FGC only uses the seismic sensors, they have developed techniques for using the devices and their own software which is priopitary. They have a francise and that's very important. Others can buy the hardware but they don't have the experience. Anyone currently in the 3-D seismic market place would have to dump $20 million dollars worth of equipment and purchase another $20 million dollars worth of equipment just to begin. And then they face a 3-4 year learning curve.
Clearly Firstgrowth has a significant competitive edge in advanced 3-D seismic. In the mining area, they have no competition at all. I met with the President and CEO of the company, Gil Schneider, and he really impressed me. He knows the technology and he knows the problems for mining and oil services and he knows he has a solution.
Firstgrowth is going to be an advertiser. I have bought shares on the open market and I am participating in a private placement. Do not for even a minute believe I am unbiased. I am as biased as I can be and this is the best opportunity for investors I have seen in five and a half years. Do your own due diligence.
Firstgrowth Capital Inc