A copy of this preliminary prospectus and amended and restated preliminary prospectus has been filed with the securities regulatory authorities in each of
the provinces and territories of Canada but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary
prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the prospectus is obtained from the
securities regulatory authorities.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a
public offering of securities only in those jurisdictions where such securities may be lawfully offered for sale and therein only by persons permitted to sell
such securities. The securities offered hereunder have not been and will not be registered under the United States Securities Act of 1933, as amended (the
“U.S. Securities Act”), or the securities laws of any state of the United States and, subject to certain exceptions, may not be offered or sold within the
United States except in transactions exempt from registration under the U.S. Securities Act and under the securities laws of all applicable states. This
prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby within the United States. See “Plan of
Distribution”.
PRELIMINARY PROSPECTUS DATED MARCH 2, 2017 IN THE PROVINCE OF QUÉBEC AND AMENDED AND RESTATED
PRELIMINARY PROSPECTUS DATED MARCH 2, 2017 AMENDING AND RESTATING THE PRELIMINARY PROSPECTUS
DATED FEBRUARY 13, 2017 IN ALL OTHER PROVINCES AND TERRITORIES OF CANADA
Initial Public Offering and Secondary Offering
March 2, 2017
$300 million
Š Common Shares
This prospectus qualifies the distribution (the “Offering”) of Š common shares (the “Common Shares”) of Source Energy Services Ltd. (the “Company”)
at a price of $Š per Common Share (the “Offering Price”). The Offering consists of an initial public offering of Š Common Shares by the Company (the
“Treasury Offering”) and a secondary offering (the “Secondary Offering”) of an aggregate of Š Common Shares by SES Sand Holdings 2 (Canada) LP,
SES Sand Holdings 3 (Canada) LP and TriWest Capital Partners IV (US), L.P. (collectively, the “TriWest Selling Shareholders”) and 2024747 Alberta
Ltd., 2024748 Alberta Ltd., 2024749 Alberta Ltd. and 2024750 Alberta Ltd. (collectively, the “Source Selling Shareholders”, and together with the
TriWest Selling Shareholders, the “Selling Shareholders”). See “Principal Shareholders”. The Company will use the net proceeds from the Treasury
Offering as described in this prospectus. The Company will not receive any proceeds from the Secondary Offering. See “Use of Proceeds”. The Offering is
being underwritten by Scotia Capital Inc. (“Scotia”), Morgan Stanley Canada Limited (“Morgan Stanley”) and BMO Nesbitt Burns Inc. (“BMO”), as
co-lead underwriters (the “Lead Underwriters”), and CIBC World Markets Inc., Goldman Sachs Canada Inc., Raymond James Ltd., RBC Dominion
Securities Inc., Canaccord Genuity Corp., AltaCorp Capital Inc., Cowen and Company, LLC, GMP Securities L.P. and Peters & Co. Limited (collectively
with the Lead Underwriters, the “Underwriters”). It is currently anticipated that the Offering Price will be between $17 and $20 per Common Share and
therefore that between 15,000,000 and 17,647,059 Common Shares will be offered pursuant to the Offering for aggregate gross proceeds of approximately
$300 million. Gross proceeds from the Treasury Offering and Secondary Offering are expected to be approximately $275 million and $25 million,
respectively. The final Offering Price will be determined by negotiation among the Company, the Selling Shareholders and the Underwriters. See “Plan of
Distribution”. The Company has applied to have the Common Shares listed on the Toronto Stock Exchange (“TSX”) under the symbol “SHLE”. Listing of
the Common Shares on the TSX is subject to approval by the TSX of the Company’s listing application and fulfillment by the Company of all of the initial
requirements and conditions of the TSX. The TSX has not conditionally approved the listing of the Common Shares and there is no assurance that the TSX
will approve the Company’s listing application. The closing of the Offering is subject to listing the Common Shares on the TSX.
Price: $Š per Common Share
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes:
(1)
(2)
Price to
the Public
Underwriters’
Commission(1)(3)
Net Proceeds to
the Company(2)(3)
Net Proceeds to
the Selling
Shareholders(2)(3)
$Š
$Š
$Š
$Š
$Š
$Š
$Š
$Š
The Company and the Selling Shareholders have agreed to pay to the Underwriters a commission equal to 5.5% of the gross proceeds of the Offering
in proportion to the number of Common Shares sold under the Treasury Offering and the Secondary Offering, respectively (the “Underwriters’
Commission”), and will reimburse the Underwriters for their reasonable expenses in connection with the Offering. See “Plan of Distribution”.
Before deducting expenses of the Offering, estimated to be approximately $3.5 million, the Selling Shareholders’ portion of which is not expected to
be a material portion of the aggregate expenses of the Offering. All of the expenses of the Offering will, together with the Underwriters’
Commission, be paid by the Company and the Selling Shareholders from the proceeds of the Treasury Offering and the Secondary Offering, as
applicable. See “Plan of Distribution”.
(continued on next page)
Source is a Leading Fully Integrated
Proppant Logistics Company in Canada
Source Terminals
Source Mines
CN Rail Network
Wellsite Storage
Mining & Processing
Terminalling & Direct to
Wellsite Solutions
Rail Shipping
Rail Transport
& Transloading
Transload Storage
Duvernay
Montney
Other Shale Plays
Frac Sand Mining
& Processing
Delivery
Wellsite
(continued from cover)
(3)
The TriWest Selling Shareholders and the Source Selling Shareholders have each, pro rata to their participation in the Secondary Offering, granted
the Underwriters an option (the “Over-Allotment Option”), exercisable at the Underwriters’ discretion, to purchase from the Selling Shareholders
up to an additional Š Common Shares (representing 15% of the number of Common Shares sold in the Offering) at a price equal to the Offering
Price, to cover over-allocations, if any, and for market stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part, at any
time on or before the date that is 30 days following the date of closing of the Offering. If the Underwriters exercise the Over-Allotment Option in
full, the total “Price to the Public”, “Underwriters’ Commission” and “Net Proceeds to the Selling Shareholders” will be $Š, $Š and $Š, respectively.
This prospectus qualifies the grant of the Over-Allotment Option and the distribution of any Common Shares issued or sold pursuant to the exercise
of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the Underwriters’ over-allocation position acquires such
Common Shares under this prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the OverAllotment Option or secondary market purchases. See “Plan of Distribution”.
The following table sets forth the number of additional Common Shares that may be sold to the Underwriters under the Over-Allotment Option:
Underwriters’ Position
Over-Allotment Option
Maximum Size or Number of
Securities Available
Exercise Period
Exercise Price
Option to acquire up
to Š Common Shares
Exercisable until the date that is 30 days
following the closing of the Offering
Equal to the Offering Price
The Underwriters, as principals, conditionally offer the Common Shares, subject to prior sale, if, as and when issued and sold by the Company, or in the
case of the Secondary Offering, if, as and when sold by the Selling Shareholders, and delivered to and accepted by the Underwriters in accordance with the
conditions contained in the Underwriting Agreement (as defined herein) referred to under “Plan of Distribution”, subject to approval of certain legal
matters relating to the Offering on behalf of the Company by Stikeman Elliott LLP as to matters of Canadian law and on behalf of the Underwriters by
Blake, Cassels & Graydon LLP as to matters of Canadian law. In connection with the Offering, the Underwriters may effect transactions which stabilize or
maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open market. See “Plan of Distribution–
Price Stabilization, Short Positions and Passive Market Making”.
Subscriptions for Common Shares will be received subject to rejection or allotment, in whole or in part. Closing of the Offering is expected to occur on or
about Š, 2017 or such later date as the Company, the Selling Shareholders and the Underwriters may agree (the “Closing Date”), but in any event not later
than Š, 2017. The Common Shares (other than any Common Shares issuable or to be sold on exercise of the Over-Allotment Option) are to be taken up by
the Underwriters, if at all, on or before a date not later than 42 days after the date of the receipt for the final prospectus. The Underwriters may offer the
Common Shares at a lower price than stated above. See “Plan of Distribution”.
Cowen and Company, LLC is not registered to sell securities in any Canadian jurisdiction and, accordingly, will only sell Common Shares outside of
Canada. This prospectus does not qualify any Common Shares sold to investors in any jurisdiction outside of Canada by Cowen and Company, LLC
pursuant to the Offering.
Except in certain limited circumstances, no certificates representing Common Shares will be issued to purchasers in the Offering. Instead, on the Closing
Date, the purchasers of Common Shares will have their securities registered in the name of CDS Clearing and Depository Services Inc. (“CDS”) or its
nominee and electronically deposited with CDS. Purchasers of the Common Shares will receive only a customer confirmation from the Underwriter or
other registered dealer who is a CDS participant and from or through whom a beneficial interest in the Common Shares is acquired.
BMO is an affiliate of Bank of Montreal, which is the sole Lender (as defined herein) to Source Canada LP (as defined herein) under the Credit
Agreement (as defined herein) and to which Source Canada LP is currently indebted. Scotia is an affiliate of The Bank of Nova Scotia which is
expected to become a Lender following the Offering in connection with the planned increase of the Revolver Limit (as defined herein).
Consequently, the Company may be considered to be a connected issuer of BMO and Scotia for the purposes of securities regulations in certain
provinces and territories. See “Relationship Among the Company and Certain Underwriters” and “Consolidated Capitalization”.
There is currently no market through which the Common Shares may be sold and purchasers may not be able to resell Common Shares
purchased under this prospectus. This may affect the pricing of the Common Shares in the secondary market, the transparency and availability
of trading prices, the liquidity of the Common Shares and the extent of issuer regulation. See “Risk Factors”.
An investment in the Common Shares is speculative and involves a high degree of risk that should be considered by potential purchasers. The
Company’s business is subject to the risks normally encountered in the frac sand industry and the Company’s business of mining, processing and
transporting of frac sand. An investment in the Common Shares is suitable only for those purchasers who are willing to risk a loss of some or all
of their investment and who can afford to lose some or all of their investment. See “Risk Factors”.
TABLE OF CONTENTS
GENERAL ADVISORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
CONVENTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
EXCHANGE RATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iv
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
v
MARKET SHARE, INDUSTRY AND OTHER STATISTICAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .
x
SCIENTIFIC AND TECHNICAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
x
IFRS AND NON-IFRS MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xii
MARKETING MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xii
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xiii
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
CORPORATE STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
SELECTED HISTORICAL FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
MANAGEMENT’S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
DESCRIPTION OF SHARE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
DESCRIPTION OF INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
CONSOLIDATED CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
OPTIONS TO PURCHASE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
PRIOR SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON
TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
INDEBTEDNESS OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
STATEMENT OF CORPORATE GOVERNANCE PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
ELIGIBILITY FOR INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
RELATIONSHIP AMONG THE COMPANY AND CERTAIN UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . .
77
MARKET FOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
LEGAL PROCEEDINGS AND REGULATORY ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS . . . . . . . . . . . . . . . . . . .
100
AUDITORS, TRANSFER AGENT AND REGISTRAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
i
MATERIAL CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
PURCHASERS’ STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION . . . . . . . . . . . . . . . . . . . . .
102
APPENDIX “FS” FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND
ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-1
APPENDIX “A” DESCRIPTIONS OF THE MINERAL PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
APPENDIX “B” MANDATE OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B-1
APPENDIX “C” AUDIT COMMITTEE MANDATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C-1
CERTIFICATE OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CC-1
CERTIFICATE OF THE UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CU-1
CERTIFICATE OF THE TRIWEST SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CS-1
CERTIFICATE OF THE SOURCE SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CS-2
ii
GENERAL ADVISORY
An investor should read this entire prospectus and consult its own professional advisors to assess the income
tax, legal, risk factors and other aspects of its investment in the Common Shares.
An investor should rely only on the information contained in this prospectus and is not entitled to rely on parts
of the information contained in this prospectus to the exclusion of others. The Company, the Underwriters and the
Selling Shareholders have not authorized anyone to provide investors with additional or different information. If
anyone provides an investor with additional or different or inconsistent information, including statements in media
articles about the Company, the investor should not rely on it.
The Company, the Selling Shareholders and the Underwriters are not offering to sell the Common Shares in any
jurisdictions where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Common Shares. The
Company’s business, financial condition, results of operations and prospects may have changed since the date of this
prospectus.
For investors outside Canada, none of the Company, the Selling Shareholders or any of the Underwriters has done
anything that would permit the Offering, or possession or distribution of this prospectus, in any jurisdiction where
action for that purpose is required, other than in Canada. Investors are required to inform themselves about and to
observe any restrictions relating to the Offering and the distribution of this prospectus.
Investors are urged to read the information under the headings “Risk Factors”, “Forward-Looking
Statements” and “IFRS and Non-IFRS Measures” appearing elsewhere in this prospectus.
CONVENTIONS
Unless otherwise noted, all information in this prospectus gives effect to an Offering Price that is equal to the
midpoint of the range (being $18.50) of the anticipated Offering Price.
Unless otherwise noted or the context indicates otherwise, “Source” refers to the Company and its subsidiaries,
collectively (or prior to the closing of the Reorganization (as defined herein), to Source Canada LP (as defined herein),
with the concurrent surrender of the Class B Shares (as defined herein), and Source US LP (as defined herein), their
respective general partners and each of their respective subsidiaries and Berthold (as defined herein), an affiliated
entity, on a combined basis). See “Corporate Structure”.
Prior to the Closing, the Company will undergo a reorganization (the “Reorganization”) pursuant to which the
Company will acquire, directly or indirectly, all of the limited partnership interests of Source Canada LP other than the
Remaining Source Canada LP Units (as defined herein), all of the limited partnership interests of Source US LP and all
of the shares of Source Canada LP GP (as defined herein), of Source US LP GP (as defined herein) and of Berthold,
such that those entities will become subsidiaries of the Company. Unless otherwise noted, all information in this
prospectus gives effect to the Reorganization but does not give effect to the exercise of the Over-Allotment Option.
Unless otherwise noted or the context indicates otherwise, on a “basic basis” refers to the total amount of issued
and outstanding Common Shares as of the noted date and on a “fully-diluted basis” refers to the total amount of issued
and outstanding Common Shares as of the noted date assuming all in-the-money Options are exercised and all
Exchangeable LP Securities (as defined herein) have been exchanged for Common Shares.
Words importing the singular number include the plural and vice versa, and words importing any gender include
all genders, unless the context requires otherwise.
Unless otherwise indicated, all references to “$”, “dollars” or “Canadian dollars” refer to Canadian dollars and all
references to “US$” or “U.S. dollars” refer to United States dollars.
All financial information in this prospectus has been presented in accordance with IFRS (as defined herein).
iii
EXCHANGE RATE INFORMATION
The following table lists, for each period presented, the high and low exchange rate, the average exchange rate and
the exchange rate at the end of the period, in each case, for one Canadian dollar, expressed in U.S. dollars, based on the
noon spot exchange rate of the Bank of Canada:
Year ended December 31
2016
2015
2014
High for the period
Low for the period
End of the period
Average for the period(1)
$0.7972
$0.6854
$0.7488
$0.7548
$0.8527
$0.7148
$0.7225
$0.7820
$0.9422
$0.8589
$0.8620
$0.9054
Note:
(1) Calculated as an average of the daily Bank of Canada Noon Rates for each day during the respective period.
The exchange rate for one Canadian dollar, expressed in U.S. dollars on March 1, 2017, based on the noon spot
exchange rate of the Bank of Canada, was $1.00 = US$0.7493.
iv
FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus constitute “forward-looking statements” or “forward-looking
information” within the meaning of Applicable Securities Laws (as defined herein) (collectively, “forward-looking
statements”). These statements relate to the expectations of Management (as defined herein) about future events,
results of operations and Source’s future performance (both operational and financial) and business prospects. All
statements other than statements of historical fact are forward-looking statements. The use of any of the words
“anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”,
“shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and
“capable” and similar expressions are intended to identify forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially
from those anticipated in such forward-looking statements. No assurance can be given that these expectations will
prove to be correct and such forward-looking statements included in this prospectus should not be unduly relied upon.
These statements speak only as of the date of this prospectus. In addition, this prospectus may contain forward-looking
statements and forward-looking information attributed to third-party industry sources.
In particular, this prospectus contains forward-looking statements pertaining to the following:
• the Offering Price, the completion, size, expenses and timing of the Offering and the number of Common
Shares offered pursuant to each of the Treasury Offering and the Secondary Offering;
• the exercise of the Over-Allotment Option;
• the share capital of the Company following closing of the Offering;
• the gross and net proceeds of the Offering and the use of the net proceeds from the Treasury Offering;
• the timing for receipt of regulatory and stock exchange approvals and the execution of ancillary agreements in
connection with the Offering;
• the completion of the Reorganization and the Blair Facility Acquisition (as defined herein), and the timing
thereof;
• the anticipated benefits of the Blair Facility Acquisition;
• the characteristics of the assets and properties being acquired in connection with the Blair Facility Acquisition;
• the terms of the Blair Facility Acquisition;
• the transaction costs associated with the Blair Facility Acquisition;
• the pro forma operations, resources and capital expenditures of Source after completion of the Blair Facility
Acquisition;
• changes to laws and regulations affecting Source’s business;
• expectations regarding the price of proppants and sensitivity to changes in such prices;
• future debt levels, financial capacity, liquidity and capital resources;
• outlook for operations;
• future capital expenditures of customers and potential customers;
• future well count and associated sand demand and sales volumes;
• expectations respecting future competitive conditions;
• industry activity levels;
• cost and efficiency of rail fleet;
• anticipated future sources of funds to meet working capital requirements;
• future capital expenditures and contractual commitments;
• that Source will add additional unit train capable locations to its network;
v
• expectations respecting future financial results;
• expectations regarding benefits of certain transactions and capital investments
• Source’s objectives, strategies and competitive strengths;
• timing and development of Source’s capital projects;
• future development activities;
• potential acquisitions and dispositions of assets;
• Source’s growth strategy;
• Source’s targets for future growth;
• expectations with respect to future opportunities and stability;
• expectations with respect to Source’s financial position;
• Source’s capital expenditure programs and future capital requirements;
• expectations regarding contractual obligations and commitments and their expected timing of funding;
• Source’s current 2017/2018 capital budget and production expectations;
• future costs;
• the use of risk-management techniques, including hedging;
• expectations as to the remaining interest in the Company of the Major Shareholders following closing of the
Secondary Offering;
• Source’s estimates of future interest and foreign exchange rates;
• Source’s dividend policy, should one be adopted, including the sustainability of dividend payments and the
amount, timing and taxation of dividend payments;
• expectations that Source’s competitive advantages will yield successful execution of its business strategy;
• capital resources and the Company’s ability to raise capital;
• industry conditions pertaining to the frac sand industry;
• Source’s treatment under governmental regulatory regimes and tax laws;
• Source’s consultation with government and other stakeholders in respect of regulatory matters;
• Management;
• the economic interest of Management in the Company’s equity and the benefits thereof;
• Source’s future general and administrative expenses; and
• compensation arrangements.
With respect to forward-looking statements contained in this prospectus, assumptions have been made regarding,
among other things:
• proppant market prices;
• future oil, natural gas and natural gas liquids prices;
• future global economic and financial conditions;
• future commodity prices, demand for oil and gas and the product mix of such demand and levels of activity in
the oil and gas industry in the areas in which Source operates;
• the timing for receipt of regulatory and stock exchange approvals and the execution of ancillary agreements in
connection with the Offering;
vi
• Source’s ability to successfully complete and integrate the Blair Facility;
• the continued availability of timely and safe transportation for Source’s products, including without limitation,
rail accessibility;
• the maintenance of Source’s key customers and the financial strength of its key customers, the maintenance of
Source’s significant contracts or their replacement with new contracts on substantially similar terms and that
that contractual counterparties will comply with current contractual terms;
• operating costs;
• that the regulatory environment in which Source operates will be maintained in the manner currently anticipated
by Source;
• future exchange and interest rates;
• geological and engineering estimates in respect of Source’s resources;
• the recoverability of Source’s resources;
• the accuracy and veracity of information and projections sourced from third parties respecting, among other
things, future industry conditions and product demand;
• the geology of the areas in which Source is conducting its mining activities;
• demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and
procedures, particularly with respect to the use of proppants;
• Source’s ability to obtain qualified staff and equipment in a timely and cost-efficient manner;
• the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which
Source conducts its business and any other jurisdictions in which Source may conduct its business in the future;
• future capital expenditures to be made by Source;
• future sources of funding for Source’s capital program;
• production estimates at the Sumner Facility, the Weyerhaeuser Facility and, if acquired, the Blair Facility;
• Source’s future debt levels;
• the intentions of the Board (as defined herein) with respect to the executive compensation plans and corporate
governance programs described herein;
• the impact of competition on Source; and
• Source’s ability to obtain financing on acceptable terms.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of the
risk factors set forth below and included elsewhere in this prospectus, including:
• volatility in market prices and demand for oil, natural gas and natural gas liquids and the effect of this volatility
on the demand for frac sand;
• demand for frac sand during drilling and completion of oil and natural gas wells;
• effects of competition and pricing pressures;
• risks inherent in key customer dependence;
• effects of fluctuations in the price of proppants;
• possible failure to realize the anticipated benefits of the Blair Facility Acquisition;
• inability to complete the Blair Facility Acquisition on the terms specified or at all;
• potential undisclosed liabilities associated with the Blair Facility Acquisition;
vii
• risks related to indebtedness and liquidity, including Source’s leverage, restrictive covenants in the Credit
Agreement (as defined herein), the Note Indenture (as described herein) and Source’s capital requirements;
• potential non-renewal of the Credit Facilities under the Credit Agreement;
• risks related to interest rate fluctuations and foreign exchange rate fluctuations;
• changes in general economic, financial, market and business conditions in the markets in which Source
operates;
• changes in the technologies used to produce oil and natural gas;
• Source’s ability to obtain, maintain and renew required permits, licenses and approvals from regulatory
authorities;
• the stringent requirements of and potential changes to applicable legislation, regulations and standards;
• Source’s inability to comply and unexpected costs of complying with government regulations;
• liabilities resulting from Source’s operations;
• the results of litigation or regulatory proceedings that may be brought against Source;
• Source’s ability to successfully bid on new contracts and the loss of significant contracts;
• uninsured and underinsured losses;
• risks related to the transportation of Source’s products, including potential rail line interruptions or a reduction
in rail car availability;
• Source’s geographic and customer concentration;
• Source’s ability to retain and attract qualified management and staff in the markets in which it operates;
• labour disputes and work stoppages and risks related to employee health and safety;
• risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and
borrowing trends;
• competition in the mining industry for properties and qualified personnel;
• limited, unfavourable or a lack of access to capital markets;
• uncertainties inherent in estimating quantities of mineral resources;
• uncertainties relating to the interpretation of drill results and the geology, grade and continuity of our mineral
resources;
• sand processing problems;
• the realization of mineral resource estimates;
• the economic viability of the Sumner Facility, Weyerhaeuser Facility and, if acquired, the Blair Facility;
• the inherent risk in the mining business;
• uncertainties related to title to our mineral properties and surface rights;
• the use and suitability of Source’s accounting estimates and judgments;
• variance of Source’s actual capital costs, operating costs and economic returns from those anticipated;
• negative public perception of hydraulic fracturing and fossil fuels;
• actions by governmental authorities, including changes in government regulation, royalties and taxation;
• management of Source’s growth;
• the ability to successfully identify and make attractive acquisitions, joint ventures or investments, or
successfully integrate future acquisitions or businesses;
viii
• the absence or loss of key employees;
• operating hazards and uninsured risks;
• execution of Source’s business plan;
• limited intellectual property protection for operating practices and dependence on employees and contractors;
• third-party claims regarding Source’s right to use technology and equipment;
• failure to realize the anticipated benefits of acquisitions or dispositions;
• changes in the interpretation and enforcement of applicable laws and regulations;
• environmental, health and safety requirements;
• adoption or modification of climate change legislation by governments;
• potential conflicts of interests;
• actual results differing materially from Management estimates and assumptions;
• seasonality of the Canadian oilfield services industry;
• alternatives to and changing demand for petroleum products;
• extensive competition in Source’s industry;
• changes in Source’s credit ratings;
• dependence upon a limited number of customers;
• lower oil, natural gas and natural gas liquids prices and higher costs;
• commodity price hedging instruments;
• terrorist attack or armed conflict;
• loss of information and computer systems;
• inability to dispose of non-strategic assets on attractive terms;
• reassessment by taxing authorities of Source’s prior transactions and filings;
• variations in foreign exchange rates and interest rates;
• third-party credit risk including risk associated with counterparties in risk management activities related to
commodity prices and foreign exchange rates;
• sufficiency of insurance policies;
• litigation;
• variation in future calculations of non-IFRS measures;
• sufficiency of internal controls;
• third-party breach of confidentiality agreements;
• impact of expansion into new activities on risk exposure;
• inability of Source to respond quickly to competitive pressures;
• risks related to the Offering, including the potential absence of a liquid public market; the volatility in the price
of Common Shares; the discretion in the use of proceeds; the risk of no return on an investment in Common
Shares; the possible future dilution of the Common Shares; the effect of future sales of Common Shares by
Shareholders on the market price of the Common Shares; the limited ability of residents of the United States to
enforce civil remedies; the absence of any immediate plans to pay dividends; changes to the Company’s
dividend policy; and the potential inaccuracy of forward-looking statements contained in this prospectus; and
• the other factors discussed under “Risk Factors”.
ix
Readers are cautioned that the foregoing list of risk factors should not be construed as exhaustive.
Statements relating to Mineral Resources are deemed to be forward-looking statements, as they involve the
implied assessment, based on certain estimates and assumptions, that the Mineral Resources described exist in the
quantities predicted or estimated and that the Mineral Resources described might be able to be profitably produced in
the future.
PricewaterhouseCoopers LLP’s independent audit report included in this prospectus refers exclusively to Source’s
historical financial statements. The independent auditor’s report does not cover any other information in this prospectus
and should not be read to do so.
The forward-looking statements included in this prospectus are expressly qualified by this cautionary
statement and are made as of the date of this prospectus. The Company does not undertake any obligation to
publicly update or revise any forward-looking statements except as required by Applicable Securities Laws.
MARKET SHARE, INDUSTRY AND OTHER STATISTICAL INFORMATION
This prospectus includes market share, industry and other statistical information that Source has obtained from
independent industry publications, government publications, market research reports and other published independent
sources. Such publications and reports generally state that the information contained therein has been obtained from
sources believed to be reliable. Although Source believes these publications and reports to be reliable, it has not
independently verified any of the data or other statistical information contained therein, nor has it ascertained or
validated the underlying economic or other assumptions relied upon by these sources. Source has no intention and
undertakes no obligation to update or revise any such information or data, whether as a result of new information,
future events or otherwise, except as required by Applicable Securities Laws.
Source has obtained the consent of each of the Well Completions & Frac Database, geoSCOUT, DrillingInfo and
Wood Mackenzie Limited (“Wood Mackenzie”) to disclose certain information obtained from such databases and
services. All information obtained from the Well Completions & Frac Database is as of January 18, 2017; all
information from geoSCOUT is as of January 25, 2017; all information from Wood Mackenzie is as of February 7,
2017; and all information from DrillingInfo is as of the noted dates.
SCIENTIFIC AND TECHNICAL INFORMATION
The scientific and technical information in this prospectus that relates to the Sumner Facility (as defined herein)
and the Blair Facility (as defined herein) was estimated as of December 16, 2015 and as of February 12, 2017,
respectively, and has been approved by D. Roy Eccles, M. Sc P. Geol and Steven Nicholls, BA.Sc, MAIG, each full
time employees of APEX (as defined herein) and independent QPs (as defined herein), as set out in the Sumner APEX
Report (as defined herein) and the Blair APEX Report (as defined herein). Reference should be made to the full text of
the Sumner APEX Report and the Blair APEX Report, which are available under the Company’s profile at
www.sedar.com.
The scientific and technical information in this prospectus has been updated with current information, where
applicable. Unless otherwise indicated, all Mineral Resource estimates contained in such scientific and technical
information have been prepared in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy and
Petroleum Classification System (“CIM”) “Estimation of Mineral Resources and Mineral Reserves Best Practice
Guidelines” dated November 23, 2003 and CIM amended and adopted “Definition Standards for Mineral Resources
and Mineral Reserves” dated May 20, 2014 (the “CIM Definition Standards”). Without limiting the foregoing, such
scientific and technical information uses terms that comply with reporting standards in Canada and certain estimates
are made in accordance with NI 43-101. NI 43-101 is a rule developed by the Canadian Securities Administrators that
establishes standards for all public disclosure an issuer makes of scientific and technical information concerning
mineral projects.
x
CIM Definition Standards
The Mineral Resources for the properties discussed herein (including as used in the Sumner APEX Report and the
Blair APEX Report) have been estimated in accordance with the CIM Definition Standards. The following definitions
are reproduced from the CIM Definition Standards:
Indicated Mineral Resource means that part of a Mineral Resource for which quantity, grade or quality,
densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of
Modifying Factors (as defined herein) as described below in sufficient detail to support mine planning and evaluation
of the economic viability of the deposit. Geological evidence is derived from adequately detailed and reliable
exploration, sampling and testing and is sufficient to assume geological and grade or quality continuity between points
of observation. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured
Mineral Resource (as defined herein) and may only be converted to a Probable Mineral Reserve (as defined herein).
Inferred Mineral Resource means that part of a Mineral Resource for which quantity and grade or quality are
estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not
verify geological and grade or quality continuity. An Inferred Mineral Resource has a lower level of confidence than
that applying to an Indicated Mineral Resource (as defined herein) and must not be converted to a Mineral Reserve. It
is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral
Resources with continued exploration.
Measured Mineral Resource means that part of a Mineral Resource for which quantity, grade or quality,
densities, shape, and physical characteristics are estimated with confidence sufficient to allow the application of
Modifying Factors to support detailed mine planning and final evaluation of the economic viability of the deposit.
Geological evidence is derived from detailed and reliable exploration, sampling and testing and is sufficient to confirm
geological and grade or quality continuity between points of observation. A Measured Mineral Resource has a higher
level of confidence than that applying to either an Indicated Mineral Resource or an Inferred Mineral Resource. It may
be converted to a Proven Mineral Reserve (as defined herein) or to a Probable Mineral Reserve.
Mineral Resource means a concentration or occurrence of solid material of economic interest in or on the Earth’s
crust in such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction.
The location, quantity, grade or quality, continuity and other geological characteristics of a Mineral Resource are
known, estimated or interpreted from specific geological evidence and knowledge, including sampling.
Mineral Reserve means the economically mineable part of a Measured and/or Indicated Mineral Resource. It
includes diluting materials and allowances for losses, which may occur when the material is mined or extracted and is
defined by studies at pre-feasibility or feasibility level as appropriate that include application of Modifying Factors.
Such studies demonstrate that, at the time of reporting, extraction could reasonably be justified. The reference point at
which Mineral Reserves are defined, usually the point where the ore is delivered to the processing plant, must be
stated. It is important that, in all situations where the reference point is different, such as for a saleable product, a
clarifying statement is included to ensure that the reader is fully informed as to what is being reported. The public
disclosure of a Mineral Reserve must be demonstrated by a pre-feasibility study or feasibility study.
Probable Mineral Reserve means the economically mineable part of an Indicated Mineral Resource, and in some
circumstances, a Measured Mineral Resource. The confidence in the Modifying Factors applying to a Probable Mineral
Reserve is lower than that applying to a Proven Mineral Reserve.
Proven Mineral Reserve means the economically mineable part of a Measured Mineral Resource. A Proven
Mineral Reserve implies a high degree of confidence in the Modifying Factors.
For the purposes of the CIM Definition Standards, “Modifying Factors” are considerations used to convert
Mineral Resources to Mineral Reserves. These include, but are not restricted to, mining, processing, metallurgical,
infrastructure, economic, marketing, legal, environmental, social and governmental factors.
Source has not based its production decisions and ongoing mine production on Mineral Reserve estimates,
preliminary economic assessments, pre-feasibility studies or feasibility studies. As a result, there may be an
increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and
historically projects without any Mineral Reserves have increased uncertainty and risk of failure. Mineral
xi
Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or
any part of the Mineral Resources described in this prospectus will be converted into a Mineral Reserve. The estimate
of Mineral Resources may be materially affected by the considerations mentioned directly above.
IFRS AND NON-IFRS MEASURES
This prospectus refers to certain financial measures that are not determined in accordance with IFRS. These
financial measures do not have standardized meanings prescribed by IFRS and Source’s method of calculating these
measures may differ from the method used by other entities and, accordingly, they may not be comparable to similar
measures presented by other companies. These financial measures should not be considered as an alternative to, or
more meaningful than, net income (loss), gross margin and other measures of financial performance as determined in
accordance with IFRS as an indicator of performance, but Source believes these measures are useful to both
Management and investors in providing relative performance and measuring changes in respect of Source as well as
measuring Source’s financial performance in the context of the capital spending necessary to maintain and grow its
assets.
Adjusted EBITDA represents, for the period presented, EBITDA as adjusted to add back or deduct, as applicable,
the following expenses, costs, charges or benefits incurred in such period which in Management’s view are not
indicative of the underlying business performance: (a) finance expense excluding interest expense; (b) Management
Fee; (c) fair value adjustment of the SES Shareholder Loan; (d) loss (gain) on asset disposal; (e) loss (gain) on
impairment; (f) infrequent transaction and professional fees; and (g) loss (gain) on derivative liability.
EBITDA represents, for the period presented, net income (loss) plus: (a) income taxes; (b) interest expense;
(c) cost of sales — depreciation; (d) depreciation; and (e) amortization, in each case to the extent deducted from net
income in such period determined on a combined basis in accordance with IFRS.
Adjusted Gross Margin represents, for the period presented, gross margin plus costs of sales —depreciation.
This prospectus makes reference to these non-IFRS measures. These non-IFRS measures and other financial
estimates of Management are based upon variable components. There can be no assurance that these components and
future calculations of non-IFRS measures will not vary.
EBITDA and Adjusted EBITDA are used by Management to evaluate the operating performance of the business,
excluding the impacts of its capital structure, tax structure and financing structure as its operating staff do not have
control over those elements of the business. The use of EBITDA and Adjusted EBITDA also provide this insight to
investors. Management uses Adjusted Gross Margin as a measure of profitability in monitoring its business.
Investors are cautioned not to consider these non-IFRS measures in isolation or place undue reliance on ratios or
percentages calculated using these non-IFRS measures. These non-IFRS measures should be read in conjunction with
Source’s audited and unaudited financial statements and the accompanying notes included in this prospectus under
Appendix “FS” — Financial Statements and Management’s Discussion and Analysis. See “Selected Historical
Financial Information” and Source’s management’s discussion and analysis for a reconciliation of such financial
measures at the noted periods.
MARKETING MATERIALS
Any “template version” of any “marketing materials” (as such terms are defined under Applicable Securities
Laws) that are utilized by the Underwriters in connection with the Offering are not part of this prospectus to the extent
that the contents of the template version of the marketing materials have been modified or superseded by a statement
contained in this prospectus. Any template version of any marketing materials that has been, or will be, filed under the
Company’s profile at www.sedar.com before the termination of the distribution under the Offering (including any
amendments to, or an amended version of, any template version of any marketing materials) is deemed to be
incorporated into this prospectus.
xii
GLOSSARY
Please see “IFRS and Non-IFRS Measures” for definitions of certain non-IFRS measures and “Scientific and
Technical Information” for definitions of certain scientific technical terms used in this prospectus. In this prospectus,
unless otherwise indicated or the context otherwise requires, the following terms have the meaning set forth below:
20/40 mesh frac sand means sand that passes through a sieve with 20 holes per linear inch and is retained by a sieve
with 40 holes per linear inch.
30/50 mesh frac sand means sand that passes through a sieve with 30 holes per linear inch and is retained by a sieve
with 50 holes per linear inch.
40/70 mesh frac sand means sand that passes through a sieve with 40 holes per linear inch and is retained by a sieve
with 70 holes per linear inch.
50/140 mesh frac sand means sand that passes through a sieve with 50 holes per linear inch and is retained by a sieve
with 140 holes per linear inch.
70/140 mesh frac sand means sand that passes through a sieve with 70 holes per linear inch and is retained by a sieve
with 140 holes per linear inch.
APEX means Apex Geoscience Ltd.
API means the American Petroleum Institute.
ABCA means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as amended, including the regulations
promulgated thereunder.
Applicable Securities Laws means all applicable securities laws, the respective regulations, rules and orders made
thereunder, and all applicable policies and notices issued by the securities regulatory authorities in Canada.
Audit Committee means the Audit Committee of the Board.
Bank Agent means Bank of Montreal acting as administrative agent on behalf of the Lenders under the Credit
Agreement.
Basket has the meaning ascribed to such term under “Business — Blair Facility Acquisition — Blair Purchase
Agreement — Indemnification”.
Berthold means Berthold Transload Inc., a Delaware corporation currently owned by certain members of Management
and their affiliates, the MFT 2 Family Trust, SES Canada LP and SES US LP.
Blair APEX Report means the technical report in respect of the Blair Facility prepared by APEX titled “Technical
Report, Geological Introduction to Source Energy Services Silica (Frac) Sand Properties in Trempealeau County,
Wisconsin, United States, and a Maiden Inferred Resource Estimate for the Highway 53 Property” dated February 12,
2017.
Blair Facility means SPC’s Northern White frac sand mine and related closed-loop wet processing plant (including
three washing circuits), dry processing plant and unit train capable loadout facility located in or around Blair,
Wisconsin and all related or associated assets and real property.
Blair Facility Acquisition has the meaning ascribed to such term under “Business — Blair Facility Acquisition —Blair
Purchase Agreement”.
Blair Facility Acquisition Closing Date has the meaning ascribed to such term under “Business — Blair Facility
Acquisition — Blair Purchase Agreement”.
Blair Option Exercise has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Information Concerning the Blair Facility Acquisition — Ancillary Properties”.
Blair Purchase Agreement has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Blair Purchase Agreement”.
BMO means BMO Nesbitt Burns Inc.
xiii
Board or Board of Directors means the board of directors of the Company.
Breach has the meaning ascribed to such term under “Business — Blair Facility Acquisition — Blair Purchase
Agreement — Termination”.
BTU means British Thermal Unit.
CAA means the United States Clean Air Act.
Cash RTR Payment has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness
outstanding following the Offering — Notes — Relevant Transaction Rights”.
CDS means CDS Clearing and Depository Services Inc.
CEO means the Chief Executive Officer of the Company.
CFO means the Chief Financial Officer of the Company.
CIM means Canadian Institute of Mining Metallurgy and Petroleum.
CIM Definition Standards means the CIM amended and adopted “Definition Standards for Mineral Resources and
Mineral Reserves” dated May 20, 2014.
Class B Founder has the meaning ascribed to such term under “Corporate Structure — Source”.
Class B Founder Payment has the meaning ascribed to such term under “Corporate Structure —Reorganization”.
Class B Founder Trust has the meaning ascribed to such term under “Corporate Structure — Source”.
Class B Shares means the class B shares in the capital of the Company as constituted on the date hereof.
Closing means the closing of the Offering, which is expected to occur on or about Š, 2017.
Closing Date means the date on which Closing occurs.
CMSA has the meaning ascribed to such term under “Legal Proceedings and Regulatory Actions”.
CMSA Customer has the meaning ascribed to such term under “Legal Proceedings and Regulatory Actions”.
CN or CN Railway means Canadian National Railway Company.
Common Shares means the common shares in the capital of the Company as constituted on the date hereof.
Common Shares RTR Payment has the meaning ascribed to such term under “Description of Indebtedness —
Indebtedness outstanding following the Offering — Notes — Relevant Transaction Rights”.
Company means Source Energy Services Ltd.
Compensation and Corporate Governance Committee means the Compensation and Corporate Governance
Committee of the Board.
Credit Agreement means the second amended and restated credit agreement with the Lenders and the Bank Agent as
administrative agent on behalf of the Lenders providing for the Credit Facilities, made as of December 8, 2016.
Credit Facilities means the two facilities in an aggregate principal amount of $41,650,000 (U.S. dollar denominated
facility represented at $1.33/US$1.00). Such facilities include (a) a revolving credit facility (the “Revolver
Commitment”), with availability thereunder subject to the limit of the lesser of: (i) $35,000,000 (which includes a
swingline with a sublimit of $5,000,000) (the “Revolver Limit”); and (ii) the borrowing base, to be used to finance day
to day operations of Source Canada LP and its subsidiaries and for general working capital requirements, including
financing receivables, inventory and capital expenditures that have been approved by the Lenders, and (b) a
US$5,000,000 standby letter of credit facility (the “SBLC Facility”) to be used to issue one or more standby letters of
credit.
Credit Facilities Guarantors has the meaning ascribed to such term under “Description of Indebtedness —
Indebtedness outstanding following the Offering — Credit Facilities”.
D95 Properties means two additional land leases located near the Blair Facility.
D95 North Property means the northerly land lease forming part of the D95 Properties.
xiv
Deep Basin means the region of the WCSB, generally extending northwest from west Central Alberta, from where oil
and natural gas can be produced from deep and multiple zones using unconventional well designs and completions.
Deferred Plans means trusts governed by an RRSP, RRIF, TFSA (as such terms are defined herein), registered
education savings plan, registered disability savings plan or deferred profit sharing plan (as such terms are defined in
the Tax Act), and Deferred Plan means any one of them.
Defect has the meaning ascribed to such term under “Business — Blair Facility Acquisition — Blair Purchase
Agreement — Purchase Price”.
Demand Distribution has the meaning ascribed to such term under “Principal Shareholders — Distribution and
Nomination Rights — Distribution Rights Agreement”.
Demanding Shareholder has the meaning ascribed to such term under “Principal Shareholders — Distribution and
Nomination Rights — Distribution Rights Agreement”.
Distribution Rights Agreement means the distribution rights agreement to be entered among the Company,
TriWest IV, Jim McMahon, Brad Thomson, Derren Newell, Scott Melbourn and Joe Jackson.
Distribution Rights Shareholders means, collectively, TriWest IV, Jim McMahon, Brad Thomson, Derren Newell,
Scott Melbourn and Joe Jackson.
dry processing plant means an industrial site where washed sand product is fed through a dryer and screening system
to be dried and screened in varying gradations. The finished product that emerges from the dry plant is then stored
before being transported to customers.
Duvernay means the Duvernay formation, a stratigraphic zone in the WCSB.
DSU means a deferred share unit granted under the LTIP.
Earnest Money has the meaning ascribed to such term under “Business — Blair Facility Acquisition —Blair Purchase
Agreement — Purchase Price”.
EPA means the United States Environmental Protection Agency.
Exchangeable LP Securities means the units of SES US LP held by TriWest IV US Fund LP following the closing of
the Reorganization.
frac sand means naturally-occurring sand utilized as proppant in the process of fracturing oil and natural formations as
part of the well completion process.
GHG means greenhouse gases.
hydraulic fracturing means the process of pumping fluids, mixed with granular proppants, into a geological formation
at pressures sufficient to create fractures in the hydrocarbon-bearing rock.
Health, Safety and Environment Committee means the Health, Safety and Environment Committee of the Board.
IFRS means International Financial Reporting Standards as issued by the International Accounting Standards Board
and implemented in Canada through the Accounting Recommendations in the Chartered Professional Accountants of
Canada Handbook.
Indemnity Cap has the meaning ascribed to such term under “Business — Blair Facility Acquisition —Blair Purchase
Agreement — Indemnification”.
IPO Amount has the meaning ascribed to such term under “Description of Indebtedness — Indebtedness outstanding
following the Offering — Notes — Relevant Transaction Rights”.
ISO means the International Organization for Standardization, a developer and publisher of international standards.
Lead Underwriters means, collectively, Scotia, Morgan Stanley and BMO.
Lenders means the syndicate of lenders party from time to time to the Credit Agreement.
xv
LTIP means the long term incentive plan of the Company to be adopted in connection with the Reorganization.
Lock-Up Agreements means the lock-up agreements to be dated as of the Closing Date between the Company, the
Underwriters, and the Locked-Up Shareholders.
Locked-Up Shareholders means each of the Shareholders immediately after the completion of the Reorganization but
before the closing of the Offering (the “Relevant Time”), including the Selling Shareholders, and each of the holders
at the Relevant Time of any securities convertible, exchangeable or otherwise exercisable into Common Shares or other
equity securities of the Company (and any Common Shares that may be acquired on exchange of Exchangeable LP
Securities), as well as each of the Company’s directors, officers and senior management (together with their respective
associates and affiliates).
Major Shareholders means, collectively, Triwest IV and its affiliates and Jim McMahon and his affiliates (including
the MFT 2 Family Trust, 2024747 Alberta Ltd. and 2024748 Alberta Ltd.).
Management means the management of Source.
Management Fee has the meaning ascribed to such term under “Corporate Structure — Source”.
Market Price means, in respect of Options only, (a) on and after the date of this prospectus and up to and including the
Closing Date, the Offering Price; and (b) for any particular day following the Closing Date, the volume weighted
average trading price of the Common Shares on the TSX, or such other exchange on which the Common Shares are
listed and posted for trading and on which the majority of the trading volume and value of the Common Shares occurs,
for the five trading days immediately preceding the date on which the Option is granted. In the event that the Common
Shares are not traded on an exchange following the Closing Date, then the Market Price shall be the fair market value
of the Common Shares as determined by the Board in its sole discretion, acting reasonably and in good faith.
McMahon Nomination Agreement means the nomination agreement to be entered between the Company and Jim
McMahon.
metric tonne or MT means one metric tonne or 1,000 kilograms (equivalent to approximately 1.102 short tons or
approximately 2,205 pounds).
mmbbl/d means one million barrels per day.
monocrystalline means consisting of a single crystal rather than multiple crystals bonded together (polycrystalline).
Monocrystalline frac sand typically exhibits higher crush strength than polycrystalline sand, as these structures are
more prone to breaking down under high pressures than a single crystal.
Montney means the Montney formation, a stratigraphic zone in the WCSB.
Morgan Stanley means Morgan Stanley Canada Limited.
MSHA means the United States Mining Safety and Health Administration.
Named Executive Officers or NEOs means the CEO, the CFO, and each of the Company’s three other most highly
compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other
than the CEO and CFO, who served as executive officers in the most recently completed financial year and whose total
salary and bonus exceeded $150,000.
NI 41-101 means National Instrument 41-101 — General Prospectus Requirements.
NI 43-101 means National Instrument 43-101 — Standards of Disclosure for Mineral Projects.
NI 52-110 means National Instrument 52-110 — Audit Committees.
NI 58-101 means National Instrument 58-101 — Disclosure of Corporate Governance Practices.
Non-TriWest Holding Corporations has the meaning ascribed to such term under “Corporate Structure —Source”.
Notes means the $130 million aggregate principal amount of 10.5% Senior Secured First Lien Notes due December 15,
2021 issued by the Note Issuers.
Note Indenture means the trust indenture dated December 8, 2016, between the Note Issuers and Computershare Trust
Company of Canada, as trustee and collateral agent.
xvi
Note Issuers means Source Canada LP and Source Canada Holdings.
Note Offering means the offering of the Notes which was completed on December 8, 2016.
Notes 35% Optional Redemption has the meaning ascribed to such term under “Description of Indebtedness —
Indebtedness outstanding following the Offering — Notes — General”.
Offering means, collectively, the Treasury Offering and the Secondary Offering.
Offering Price means $Š.
OPEC means Organization of the Petroleum Exporting Countries.
Option means an option to purchase a Common Share granted under the Option Plan.
Option Plan means the stock option plan of the Company to be adopted in connection with the Reorganization.
Over-Allotment Option means, collectively, the option granted by the Selling Shareholders to the Underwriters to
purchase from the Selling Shareholders, at the Offering Price, up to an additional Š Common Shares (representing 15%
of the Offering), all as more particularly described herein under the heading “Plan of Distribution”.
Participating Shareholder has the meaning ascribed to such term under “Principal Shareholders — Distribution and
Nomination Rights — Distribution Rights Agreement”.
Piggyback Distribution has the meaning ascribed to such term under “Principal Shareholders — Distribution and
Nomination Rights — Distribution Rights Agreement”.
Prepayment Note has the meaning ascribed to such term under “Legal Proceedings and Regulatory Actions”.
Previous Credit Facility means the senior secured credit facility with Bank of Montreal, as agent, pursuant to an
amended and restated credit agreement dated as of December 21, 2015, which was repaid in full in connection with the
Note Offering and the credit agreement governing the Previous Credit Facility was amended and restated, creating the
Credit Agreement.
Prior EEPP Unit means an irrevocable right to acquire one-tenth of a class C unit in the capital of Source Canada LP
granted under the Prior Employee Equity Participation Plan to certain employees of Source Canada LP.
Prior EEPP Unit Holders Payment has the meaning ascribed to such term under “Corporate Structure —
Reorganization”.
Prior Employee Equity Participation Plan means the employee equity participation plan of Source Canada LP dated
October 16, 2013, under which, following Closing, no further awards will be granted.
proppant means a sized particle mixed with fracturing fluid to hold fractures open after a hydraulic fracturing
treatment.
PSU means a performance share unit granted under the LTIP.
QP means Qualified Person within the meaning of NI 43-101.
Remaining Source Canada LP Units means the Source Canada LP limited partnership units retained by
SES US Corp. following the closing of the Reorganization.
Reorganization has the meaning ascribed to such term under “Conventions”.
Restricted Group means, collectively, Source Canada LP, Source US LP, Source Energy Services Canadian Logistics
LP GP Ltd., Source Energy Services Canadian Chemical LP GP Ltd., Source Energy Services US GP Ltd., Source
Energy Services US Chemical GP, Inc. and Berthold with each of their respective and existing subsidiaries.
RRIF means a registered retirement income fund as defined in the Tax Act.
RRSP means a registered retirement savings plan as defined in the Tax Act.
RSU means a restricted share unit granted under the LTIP.
Sahara means Source’s proprietary wellsite mobile proppant storage and handling system.
Sand Products means Sand Products Wisconsin, LLC.
xvii
Sand Royalty Loan has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness to be
repaid in connection with the Offering — Sand Royalty Loan”.
Scotia means Scotia Capital Inc.
Secondary Offering means the public offering of an aggregate of Š Common Shares held by the Selling Shareholders
pursuant to this prospectus.
Seller means West Michigan Sand Holdings LLC.
Seller Indemnification Parties means, collectively, the Seller, SPC and VPC.
Seller Indemnified Losses has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Blair Purchase Agreement — Indemnification”.
Seller Indemnified Parties has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Blair Purchase Agreement — Indemnification”.
Selling Shareholders means, collectively, the TriWest Selling Shareholders and the Source Selling Shareholders.
SES Canada LP means SES Sand Holdings (Canada) LP.
SES Canada 2 LP means SES Sand Holdings 2 (Canada) LP.
SES Canada 3 LP means SES Sand Holdings 3 (Canada) LP.
SES Canada Corp. means SES Sand Holdings (Canada) Inc.
SES II Shareholder Loan has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness
to be repaid in connection with the Offering — Shareholder Loans”.
SES III Shareholder Loans has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness
to be repaid in connection with the Offering — Shareholder Loans”.
SES IV Shareholder Loans has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness
to be repaid in connection with the Offering — Shareholder Loans”.
SES Shareholder Loan has the meaning ascribed to such term under “Description of Indebtedness —Indebtedness to
be repaid in connection with the Offering — Shareholder Loans”.
SES US Corp. means SES Sand Investments (US) Ltd.
SES US LP means SES Sand Holdings (US) LP.
Shareholder Loans means, collectively, the SES Shareholder Loan, the SES II Shareholder Loan, the SES III
Shareholder Loans and the SES IV Shareholder Loans.
Shareholders means the holders of Common Shares from time to time.
Source has the meaning ascribed to such term under “Conventions”.
Source Canada Exchange Agreement has the meaning ascribed to such term under “Corporate Structure —
Reorganization”.
Source Canada Holdings means Source Energy Services Canada Holdings Ltd.
Source Canada LP means Source Energy Services Canada LP.
Source Canada LP Class B Units means the class B non-voting units in the capital of Source Canada LP, which are
entitled to following preferred distributions: (a) 5.92% per annum up to June 30, 2016; (b) 6.82% per annum from
July 1, 2016 to June 30, 2017; (c) 7.7% per annum from July 1, 2017 to June 30, 2018; and (d) 8.59% per annum from
July 1, 2018 and thereafter.
Source Canada LP GP means Source Energy Services Canada LP GP Ltd.
Source GP Holding Company means SES Sand Holdings GP Ltd.
xviii
Source Indemnified Losses has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Blair Purchase Agreement — Indemnification”.
Source Indemnified Parties has the meaning ascribed to such term under “Business — Blair Facility Acquisition —
Blair Purchase Agreement — Indemnification”.
Source Selling Shareholders means, collectively, 2024747 Alberta Ltd., 2024748 Alberta Ltd., 2024749 Alberta Ltd.
and 2024750 Alberta Ltd, corporations which are owned or controlled by Jim McMahon, MFT 2 Family Trust and
members of Management. See “Corporate Structure – Source”.
Source US LP means Source Energy Services US LP.
Source US LP GP means Source Energy Services US II LP GP Ltd.
SPC means Sand Products Corporation.
sphericity means a measure of how well an object is formed in a shape where all points are equidistant from the center.
The more spherical a proppant, the less likely it will be to restrict the flow of hydrocarbons.
spring breakup means the spring thaw that makes the ground less stable and less capable of supporting heavy
weighted equipment.
Sumner APEX Report means the technical report in respect of the Sumner Facility prepared by APEX titled
“Technical Report, Indicated and Inferred Resource Estimate for Source Energy Services Silica (Frac) Sand Deposit in
Wisconsin, United States” dated December 16, 2015.
Sumner Facility has the meaning ascribed to such term under “Prospectus Summary — Business”.
Tax Act means the Income Tax Act (Canada), R.S.C. 1985, c-1 (5th Supp.), as amended, including the regulations
promulgated thereunder.
TFSA means a tax-free savings account as defined in the Tax Act.
Treasury Offering means the public offering of Š Common Shares by the Company pursuant to this prospectus.
TriWest Capital means TriWest Capital Partners IV (2011) Inc.
TriWest IV means, collectively, TriWest IV Canada Fund LP, TriWest IV US Fund LP, SES Canada LP, SES Canada
2 LP, and SES Canada 3 LP.
TriWest IV Canada Fund LP means TriWest Capital Partners IV, L.P.
TriWest IV US Fund LP means TriWest Capital Partners IV (US), L.P.
TriWest Nomination Agreement means the nomination agreement to be entered between the Company and TriWest
IV.
TriWest Selling Shareholders means, collectively, SES Canada 2 LP, SES Canada 3 LP and TriWest IV US Fund LP.
TSX means the Toronto Stock Exchange.
U.S. or United States means the United States of America, its territories and possessions, any state of the United States
and the District of Columbia.
U. S. Securities Act means the United States Securities Act of 1933, as amended.
U. S. Tax Code means the United States Internal Revenue Code of 1986, as amended.
Underwriters means, collectively, the Lead Underwriters, CIBC World Markets Inc., Goldman Sachs Canada Inc.,
Raymond James Ltd., RBC Dominion Securities Inc., Canaccord Genuity Corp., AltaCorp Capital Inc., Cowen and
Company, LLC, GMP Securities L.P. and Peters & Co. Limited.
Underwriting Agreement means the underwriting agreement dated Š, 2017 among the Company, the Selling
Shareholders and the Underwriters.
Underwriters’ Commission means the cash commission to be received by the Underwriters, equal to 5.5% of the
gross proceeds of the Offering and payable to the Underwriters pursuant to the Underwriting Agreement.
VPC means Verplank Dock Co.
xix
WCSB means the Western Canadian Sedimentary Basin.
Wembley Terminal means Source’s unit train capable terminal located in Wembley, Alberta.
Weyerhaeuser Facility has the meaning ascribed to such term under “Prospectus Summary — Business”.
Wood Mackenzie has the meaning ascribed to such term under “Market Share, Industry and Other Statistical
Information”.
xx
PROSPECTUS SUMMARY
The following is a summary of the principal features of the Offering and is qualified by and should be read
together with the more detailed information, reserves, resources and financial data and statements contained
elsewhere in this prospectus. Capitalized terms used herein shall have the meaning ascribed thereto under the
heading “Glossary”.
Business
Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a
preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells.
Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal
network, which Source believes is the largest of its kind in the WCSB. Source currently has the capability to produce
over two million metric tonnes per annum of Northern White frac sand at its Sumner and Weyerhaeuser facilities and,
in the event the Blair Facility Acquisition is completed, Source expects its production capacity of Northern White frac
sand to increase to over three million metric tonnes per annum. Source’s fully integrated logistics platform enables it to
transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that during
2016, Source sold substantially all of its product in-basin and over 50% of its product directly at its customers’
wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver
sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably
deliver high volumes of frac sand to its customers in a cost-effective manner.
Source owns and operates seven strategically located transload terminals in the WCSB with total storage capacity
of over 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned
expansions in 2017 and 2018) and annual throughput capacity of over 3.3 million metric tonnes per year (which Source
expects will increase to over 4.7 million metric tonnes following planned expansions in 2017 and 2018), all of which
are serviced by CN, which is the only Class I railway that effectively services the Montney, Duvernay and Deep Basin,
which are three of the most active oil and natural gas development regions in the WCSB. Furthermore, Source
estimates that its terminals accounted for more than half of the total throughput capacity of all terminals located in the
proppant-intensive Montney, Duvernay and Deep Basin plays. Source believes that having a network of terminals in
close proximity to key producing regions is a critical element of its customer service strategy, which allows it to
rapidly respond to customer demand and helps to ensure reliable and timely delivery of product. Source believes that
the in-basin storage capacity of its terminal network is approximately four times the size of Source’s largest competitor
in the WCSB.
Source owns and operates a Northern White frac sand mine and related closed-loop wet processing plant, which
includes three washing circuits, located in east-central Barron County near the town of Sumner, Wisconsin (the
“Sumner Facility”) and a dry processing plant, storage and loadout facility located in Weyerhaeuser, Wisconsin (the
“Weyerhaeuser Facility”). In addition, Source expects to complete the Blair Facility Acquisition in connection with or
immediately following Closing, which includes a Northern White frac sand mine with associated processing and unit
train capable rail loading facilities. In the event the Blair Facility Acquisition is completed, Source would have an
expected total annual production capacity of over three million metric tonnes. Both the Weyerhaeuser Facility and the
Blair Facility, with on-site rail infrastructure, have direct access to the CN, enabling Source to process and costeffectively deliver frac sand to customers through its integrated logistics network. Both the Weyerhaeuser Facility and
the Blair Facility are capable of loading and shipping unit trains, allowing for significantly more efficient
transportation of frac sand to Source’s terminals in the WCSB.
In addition to its transload terminal network, Source has developed Sahara, a proprietary wellsite mobile sand
storage and handling system. Sahara offers significant competitive advantages over many traditional wellsite storage
systems, such as decreased unloading times for trucks delivering proppant to the wellsite, reduced physical footprint,
reduced proppant damage and increased ability to store multiple types of proppant. Despite Sahara’s small physical
footprint, the system offers a storage capacity of approximately 1,800 metric tonnes, which Management believes is
greater than that of many competitor systems, and can be loaded significantly faster than pneumatic systems.
Additionally, the system is recognized for its ability to reduce silica dust (a significant health concern), reduce noise
and reduce truck traffic at the wellsite (a significant safety concern). Source has received positive customer feedback
-1-
on Sahara and intends to continue to build out its fleet over the coming years to meet anticipated demand. Source has
applied for a number of patents in respect of the Sahara.
See “Business”.
Competitive Strengths
Source believes that the following competitive strengths help it to execute its business strategies:
• Fully Integrated Network Positioned to Capture Value Throughout the Proppant Supply Chain. Source
believes it is the leading fully integrated supplier and distributer of frac sand in the WCSB providing an
end-to-end solution through its processing facilities, rail assets, leading terminal network and “last mile”
logistics capabilities. Source’s full service approach allows customers to rely on its logistics capabilities to
increase the reliability and timeliness of delivery of frac sand as part of their well completion programs.
Source’s integrated network enabled it to sell substantially all of its product in-basin and nearly 50% of its
product at its customers’ wellsites in 2016.
• Intrinsic Logistics Advantages Created Through First Mover Advantage. Source’s seven Canadian terminals,
strategically located within key producing regions in the WCSB, provide a competitive and first mover
advantage through extensive coverage and throughput capacity, enabling cost-effective delivery of frac sand
directly to customers’ wellsites. In northern Alberta and British Columbia, the number of potential terminal
locations is limited by the remoteness of the geography and challenging topography. Source has secured
locations that it believes are advantaged, where the CN and highway infrastructure intersect. With more than
90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned
expansions in 2017 and 2018) of storage capacity, which Source believes represents approximately four times
the amount of its largest competitor, Source is able to meet demand peaks from its customer base and manage
supply backlog associated with well completion delays.
• Direct Access to High-Quality Northern White Sand Supply through Strategically Located Mining and
Processing Facilities. The Sumner Facility and the Blair Facility are each situated on the CN and provide direct
rail access to the WCSB, including full unit train loading capability at the Weyerhaeuser Facility. With all of
Source’s mining and processing capacity situated on the CN, Source is able to create optimal origin-destination
pairs with its expansive WCSB terminal network, which is also situated on the CN.
• Trusted and Embedded Partner with Its Customers. Source is a trusted partner of, and has developed
significant relationships with, leading exploration and production companies and pressure pumpers in Canada.
Source believes that it has contributed to its reputation for dependability and high-quality products and services
through a long track record of timely delivery of frac sand to the wellsites according to customer specifications.
Source believes customers value Source’s substantial scale, extensive logistics network and wellsite solutions to
meet their frac sand demand for their well completion programs.
• Strong Balance Sheet and Ability to Capitalize on Opportunities to Reinforce Leading Position in the WCSB.
Source believes that, following the Offering, Source will have a strong balance sheet and ample liquidity to
pursue organic and external growth initiatives to build on its leading position in the WCSB. Source has a
demonstrated track record of pursuing external growth to expand throughout the proppant supply chain. Source
intends to continue this strategy, which will reinforce and expand Source’s leading market position in the
WCSB.
• Experienced Management Team with a Track Record of Delivering Results. Source’s experienced
Management has over 75 years of collective relevant experience, extensive industry knowledge and a proven
track record of operational success. Source’s Management has built Source into a leading fully integrated frac
sand supplier in Canada through mine development, capacity expansions and investments in logistics
infrastructure.
See “Business — Competitive Strengths”.
-2-
Business Strategies
Source’s principal business objective is to be a highly efficient and reliable supplier of delivered frac sand in the
WCSB. Key elements of Source’s strategy include:
• Capitalize on Trends in Increased Frac Sand Intensity. Source believes that its leading terminal network,
which Source believes is the largest of its kind in the WCSB, along with its focus on logistics and ability to
efficiently deliver sand directly to the wellsite, attractively position Source to capitalize on trends in increased
frac sand intensity. Exploration and production companies continue to increase well completion proppant
intensities such that in the Montney and Duvernay, for instance, proppant used per well has increased by
approximately 91% and 86%, respectively, from 2013 to the first quarter of 2016 according to the Well
Completions & Frac Database. As customers demand more proppant for well completions, Source believes that,
over time, customers will prefer to consolidate their purchases of frac sand to fully integrated suppliers with
robust logistics capabilities such as Source.
• Increase Leading Market Share Position in Growing WCSB Market. Source intends to continue to position
itself as the leading producer, supplier and distributor of high-quality Northern White frac sand into the WCSB.
Source intends to grow its WCSB position by identifying and executing on organic and external growth
opportunities. Source will continue to evaluate economically attractive proppant supply chain enhancement
opportunities, including additional terminals, Sahara units, mines and sand processing capacity.
• Focus on Offering Superior Logistics and Terminal Flexibility. Source believes it offers a superior logistics
solution to customers by providing substantially all of its product in-basin and over 50% of product at the
wellsite. Logistical capabilities have become an important differentiating factor for frac sand customers, who
increasingly seek convenient in-basin and/or at-the-wellsite proppant delivery capability from suppliers. Source
believes that its dedicated focus on offering a superior logistical solution directly caters to the needs of
exploration and production companies and oilfield service providers.
• Build-Out In-Basin Terminal Network. Source intends to continue to invest in terminals, storage, and rail
infrastructure to meet the growing proppant demand needs of customers. When evaluating new terminal
locations, Source carefully considers their proximity to exploration and production companies’ drilling and
completion activities, as well as the anticipated frac sand intensity used in the development of these oil and
natural gas resources. Recently, Source has identified and entered into agreements to secure three additional
locations that are suitable for developing into unit train capable terminals. The development of these terminals
will allow Source to increase the amount of sand sold to customers operating in the Montney and Duvernay.
These additional terminals are expected to be placed into service in 2017 and Source believes these terminals
are well positioned to serve and meet the needs of customers.
• Expand Sahara Fleet and Increase Source’s Wellsite Presence. Source believes that its mine-to-wellsite
delivery service and proprietary wellsite mobile sand storage and handling system, Sahara, offers an attractive
value proposition to upstream customers. The increasing intensity of proppant completion designs and the
remote locations of WCSB wellsites has increased the need for proppant inventory management and wellsite
solutions to meet customer demand needs. Sahara addresses these challenges and Source intends to continue to
build out its Sahara fleet to meet the anticipated current and future demand.
• Match Production Capacity with Demand to Control Supply Chain. Source believes that reliable and timely
deliverability of product is a key competitive advantage. Source is able to ensure reliable and timely
deliverability via a fully vertically-integrated proppant supply chain. As demand for frac sand grows, Source
will actively evaluate additional sand resources and processing capacity to maintain its leading WCSB footprint
and market share.
• Maintain Financial Strength and Flexibility. Source plans to pursue a disciplined financial policy to maintain
financial strength and flexibility to enable the Company to actively evaluate new growth opportunities as they
arise. Source believes that, following the Offering, its cash on hand, borrowing base capacity and ability to
access debt and equity capital markets will provide the financial flexibility necessary to achieve its growth
objectives while maintaining a strong balance sheet.
See “Business — Business Strategies”.
-3-
Proppant Market Trends
Demand for frac sand and other proppants is primarily driven by the use of hydraulic fracturing when completing
oil and natural gas wells. In particular, well completion technologies, which employ horizontal drilling and multi-stage
fracturing (where multiple delivery points are utilized to increase the fractures created within a single wellbore), have
significantly increased the demand for proppant in recent years. These completion techniques have made the extraction
of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to
develop. As a result, according to Baker Hughes Incorporated North American Rig Count, the percentage of active
Canadian drilling rigs used to drill horizontal wells, which require significantly greater volumes of proppant than
vertical wells, increased from 71% in 2011 to 83% in 2014, and year-to-date in 2017, 87% of active rigs were drilling
horizontal wells on average.
Within the WCSB, the majority of recent drilling activity has focused on developing and producing hydrocarbons
from the Montney and Duvernay formations as well as various formations within the Deep Basin, such as the Wilrich
and Falher. Development of these formations has been driven by technological advancements in horizontal drilling,
fracturing and stimulation, including increased length of horizontal wellbores and well completion intensity (additional
fracturing per well and increased proppant usage per stage). These liquids-rich or “wet” gas plays are some of North
America’s most prolific and are anticipated to continue to see significant development and production growth. For
example, stages per well in the WCSB have increased by over 40% on average from 2013 to the first quarter of 2016,
while in the Montney and Duvernay, proppant used per well has increased by approximately 91% and 86%,
respectively, during the same period according to the Well Completions & Frac Database.
Source estimates, based on data from geoSCOUT and the Well Completions & Frac Database, that the WCSB
proppant market amounted to approximately 2.4 million metric tonnes in 2016. Market demand is estimated to have
dropped by approximately 24% in 2016 compared to 2015 due to the downturn in commodity prices since late 2014,
which led to a corresponding decline in oil and natural gas drilling and completion activity. Based on estimated wells
drilled and 2016 proppant intensity per horizontal well, proppant demand in 2017 is expected to increase relative to
2016.
See “Industry Overview — Proppant Market Trends”.
-4-
Selected Historical Financial Information
The majority of Source’s revenue is derived from mining, processing and providing a full frac sand delivery
solution to customers in-basin or at the wellsite. In addition, Source generates revenue from related services including
terminal services, which involve transloading services, and wellsite solutions, which include wellsite storage and
logistics coordination at the wellsite. Source commenced material frac sand sales after completion of the Weyerhaeuser
Facility in June 2014, increasing sales volumes to approximately 280,000 metric tonnes in the fourth quarter of 2014
and achieving an Adjusted Gross Margin of $78 per metric tonne in the same period. As indicated below under
“Operating Data”, Source maintained its frac sand sales volumes through the recent downturn in commodity prices on
an annual basis and has been experiencing the effects of a recovery of frac sand sales in the fourth quarter of 2016.
Activity levels continue to be strong in the early part of 2017. In January 2017, Source sold approximately 130,000
metric tonnes of frac sand compared to approximately 84,000 metric tonnes in January 2016.
The following table sets out selected historical financial information as at and for the periods indicated. The
selected historical financial information below other than Adjusted Gross Margin and Adjusted EBITDA is extracted or
derived from Source’s audited financial statements. Investors should read the selected historical financial information
below in conjunction with Source’s management’s discussion and analysis, Source’s audited financial statements and
the accompanying notes included in this prospectus under Appendix “FS” — Financial Statements and Management’s
Discussion and Analysis.
(in $ thousands unless otherwise indicated)
Year Ended December 31,
2016
2015
2014
Combined Statements of Operations Data
Sales:
Sand revenue
Wellsite solutions revenue
Terminal services revenue
$ 112,962
$ 21,261
$ 4,976
$ 139,574
$ 6,208
$ 7,353
$ 118,755
$ 11,782
$ 15,969
$ 139,199
$ 153,135
$ 146,506
Expenses:
Cost of sales
$ 123,257
$ 116,364
$ 95,504
Adjusted Gross Margin
$ 15,942
$ 36,771
$ 51,002
Other Income
Other Expenses:
Operating and general and administrative expense
Foreign exchange loss/(gain)
Add:
Infrequent transaction and professional fees
$
$
$
$ 23,866
$ 2,059
$ 18,183 $ 18,913
($ 1,255) ($
64)
$
$
Adjusted EBITDA
($ 4,198) $ 22,385
Net Income (Loss)
($ 43,402) ($ 9,766) $ 17,035
Statements of Cash Flow Data
Cash provided by operating activities
Cash used in investing activities
Cash provided by financing activities
($ 9,453) $ 23,624 ($ 7,882)
($ 10,470) ($ 35,461) ($ 37,621)
$ 20,122 $ 10,970 $ 46,167
Other Financial Data
Capital expenditures
Long term debt (including current portion)(1)
Total assets(1)
$ 6,405
$ 124,351
$ 219,406
$ 38,901
$ 83,114
$ 231,112
$ 45,390
$ 63,797
$ 194,788
832,435
136
7,903
10
19
821,482
$
170
$ 29,638
$
36
$
45
727,213
$
163
$ 46,391
$
64
$
70
Operating Data
Sand sales volumes (metric tonnes)
Sand Revenue / metric tonne ($/MT)
Gross Margin
Gross Margin / metric tonne ($/MT)
Adjusted Gross Margin / metric tonne ($/MT)
Notes:
(1) At year end.
$
$
$
$
4,859
926
1,796
746
$
420
229
$ 32,802
See “Selected Historical Financial Information” for additional information and for a reconciliation of EBITDA
and Adjusted EBITDA to Net Income (loss) and of Adjusted Gross Margin to Gross Margin.
-5-
THE OFFERING
Issuer:
Source Energy Services Ltd.
Selling Shareholders:
SES Sand Holdings 2 (Canada) LP, SES Sand Holdings 3 (Canada) LP, TriWest
Capital Partners IV (US), L.P., 2024747 Alberta Ltd., 2024748 Alberta Ltd.,
2024749 Alberta Ltd. and 2024750 Alberta Ltd. The Selling Shareholders will enter
into certain lock-up agreements in relation to their ownership in the Company. See
“Lock-Up Arrangements” below.
Treasury Offering:
Š Common Shares. It is currently anticipated that between 13,750,000 and
16,176,471 Common Shares will be issued pursuant to the Treasury Offering. See
“Description of Share Capital” for more information regarding the Common Shares.
Secondary Offering:
Š Common Shares. It is currently anticipated that between 1,250,000 and 1,470,588
Common Shares will be offered pursuant to the Secondary Offering. See “Retained
Interest” below.
Offering Price:
$Š per Common Share. It is anticipated that the Offering Price will be between $17
and $20 per Common Share.
Shares Offered:
It is currently anticipated that between 15,000,000 and 17,647,059 Common Shares
will be distributed under the Offering. See “Plan of Distribution”.
Gross Proceeds:
$275 million from the Treasury Offering and $25 million from the Secondary
Offering for a total of $300 million (or $345 million if the Over-Allotment Option is
exercised in full). See “Plan of Distribution”.
Common Shares
Outstanding:
Price per Common Share
$17
$18.50
$20
Prior to Completion
of the Offering
After Completion
of the Offering(1)
Common Shares
(fully-diluted basis)
30,227,464
30,227,464
30,227,464
Common Shares
(fully-diluted basis)
47,540,155
46,228,549
45,113,684
Note:
(1) Assumes the issuance of 1,136,220 Common Shares pursuant to the Common Shares RTR
Payments (assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that
will become owing under the Note Indenture at Closing. See “Description of Indebtedness —
Indebtedness outstanding following the Offering — Notes — Relevant Transaction Rights”.
Retained Interest:
The following table sets out the shareholdings of the Major Shareholders and those
Shareholders that, to the knowledge of Source, beneficially own, directly or indirectly,
or exercise control or direction over, any class of voting securities carrying in
aggregate 10% or more of the votes attached to such issued and outstanding voting
securities, both before and after giving effect to the Offering:
Shareholder
Number and
Percentage of
Common Shares Upon
the Reorganization(1)
Number of Common
Shares Being Offered
in the Secondary
Offering (or if the
Over- Allotment
Option is exercised
in full)
Number and
Percentage of
Common
Shares After
Giving Effect
to the Offering(1)(2)
Number and
Percentage of
Common
Shares After Giving
Effect
to the Offering
and the OverAllotment
Option(1)(2)(3)(4)
TriWest IV
Jim McMahon(5)
Brad Thomson(6)
13,627,256 (45.08%)
8,277,899 (27.39%)
3,645,990 (12.06%)
683,876 (1,914,853)
415,422 (1,163,181)
179,937 (503,823)
12,943,380 (28.00%)
7,862,477 (17.01%)
3,466,053 (7.50%)
11,712,403 (25.34%)
7,114,718 (15.39%)
3,142,167 (6.80%)
-6-
Notes:
(1) On a fully-diluted basis, at the applicable date.
(2) Assumes the issuance of 1,136,220 Common Shares pursuant to the Common Shares RTR Payments
(assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that will become
owing under the Note Indenture at Closing. See “Description of Indebtedness — Indebtedness
outstanding following the Offering — Notes — Relevant Transaction Rights”.
(3) Assumes exercise of the Over-Allotment Option in full.
(4) The TriWest Selling Shareholders and the Source Selling Shareholders will be entitled to participate
in the Over-Allotment Option on a basis pro rata to their participation in the Secondary Offering.
(5) Includes Common Shares held by the MFT 2 Family Trust 2024747 Alberta Ltd. and 2024748
Alberta Ltd.
(6) Includes Common Shares held by Sand Ventures LP, 2024749 Alberta Ltd. and by Mr. Thomson’s
spouse.
Closing:
On or about Š, 2017, subject to postponement as the Underwriters, the Company and
the Selling Shareholders may agree, but not later than Š, 2017. See “Plan of
Distribution”.
Use of Proceeds:
The Company expects to receive net proceeds from the Treasury Offering of
approximately $255 million after deducting the Underwriters’ Commission
applicable to the Treasury Offering and the Company’s portion of the expenses of the
Offering, estimated to be approximately $3.5 million.
The Company intends to use the net proceeds from the Treasury Offering to pay for
the purchase price related to the Blair Facility Acquisition and associated transaction
costs, exercise and pay for the Blair Option Exercise, repay the Shareholder Loans
and the Sand Royalty Loan, exercise and pay for the Notes 35% Optional
Redemption, pay the Class B Founder Payment, pay the Prior EEPP Unit Holders
Payment, fund Source’s ongoing capital expenditure program and for general
corporate purposes. See “Use of Proceeds”.
The TriWest Selling Shareholders will receive aggregate net proceeds of the
Secondary Offering of approximately $12.7 million ($35.4 million if the OverAllotment Option is exercised in full), after deducting the Underwriters’ Commission
applicable to the Secondary Offering and their portion of the expenses of the
Offering.
The Source Selling Shareholders will receive aggregate net proceeds of the
Secondary Offering of approximately $11.0 million ($30.8 million if the OverAllotment Option is exercised in full), after deducting the Underwriters’ Commission
applicable to the Secondary Offering and their portion of the expenses of the
Offering.
The Company will not receive any of the proceeds from the Secondary Offering.
Lock-Up Arrangements:
The Company has agreed that it will not, directly or indirectly, without the prior
written consent of the Lead Underwriters, on behalf of all of the Underwriters, such
consent not to be unreasonably withheld, sell, offer to sell, file in any jurisdiction any
prospectus or registration statement, issue, grant any option, warrant or other right for
the sale or issuance of, or otherwise lend, transfer, assign or dispose of, in a public
offering or by way of private placement or otherwise (or agree to any of the
foregoing or publicly announce any intention to do so), any Common Shares or other
equity securities of the Company, or any securities convertible, exchangeable or
otherwise exercisable into Common Shares or other equity securities of the
Company, for a period commencing on the date of filing of this preliminary
prospectus and ending 180 days following the Closing, subject to certain exceptions.
In addition, each of the Locked-Up Shareholders will enter into Lock-Up Agreements
under which they will agree not to, directly or indirectly, for a period commencing on
-7-
the date of filing of this preliminary prospectus and ending on the date that is 180
days following Closing, subject to certain exceptions, without the prior written
consent of the Lead Underwriters, on behalf of the Underwriters, such consent not to
be unreasonably withheld, (a) file in any jurisdiction any prospectus or registration
statement, or exercise any demand or registration rights, with respect to the Common
Shares or other equity securities of the Company, or any securities convertible,
exchangeable or otherwise exercisable into Common Shares or other equity securities
of the Company; (b) sell, offer to sell, grant any option, right or warrant for the sale
of, or otherwise lend, transfer or dispose of any Common Shares or other equity
securities of the Company, or any securities convertible, exchangeable or otherwise
exercisable into Common Shares or other equity securities of the Company, owned
by such holder, (c) make any short sale, engage in any hedging transaction, or enter
into any swap, monetization, securitization or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of any
of the Common Shares or other equity securities of the Company, or any securities
convertible, exchangeable or otherwise exercisable into Common Shares or other
equity securities of the Company, owned by such holder, (d) secure or pledge any
Common Shares or other equity securities of the Company, or any securities
convertible, exchangeable or otherwise exercisable into Common Shares or other
equity securities of the Company, or (e) agree to or announce any intention to do any
of the foregoing.
Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as
a result of a Common Shares RTR Payment will be deemed to have entered into a
lock-up agreement the terms of which are substantially similar to those of the
Lock-Up Agreements.
Dividends:
Eligibility for Investment:
Risk Factors:
See “Escrowed Securities and Securities Subject to Contractual Restriction on
Transfer” and “Plan of Distribution — Lock-Up Arrangements”.
The Company does not currently anticipate paying any dividends on the Common
Shares. The Company currently intends to use its future earnings and other cash
resources for the operation and development of its business, but may declare and pay
dividends in the future as operational circumstances permit. See “Dividend Policy”.
On the Closing Date, provided that the Common Shares are listed on a designated
stock exchange (which includes the TSX), and subject to the more detailed
discussion under “Eligibility for Investment”, the Common Shares will on that date
be a qualified investment under the Tax Act for Deferred Plans.
An investment in the Common Shares is speculative and involves a high degree
of risk that should be considered by potential investors. Source’s business is
subject to the risks normally encountered in the frac sand industry. These risks
include:
•
•
•
•
•
•
•
•
•
changes in the price and availability of transportation;
inability to obtain necessary production equipment or replacement parts;
inclement or hazardous weather conditions, including flooding, and the physical
impacts of climate change;
unanticipated ground, grade or water conditions;
inability to acquire or maintain necessary permits or mining or water rights;
late delivery of supplies;
changes in the price and availability of natural gas or electricity that Source uses
as fuel sources for its frac sand plants and equipment;
technical difficulties or failures;
cave-ins or similar pit wall failures;
-8-
•
•
•
•
•
•
•
environmental hazards, such as unauthorized spills, releases and discharges of
wastes, tank ruptures and emissions of unpermitted levels of pollutants;
industrial accidents;
changes in laws and regulations (or the interpretation thereof) related to the
mining and oil and natural gas industries, silica dust exposure or the
environment;
inability of Source’s customers or distribution partners to take delivery;
reduction in the amount of water available for processing;
fires, explosions or other accidents; and
facility shutdowns in response to environmental regulatory actions.
Risks related to the Blair Facility Acquisition include: the possible failure to realize
anticipated benefits; possible failure to complete the Blair Facility Acquisition;
potential undisclosed liabilities; and potential significant transaction and related
costs.
Risks related to the Offering include: the potential absence of a liquid public market;
the volatility in the price of Common Shares; the discretion in the use of proceeds;
the risk of no return on an investment in Common Shares; the possible future dilution
of the Common Shares; the effect of future sales of Common Shares by Shareholders
on the market price of the Common Shares; the limited ability of residents of the
United States to enforce civil remedies; the absence of plans to pay dividends;
changes to the Company’s dividend policy; and the potential inaccuracy of forwardlooking statements contained in this prospectus.
These risk factors and those discussed in greater detail in the section entitled “Risk
Factors” are not an exhaustive list of all risks associated with an investment in the
Common Shares and should be read in conjunction with the information set forth
elsewhere in this prospectus. See “Market for Securities” and “Risk Factors”.
-9-
CORPORATE STRUCTURE
Incorporation and Office
The Company was formed on February 7, 2017 by articles of incorporation under the ABCA.
The head office of the Company is located at 100, 438 — 11th Avenue SE, Calgary, Alberta, T2G 0Y4 and the
registered and records office of the Company is located at 4300 Bankers Hall West, 888 — 3rd Street S.W., Calgary,
Alberta T2P 5C5.
Source
Source Canada LP and Source US LP are each privately owned limited partnerships organized under the laws of
the Province of Alberta and governed by limited partnership agreements each dated October 7, 2013. Source Canada
LP GP is the general partner of Source Canada LP, and Source US LP GP is the general partner of Source US LP.
Source Canada LP GP and Source US LP GP are both owned by Source GP Holding Company which is indirectly
owned and controlled by senior principals of TriWest Capital.
The limited partnership units of Source Canada LP are owned (other than as to a nominal interest held by Source
Canada LP GP as general partner) by: (a) SES Canada LP, SES Canada 2 LP, SES Canada 3 LP and SES US Corp.; (b)
investment vehicles owned, directly and indirectly, by certain members of Management (by way of
2024751 Alberta Ltd., 2024749 Alberta Ltd. and Sand Ventures LP with respect to Brad Thomson and by way of
2024750 Alberta Ltd. and Source Energy Services New Partners Investment LP in respect of Derren Newell,
Scott Melbourn and Joe Jackson) and Jim McMahon (by way of 2024747 Alberta Ltd., 2024748 Alberta Ltd. and MFT
2 Family Trust), a current director and unitholder of Source (being Alberta incorporated special purpose vehicle
corporations, the “Non-TriWest Holding Corporations”); and (c) a founding owner of Source (the “Class B
Founder”), who holds all of the issued and outstanding Source Canada LP Class B Units directly and through a trust
(the “Class B Founder Trust”).
The limited partnership units of Source US LP are owned (other than as to a nominal interest held by Source US
LP GP as general partner) by: (a) SES US LP and SES Canada Corp.; (b) the Non-TriWest Holding Corporations; (c)
the MFT 2 Family Trust; and (d) the Class B Founder Trust.
The limited partnership agreements of Source Canada LP and Source US LP governed the formation of such
limited partnerships, the relationships between their respective partners, the authorized and issued capital of the limited
partnerships, the rights to allocations and distributions of income and cash among the classes of units, the issuance of
units, the restrictions on transfer of units, and generally the rights, obligations and transactions among the applicable
general partner and its limited partners and also included provisions with respect to the composition of the board of
directors of Source Canada LP GP and Source US LP GP, respectively, including that each such board of directors
would be comprised of two nominees of TriWest IV, the Chief Executive Officer of Source Canada LP GP or Source
US LP GP, as the case may be, and Jim McMahon (for so long as he holds units of the applicable limited partnership).
These limited partnership agreements will be amended in connection with the Reorganization. See “Corporate
Structure — Reorganization”.
Source Canada LP and Source US LP are each parties to a management assistance agreement with TriWest
Capital and Jim McMahon dated October 15, 2013, providing for the provision of management and advisory services.
Pursuant to such agreements, Source Canada LP and Source US LP, as the case may be, are required to pay a quarterly
fee equal to 0.5% of the invested capital managed by the counterparties (the “Management Fee”). The management
assistance agreements and corresponding Management Fee will be terminated in connection with the Reorganization.
See “Corporate Structure — Reorganization”.
Reorganization
The purpose of the Reorganization is to transfer to the Company the business that has been conducted by Source
prior to the Reorganization. Subject to the exceptions described below, the persons who directly or indirectly held
equity interests in Source immediately prior to the Reorganization will become Shareholders upon the closing of the
Reorganization. The Reorganization will initially result in SES US Corp. (an entity not owned by the Company or its
wholly-owned subsidiaries) holding a minor interest in Source Canada LP, the entity that holds most of Source’s
Canadian business. That interest will be acquired by Source following the Closing, as and when determined by TriWest
IV US Fund LP pursuant to the Source Canada Exchange Agreement described below. See paragraphs (i)(ii) for a
description of the manner in which distributions to SES US Corp. will be restricted pending the acquisition of those
interests by the Company.
- 10 -
The principal steps of the Reorganization will be effected immediately prior to the Closing and will include the
following:
(a) the shareholders of the Non-TriWest Holding Corporations will each enter into exchange agreements with
the Company to transfer their respective shares in the Non-TriWest Holding Corporations to the Company in
exchange for Common Shares;
(b) SES Canada LP will enter into an exchange agreement with the Company to transfer its units in Source
Canada LP, its shares of SES Canada Corp. and its shares of Berthold to the Company in exchange for
Common Shares;
(c) SES Canada 2 LP and SES Canada 3 LP will each enter into an exchange agreement with the Company to
transfer their respective units in Source Canada LP to the Company in exchange for Common Shares;
(d) the Class B Founder and the Class B Founder Trust will each enter into exchange agreements with the
Company to transfer their respective limited partnership units in Source Canada LP to the Company in
exchange for Common Shares and a cash payment in the amount of approximately $16.99 million (the
“Class B Founder Payment”), which payment will include certain outstanding preferred distributions on the
Source Canada LP Class B Units;
(e) Source GP Holding Company will sell its shares in Source Canada LP GP and Source US LP GP to the
Company in exchange for nominal cash consideration;
(f)
SES US LP will sell its units in Source US LP and its shares of Berthold to the Company for Common Shares
which will subsequently be distributed to TriWest IV US Fund LP;
(g) the MFT 2 Family Trust and the Class B Founder Trust will each will enter into an exchange agreement with
the Company to transfer their respective units in Source US LP to the Company in exchange for Common
Shares;
(h) TriWest IV US Fund LP will subscribe for nominal consideration for Class B Shares corresponding to the
number of Common Shares it will receive on the exchange of its Exchangeable LP Securities pursuant to the
Source Canada Exchange Agreement described below;
(i)
Source Canada LP, the Company, TriWest IV US Fund LP, SES US LP and SES US Corp. will enter into an
exchange agreement (the “Source Canada Exchange Agreement”) to provide:
(i)
for the exchange of the units of SES US LP for Common Shares, upon the concurrent surrender of a
corresponding number of Class B Shares, as and when determined by TriWest IV US Fund LP; and
(ii) that any cash distributed by Source Canada LP to SES US Corp. will be directed to the Company as a
non-interest bearing loan (which may only be repaid after all units of SES US LP have been exchanged
for Common Shares and SES US Corp. has thereby become an indirect wholly-owned subsidiary of the
Company) except to the extent of (A) any cash taxes payable by SES US Corp. in connection with
income allocated by Source Canada LP to SES US Corp. or (B) any distributions that TriWest IV US
Fund LP would have received from the Company had TriWest IV US Fund LP exchanged its units of
SES US LP for Common Shares prior to such distribution by the Company;
(j)
the remaining shareholders of Berthold will sell their shares in Berthold to the Company for Common
Shares;
(k) the limited partnership agreement of Source Canada LP will be amended to remove the provisions related to
the composition of the board of directors of Source Canada LP GP and Source US LP GP and certain other
administrative amendments; and
(l)
the limited partnership agreement of Source US LP will be amended to remove the provisions related to the
composition of the board of directors of Source Canada LP GP and Source US LP GP and certain other
administrative amendments.
Following the Closing, it is expected that the Non-TriWest Holding Corporations will be wound-up and dissolved
resulting in the Company owning all of the Source Canada LP units and Source US LP units currently owned by the
Non-TriWest Holding Corporations.
- 11 -
The summary of certain provisions of the Source Canada Exchange Agreement provided above does not purport
to be complete and is qualified in its entirety by reference to the provisions of the Source Canada Exchange
Agreement, a copy of each of which will be provided under the Company’s profile at www.sedar.com.
The Reorganization may be considered a “Change of Control” pursuant to the Prior Employee Equity
Participation Plan resulting in the Prior EEPP Units becoming exercisable. Accordingly, the Company, Source Canada
LP and each holder of Prior EEPP Units are anticipated to enter into an agreement under which each holder of Prior
EEPP Units will surrender his or her Prior EEPP Units to Source Canada LP in connection with the Reorganization for
a combination of cash (being an aggregate of $1.73 million) (the “Prior EEPP Unit Holders Payment”) and an
aggregate of 187,371 Common Shares. In consideration for a commensurate amount of class C units in the capital of
Source Canada LP being issued to the Company, the Company will pay the Prior EEPP Unit Holders Payment and
issue such Common Shares to the holders of Prior EEPP Units to satisfy the aforementioned exercise of the Prior EEPP
Units in connection with the Reorganization. Following the Reorganization, no Prior EEPP Units are expected to be
outstanding. See “Use of Proceeds” and “Executive Compensation — Share-based Compensation Arrangements —
Prior Employee Equity Participation Plan”.
The Company will attempt to sell Berthold or its assets following the Closing.
Further, in connection with the Reorganization, the management assistance agreements and corresponding
obligations of Source to pay Management Fees will be terminated, and the Company will enter into the Distribution
Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement. See “Principal
Shareholders”.
- 12 -
The following organizational chart sets out Source’s organizational structure after giving effect to the
Reorganization, the Offering and the Blair Facility Acquisition:
Shareholders
including the
Public
TriWest
IV US Fund LP
(Alberta)
Class
B Sha
res
LP
Source Energy
Services Ltd.
(Alberta)
Source US LP
(Alberta)
LP
LP
Source US
LP GP
(Alberta)
Source Canada
LP GP
(Alberta)
SES US Corp
(Alberta)
LP(1)
GP
Berthold
(Delaware)
GP
Source Canada
LP (Alberta)
Source US LP
(Alberta)
CSP Property
Holdings LLC
(Wisconsin)
Limited Partnerships
LP
Sand Products
(Michigan)
Corporations
Note:
(1) SES US Corp., an entity not owned by the Company or its wholly-owned subsidiaries, holds a minor interest. See Reorganization step (i)(ii)
above for additional detail.
- 13 -
INDUSTRY OVERVIEW
The oil and natural gas proppant industry is comprised of businesses involved in the mining or manufacturing,
distribution and sale of the propping agents used in hydraulic fracturing, the most widely used method for stimulating
increased production from lower permeability oil and natural gas reservoirs. The process consists of pumping fluids,
mixed with granular proppants, into geologic formations at pressures sufficient to create fractures in the hydrocarbonbearing rock. Proppant-filled fractures create conductive channels through which the hydrocarbons can flow more
freely from the formation into the wellbore and then to the surface.
Types of Proppant
The term proppant, as used in the oil and natural gas industry, encompasses several different types of sand and
sand-like materials. The materials used as proppant in hydraulic fracturing processes come in a variety of shapes and
sizes, each with varying attributes that are measured to standards set by the API. Proppant is comprised of either
naturally-occurring sands, resin-coated natural sands, or manufactured artificial sands (ceramics). Naturally-occurring
silica frac sand is typically sourced from sandstone deposits and once washed, screened, and dried, it is sold by graded
sizes. Resin-coated sand is made from silica sand that has been coated with resin. Ceramic proppants are manufactured
proppants made from polymeric beads; this type of proppant is technologically advanced relative to naturally-occurring
sands, but is generally much more expensive.
The key features that determine a proppant’s quality are: (a) crush resistance; (b) sphericity (roundness); and
(c) resistance to acids. These properties enable proppants to keep fractures open and allow hydrocarbons to flow more
easily through the largest possible space in harsh environments that exist at reservoir depths. Where a proppant
possesses these three qualities, the proppant facilitates the flow of hydrocarbons to the well bore. This is referred to as
“conductivity” and proppants with higher conductivity typically yield higher production rates. Proppants that feature
higher levels of crush resistance, sphericity, and conductivity command superior pricing. Generally speaking, frac sand
is the low cost form of proppant. Resin-coated sand and ceramic proppants may cost significantly more and as a result
the North American proppant market continues to be dominated by naturally-occurring frac sand.
Frac sand is generally mined from the surface or underground, and then cleaned and sorted into consistent sizes or
grades referred to as mesh sizes. Frac sand can generally be delineated into three main naturally-occurring types:
(a) Northern White frac sand; (b) Brady Brown frac sand; and (c) Canadian domestic frac sand. Northern White frac
sand is a specific type of white sand mined primarily in Wisconsin and generally considered to be of higher quality
than Brady Brown and Canadian domestic frac sand for use as a proppant due to its crush strength, sphericity and
monocrystalline grain structure. Brady Brown frac sand has lower crush strength due to its polycrystalline structure,
and Canadian domestic frac sand has further reduced crush strength due to its angularity and polycrystalline structure.
The API has identified thresholds that various physical characteristics of proppants should pass, and Northern White
frac sand consistently meets these thresholds.
The superior physical characteristics of Northern White frac sand and the limited availability of Canadian
domestic frac sand that meets the API specifications for use as a proppant, make Northern White frac sand a preferred
proppant for wells at greater depths, higher pressures or higher production levels, such as the wells in the Montney,
Duvernay and Deep Basin. Source believes that the demand for natural frac sand will increase with the overall activity
in the WCSB as well as from the increase in well completion intensity (i.e., longer horizontal wells, increased number
of stages per horizontal well and increased proppant load per stage).
Frac Sand Extraction, Processing and Distribution
Frac sand is a naturally-occurring mineral that is mined and processed. While the specific extraction method
utilized depends primarily on the geologic setting, most frac sand is mined using conventional open-pit bench
extraction methods. The composition, depth and chemical purity of the sand also dictate the processing method and
equipment utilized. After extraction, the frac sand is washed with water to remove fine impurities such as clay and
other organic particles. The final steps in the production process involve the drying and sorting of the frac sand
according to mesh sizes required to meet API specifications.
Frac sand is typically sold at the processing facility, in-basin at a terminal or directly at a wellsite. For sand sold at
the processing facility, the purchaser is responsible for the transportation of the frac sand. For in-basin sales of frac
- 14 -
sand, the supplier is typically responsible for transporting the sand to either the terminal or the wellsite, which requires
an efficient and integrated logistics network for low cost delivery.
For high volumes of frac sand, transportation costs often represent a significant portion of the customer’s overall
cost, which highlights the importance of efficient bulk shipping. Source believes that approximately 80% of the
delivered cost of Northern White frac sand delivered in-basin in the WCSB from Wisconsin is related to logistics and
transportation, while only 20% is related to the mining and processing of the sand, based on Source’s historical cost
structure. As a result, efficient and integrated logistics capabilities, including direct rail access from the processing
facility, unit train capable facilities, scale and location of in-basin terminals and efficiency of logistics operations are
critical to a supplier’s ability to deliver sand at a competitive cost to its customers and capture margins.
Approximate Breakdown of Delivered Cost of Northern White Frac
Sand to the WCSB
Wellsite Solutions
% Delivered Cost
Mining and Processing
~20%
Mining &
Processing
~80%
Logistics
Logistics Services
Unit Train Shipping
High Capacity Terminals
Rail is the predominant method of delivery of Northern White frac sand into the WCSB. For this reason, direct
access to Class I rail lines, and particularly the CN network, is an important differentiator in the industry. Rail shipment
can occur via manifest trains or unit trains. Manifest trains, also called mixed-freight trains, are considered less
efficient because these trains switch cars at various intermediate junctions in transit and routinely encounter delays. By
contrast, unit trains, which typically consist of 100 or more cars of one product, travel directly from origin to
destination at a higher speed than manifest traffic. The ability to ship via unit train, which can transport more than
10,000 MTs of frac sand, and simultaneously manage multiple unit trains at the production facility, facilitates reliable
and cost-effective delivery of high volumes of sand to in-basin terminals, and ultimately the wellsite.
From the in-basin terminals, frac sand is typically delivered to the wellsite via trucking where it is then delivered
to a wellsite storage unit. In-basin terminals and wellsite delivery and storage of frac sand are becoming increasingly
important to meet the needs of customers such as inventory management and quick response times, particularly as
customers shift activity towards pad developments which require greater volumes of frac sand on the wellsite. In
addition, the ability to deliver directly to the customers’ wellsite locations increases efficiency and provides a lower
cost logistics solution to customers.
- 15 -
Proppant Market Trends
Recently Improving Macro Conditions
Demand for proppant is predominantly influenced by the level of drilling and completions spending by oil and
natural gas exploration and production companies, which, in turn, depends largely on the current and anticipated
profitability of developing oil and natural gas reserves. In 2015 and 2016, relatively low oil and natural gas prices
resulted in reduced capital spending on drilling and completions activity leading to an 80% decline in the United States
land rig count from recent peak levels in November 2014 to the low in May 2016 according to Baker Hughes
Incorporated’s North American Rig Count. Production declines resulting from reductions in capital expenditures, in
North America and globally, and recent agreements by OPEC members to reduce oil production quotas have provided
upward momentum for oil prices. West Texas Intermediate benchmark pricing has nearly doubled to US$53.83 per
barrel as of March 1, 2017 from lows of US$26.19 per barrel in February 2016.
In response to the improved returns generated by these increases in hydrocarbon prices, oil and natural gas
exploration and production companies have increased their capital spending on drilling and completion activities since
the second half of 2016, and the demand for oilfield activities has increased. According to Baker Hughes
Incorporated’s North American Rig Count, the number of active total land drilling rigs in the United States has
increased from a low of 380 rigs as reported on May 27, 2016 to 737 active drilling rigs as reported on February 24,
2017, while the number of active Canadian land drilling rigs has increased 95% to 341 rigs year-over-year as of
February 24, 2017.
Source believes North American onshore shale resources will continue to capture an increasing share of global
capital spending on oil and gas resources as a result of their competitive positioning on the global cost curve, short
cycle times and the relatively low level of reservoir, political and legal risk as compared to other regions. Therefore, if
hydrocarbon prices stabilize at current levels or rise further, Source expects to see further increased drilling and
completion activity and improved pricing for oilfield services and proppant.
Frac Sand Demand Trends
Demand for frac sand and other proppants is primarily driven by the use of hydraulic fracturing when completing
oil and natural gas wells. In particular, well completion technologies, which employ horizontal drilling and multi-stage
fracturing (where multiple delivery points are utilized to increase the fractures created within a single wellbore), have
significantly increased the demand for proppant in recent years. These completion techniques have made the extraction
of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to
develop. As a result, according to Baker Hughes Incorporated North American Rig Count, the percentage of active
Canadian drilling rigs used to drill horizontal wells, which require significantly greater volumes of proppant than
vertical wells, increased from 71% in 2011 to 83% in 2014, and year-to-date in 2017, 87% of active rigs were drilling
horizontal wells on average.
In addition to the increase in the number of horizontal wells drilled, Source believes that growth in demand for
frac sand will be further supported by the following factors, each of which has contributed to improving performance
of typical wells drilled using horizontal drilling and multi-stage fracturing:
• the increase in length of the typical horizontal wellbore;
• the increase in the number of fracturing stages in the typical completed horizontal wellbore; and
• the increase in typical amount of proppant use in each fracturing stage.
Recent growth in demand for natural frac sand has outpaced growth in demand for other proppants. In addition, as
completion costs have increased as a proportion of total well costs, exploration and production companies have
increasingly looked for ways to improve well economics by lowering costs without sacrificing well production
performance. The oil and natural gas industry is shifting away from the use of higher-cost proppants, such as ceramics,
towards more cost-effective natural frac sand such as the Northern White frac sand which Source supplies.
Within the WCSB, the majority of recent drilling activity has focused on developing and producing hydrocarbons
from the Montney and Duvernay formations as well as various formations within the Deep Basin, such as the Wilrich
and Falher. Development of these formations has been driven by technological advancements in horizontal drilling,
- 16 -
fracturing and stimulation, including increased length of horizontal wellbores and well completion intensity (additional
fracturing per well and increased proppant usage per stage). These liquids-rich or “wet” gas plays are some of North
America’s most prolific and are anticipated to continue to see significant development and production growth. Activity
in these three regions is expected to continue due to their relatively high economic returns, which is the result of
various factors including: (a) well performance; (b) composition of the production between crude oil, natural gas and
natural gas liquids; (c) Alberta’s Modernized Royalty Framework, which incentivizes exploration and production
companies to place higher amounts of proppants into the formation; and (d) increasing drilling efficiencies and
completion intensities. Specifically, the figure below compares the internal rate of return (“IRR”) for a single well in
leading North American plays.
North American Play Ranking by IRR(1)(2)(3)
Source Play Exposure
Other North American Plays
80%
70%
70%
59%
60%
55%
54%
52%
50%
41%
40%
38%
35%
33%
32%
30%
23%
20%
10%
Deep Basin
Permian (Delaware Bone Spring)
Utica
Marcellus
SCOOP/STACK
Permian (Delaware Wolfcamp)
Montney
US Bakken
Eagle Ford
Duvernay
Permian (Midland Wolfcamp)
0%
Notes:
(1) The figure reflects estimates of internal rate of return for a single well in each respective play.
(2) Data provided via Wood Mackenzie Global Economic Model (GEM) as accessed on February 7, 2017. Pre-tax IRR using the Wood Mackenzie
BASE price scenario (as described in Note (3) below) based on the following sub-plays:
(a) Permian (Midland Wolfcamp) indicates the Wood Mackenzie defined sub-play ZS_Type Well MID Wolfcamp Deep Basin Hz SHO TX
State;
(b) Duvernay indicates the Wood Mackenzie defined sub-play ZS_Type Well Duvernay Kaybob AB;
(c) Eagle Ford indicates the Wood Mackenzie defined sub-play ZS_Type Well GFC Eagle Ford Karnes Trough SHG TX Fee;
(d) US Bakken indicates the Wood Mackenzie defined sub-play ZS_Type Well WLN Bakken Fort Berthold Hz SHO ND Fee;
(e) Montney indicates the Wood Mackenzie defined sub-play ZS_Type Well Montney Karr Resthaven AB;
(f)
Permian (Delaware Wolfcamp) indicates the Wood Mackenzie defined sub-play ZS_Type Well DEL Wolfcamp Reeves Core Hz SHO
TX Fee;
(g) SCOOP/STACK indicates the Wood Mackenzie defined sub-play ZS_Type Well ADK STACK Oil Mississippian Hz SHO OK Fee;
(h) Marcellus indicates the Wood Mackenzie defined sub-play ZS_Type Well APP Marcellus Susquehanna Core Hz SHG PA Fee;
(i)
Utica indicates the Wood Mackenzie defined sub-play ZS_Type Well APP Utica Lean Gas Core Choked Hz SHG OH Fee;
(j)
Permian (Delaware Bone Spring) indicates the Wood Mackenzie defined sub-play ZS_Type Well DEL Bone Spring Western Fairway
Hz SHO NM Fee; and
(k) Deep Basin indicates the Wood Mackenzie defined sub-play ZS_Type Well Deep Basin Glauconite AB.
- 17 -
(3)
The Wood Mackenzie BASE price scenario assumed the following price and forecasts:
(a) WTI (US$/bbl): $49.00, $51.00, $61.48, $71.98 for 2017, 2018, 2019, and 2020, grown at 2% annually thereafter; and
(b) Henry Hub (US$/mcf): $3.19, $3.08, $3.36, $3.62 for 2017, 2018, 2019, and 2020, respectively, grown at 2% annually thereafter.
In particular, within the Montney and Duvernay, a material portion of the production consists of a low-density,
high-API gravity liquid hydrocarbon commonly referred to as condensate or “C5+”. Condensate is used as a diluent in
connection with Western Canadian oil sands bitumen production and has historically received a premium price relative
to crude oil in Canada, which enhances well economics.
0.6
6.0
0.5
5.0
0.4
0.3
Canada is
net short
diluent
resulting in
premium
pricing
0.2
Oil & Bitumen (mmbbl/d)
Diluent Supply / Demand (mmbbl/d)
Alberta Diluent Supply & Demand (Left) and Crude Oil and Bitumen Production (Right)(1)(2)
Crude Oil
Bitumen
Oil sands require diluent
(C5+) for blending in
order to ship to market
4.0
3.0
2.0
1.0
0.1
0.0
0.0
2016 AB Diluent
Supply (C5+)
2016 AB Diluent
Demand
2013
2015
2017
2019
2021
2023
2025
Notes:
(1) Alberta Energy Regulator ST98-2016: Alberta’s Energy Reserves 2015 and Supply/Demand Outlook 2016-2025; as of January 25, 2017.
(2) C5+ satisfies the majority of diluent demand in Alberta.
- 18 -
As a result of attractive economics, Source expects capital spending and horizontal well count to increase, leading
to continued drilling and production growth in key plays as shown below, including the Montney, Duvernay and Deep
Basin. While the total number of horizontal wells drilled in 2016 in the WCSB was approximately 3,450 based on data
provided by geoSCOUT, which exceeds the figure on the chart below, Source is focused on the higher intensity
Montney, Duvernay and Deep Basin plays.
Canadian Production by Key Play(4)
(thousand barrels of oil
equivalent per day)
Number of Horizontal Wells Rig Released
by Higher Frac Intensity Play(1)(2)(3)(5)
1,200
3,000
Montney
Montney
Duvernay
Duvernay
Deep Basin
Deep Basin
1,000
2,500
2,032
800
2,000
1,754
1,501
1,442
1,500
1,462
600
943
1,000
400
200
500
0
2013
2014
2015
2016
2017E
2018E
0
2008
2010
2012
2014
2016
Notes:
(1) Historical number of horizontal wells drilled by play to date is based on data provided by geoSCOUT.
(2) The number of wells forecast to be drilled in each of the Montney, Deep Basin and Duvernay plays identified above for 2017E and 2018E (the
“Higher Frac Intensity Well Count Forecast” for each such play) is calculated as the product of (A) the estimated average annual capital
expenditures by the Higher Frac Intensity Companies (as defined below), expressed as a percentage of average annual capital expenditures by
the Higher Frac Intensity Companies in the previous year, as estimated by Bloomberg using the consensus median capital expenditures
estimate, multiplied by (B) the number of wells drilled in that play in the previous year. This forecast is based on the assumption that “Higher
Frac Intensity Companies” means Advantage Oil & Gas Ltd., ARC Resources Ltd., Bellatrix Exploration Ltd., Birchcliff Energy Ltd.,
Bonavista Energy Corporation, Crew Energy Inc., Encana Corporation, Kelt Exploration Ltd., NuVista Energy Ltd., Painted Pony Petroleum
Ltd., Paramount Resources Ltd., Peyto Exploration and Development Corp., Seven Generations Energy Ltd., Tourmaline Oil Corp. and Trilogy
Energy Corp.
(3) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts
are accurate, and, as such, undue reliance should not be placed thereon. See “Forward-Looking Statements” and “Risk Factors”.
(4) Production history by play is based on data provided by geoSCOUT.
(5) An increase in producers’ overall capital expenditures will yield a proportional increase in the number of wells drilled. However, the actual
increase in wells drilled could differ from the increase in capital expenditures in the event of a relatively greater increase in non-drilling capital
expenditures, such as facility construction or maintenance.
- 19 -
An additional trend across North America, and the WCSB, is increasing well completion intensities leading to
increased proppant demand by exploration and production companies. For example, stages per well in the WCSB have
increased by over 40% on average from 2013 to the first quarter of 2016, while in the Montney and Duvernay,
proppant used per well has increased by approximately 91% and 86%, respectively, during the same period according
to the Well Completions & Frac Database. Certain companies have performed significantly larger fracture stimulations
than basin averages as indicated in the figure below.
Proppant Intensity per Well by Play(1)
- Indicates Source is a leading proppant provider to this market
5,000
Permian
Duvernay
Eagle Ford
Montney
4,000
(Avg. of Top
25%)
Metric Tonnes
3,000
Montney
2,000
1,000
Deep Basin
0
2013
2014
2015
2016
Notes:
(1) Proppant intensity per well in Canadian plays defined as the average amount of proppant pumped per well, by play, in the indicated year based
on data provided by the Well Completions & Frac Database with the exception of 2016 which uses data for the first quarter of 2016 to calculate
proppant intensity due to more complete data. Proppant intensity per well in U.S. plays defined as the average amount of proppant pumped per
well, by play, in the indicated year based on data provided from DrillingInfo. Eagle Ford data is as of December 28, 2016 and Permian data is
as of January 18, 2017.
- 20 -
Source estimates, based on data from geoSCOUT and the Well Completions & Frac Database, that the WCSB proppant
market amounted to approximately 2.4 million metric tonnes in 2016. Market demand is estimated to have dropped by
approximately 24% in 2016 compared to 2015 due to the downturn in commodity prices since late 2014, which led to a
corresponding decline in oil and natural gas drilling and completion activity. Based on the assumptions referred to in the table
below, Management believes that there is potential for proppant demand in 2017 to increase relative to 2016.
Estimated Canadian Proppant Demand by Play(1)(2)(3)(4)
8.0
Historical Completion Intensity
90th Percentile
Proppant Intensity
(Q1 2016 Data)
Modern Completion Intensity
7.0
Million Metric Tonnes
6.0
5.0
Flat
Proppant Intensity
(Q1 2016 Data)
4.0
3.7
3.2
Higher Frac Intensity
3.0
Montney
2.4
2.4
Duvernay
Deep Basin
2.0
Lower Frac Intensity
Viking
Cardium
Bakken/Torquay
Midale/Shaunavon
1.0
0.0
2013
2014
2015
2016
2017E
2018E
Notes:
(1) The number of wells forecast to be drilled in each of the Lower Frac Intensity plays identified above for 2017E and 2018E (the “Lower Frac
Intensity Well Count Forecast” for each such play) is calculated as the product of (a) the estimated average annual capital expenditures by the
Lower Frac Intensity Companies (defined below), expressed as a percentage of annual capital expenditures by the Lower Frac Intensity
Companies in the previous year, as estimated by Bloomberg using the consensus median estimate, multiplied by (b) the number of wells drilled
in that play in the previous year. The “Lower Frac Intensity Companies” means Bonterra Energy Corp., Cardinal Energy Ltd., Crescent Point
Energy Corp., Penn West Petroleum Ltd., Raging River Exploration Inc., Surge Energy Inc., Tamarack Valley Energy Ltd., TORC Oil & Gas
Ltd., Vermilion Resources Ltd. and Whitecap Resources Inc.
(2) The demand for proppant from 2013 to 2016 is estimated by multiplying the historical number of wells drilled based on data provided by
geoSCOUT in each play by the average amount of proppant pumped per well, by play, in the indicated year with the exception of 2016 which
uses data for the first quarter of 2016 to calculate proppant intensity due to more complete data (based on data provided by the Well
Completions & Frac Database).
(3) The potential range of aggregate demand for proppant in the Higher Frac Intensity plays and Lower Frac Intensity plays identified above for
2017E and 2018E is calculated as the sum, for each such play, of the product of (A) the relevant Higher Frac Intensity Well Count Forecast or
Lower Frac Intensity Well Count Forecast, as applicable, for the relevant play multiplied by (B) Historical Completion Intensity for such play
(as defined below) (shown as “Flat Proppant Intensity” in the chart above) and by Modern Completion Intensity for such play (as defined
below) (shown as “90th Percentile Proppant Intensity” in the chart above). Proppant per well forecast by play assuming “Historical Completion
Intensity” means the amount of frac sand utilized as proppant pumped per well that is equal to the level for an average well in the first quarter
of 2016 for the indicated play; and proppant per well forecast by play assuming “Modern Completion Intensity” means the amount of frac sand
utilized as proppant pumped per well that is equal to the level for a well in the 90th percentile in the first quarter of 2016 for the indicated play,
in each case based on data provided by the Well Completions & Frac Database.
(4) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts
are accurate, and, as such, undue reliance should not be placed thereon. See “Forward- Looking Statements” and “Risk Factors”.
- 21 -
BUSINESS
Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a
preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells.
Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal
network, which Source believes is the largest of its kind in the WCSB. Source currently has the capability to produce
over two million metric tonnes per annum of Northern White frac sand at its Sumner and Weyerhaeuser facilities and,
in the event the Blair Facility Acquisition is completed, Source expects its production capacity of Northern White frac
sand to increase to over three million metric tonnes per annum. Source’s fully integrated logistics platform enables it to
transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that during
2016, Source sold substantially all of its product in-basin and over 50% of its product directly at its customers’
wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver
sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably
deliver high volumes of frac sand to its customers in a cost-effective manner.
Source owns and operates seven strategically located transload terminals in the WCSB with total storage capacity
of over 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned
expansions in 2017 and 2018) and annual throughput capacity of over 3.3 million metric tonnes per year (which Source
expects will increase to over 4.7 million metric tonnes following planned expansions in 2017 and 2018), all of which
are serviced by CN, which is the only Class I railway that effectively services the Montney, Duvernay and Deep Basin,
which are three of the most active oil and natural gas development regions in the WCSB. Furthermore, Source
estimates that its terminals accounted for more than half of the total throughput capacity of all terminals located in the
proppant-intensive Montney, Duvernay and Deep Basin plays. Source believes that having a network of terminals in
close proximity to key producing regions is a critical element of its customer service strategy, which allows it to
rapidly respond to customer demand and helps to ensure reliable and timely delivery of product. Source believes that
the in-basin storage capacity of its terminal network is approximately four times the size of Source’s largest competitor
in the WCSB.
Source owns and operates the Sumner Facility and the Weyerhaeuser Facility. In addition, Source expects to
complete the Blair Facility Acquisition in connection with or immediately following Closing, which includes a
Northern White frac sand mine with associated processing and unit train capable rail loading facilities. In the event the
Blair Facility Acquisition is completed, Source would, have an expected total annual production capacity of over three
million metric tonnes. Both the Weyerhaeuser Facility and the Blair Facility, with on-site rail infrastructure, have direct
access to the CN, enabling Source to process and cost-effectively deliver frac sand to customers through its integrated
logistics network. Both the Weyerhaeuser Facility and the Blair Facility are capable of loading and shipping unit trains,
allowing for significantly more efficient transportation of frac sand to Source’s terminals in the WCSB.
In addition to its transload terminal network, Source has developed Sahara, a proprietary wellsite mobile sand
storage and handling system. Sahara offers significant competitive advantages over many traditional wellsite storage
systems, such as decreased unloading times for trucks delivering proppant to the wellsite, reduced physical footprint,
reduced proppant damage and increased ability to store multiple types of proppant. Despite Sahara’s small physical
footprint, the system offers a storage capacity of approximately 1,800 metric tonnes, which Management believes is
greater than that of many competitor systems, and can be loaded significantly faster than pneumatic systems.
Additionally, the system is recognized for its ability to reduce silica dust (a significant health concern), reduce noise
and reduce truck traffic at the wellsite (a significant safety concern). Source has received positive customer feedback
on Sahara and intends to continue to build out its fleet over the coming years to meet anticipated demand. Source has
applied for a number of patents in respect of the Sahara.
Logistics capabilities have become an important differentiating factor for frac sand customers, who increasingly
seek convenient and reliable in-basin or at-the-wellsite proppant delivery capabilities. Source sells its products
primarily to oil and natural gas exploration and production companies, such as Encana Corporation, Chevron Canada
Resources Ltd. and Seven Generations Energy Ltd., and oilfield service companies, such as Canyon Services Group
Inc. and Trican Well Services Ltd., under a combination of contracts and spot sales in the open market. Source believes
that security of supply for exploration and production companies is enhanced by its integrated logistics capabilities.
- 22 -
Overview of Operations
Source has developed an integrated supply chain for the delivery of frac sand into the WCSB. Source believes that
this integrated supply chain allows it to provide its customers with the highest levels of reliable service and access to
products. Source’s integrated supply chain is made up of the following components: sand resources, mining and wet
processing, dry processing plant and rail load out, rail fleet, terminal network and Sahara wellsite solutions.
- 23 -
Source is a fully integrated proppant logistics company, delivering Northern White frac sand from fully owned
and operated Wisconsin mining and processing operations to wellsites in the WCSB.
Terminalling & Direct
to Wellsite Solutions
Challenges for Canadian Proppant Delivery
• Over 1,700 miles from mine to wellsite
Rail Transport &
Transloading
g
• Limited rail line access
• Seasonal weather challenges
• Remote locations
Frac Sand
Mining & Processing
Wellsite Storage
Source Terminals
Source Mines(1)
CN Rail Network
Duvernay
Montney
Other Shale Plays
Notes:
(1) Assumes completion of the Blair Facility Acquisition.
(2) Berthold, North Dakota terminal serviced by BNSF Railway Company.
Sand Resources
Source owns and operates the Sumner Facility. According to the Sumner APEX Report, Source had
approximately 21.5 million metric tonnes of Indicated Mineral Resources and 94.1 million metric tonnes of Inferred
Mineral Resources on over 1,000 contiguous acres of land, as of December 16, 2015. The Sumner Facility and the
Weyerhaeuser Facility have a combined annual processing capacity of approximately two million metric tonnes. See
“Scientific and Technical Information” and “Business — Descriptions of the Mineral Properties”.
Mining and Wet Processing
The sand resources at the Sumner Facility are mined via digging or ripping, sometimes after blasting, if required.
If parts of the deposit are highly consolidated into sandstone, the sandstone is then crushed into its monocrystalline
sand components for further processing. Frac sand is then fed into Source’s mine-site-located washing and sorting plant
which removes any remaining impurities and sorts the material by size. The washing and sorting plant is enclosed and
heated, making it capable of operating year round, including through the winter months. This is different than most
other producers of frac sand that will generally not wash sand during the colder seasons. Winter operations at the
Sumner Facility are an important facet of Source’s business, as the WCSB is seasonally busiest in the winter months.
Following the washing and sorting process, frac sand is stored on site before being transported by truck to the nearby
Weyerhaeuser Facility.
Dry Processing Plant and Rail Load Out
The Weyerhaeuser Facility receives washed and sorted raw material from the Sumner Facility. At the
Weyerhaeuser Facility, the washed frac sand is dried and screened into API specified mesh sizes. Source’s fully
processed Northern White frac sand is then stored at the dry processing plant prior to being loaded into rail cars for
transportation to its in-basin terminal network. Source’s 45,000 metric tonnes of finished product storage at its
Weyerhaeuser Facility allows Source to rapidly load unit trains in less than 24 hours. Source’s rail load out facility has
- 24 -
approximately five miles of track that is directly connected to a railway serviced by CN, which is the only Class I
railway that effectively services the Montney, Duvernay and Deep Basin. Source has contracts with CN that establish a
set rate for delivery to the Wembley Terminal for five years beginning 2014 with annual escalator rates each year. For
other lanes, Source pays the annual rates published by CN at the beginning of every calendar year. All freight is paid
on a car load rate with a fuel surcharge. Source currently ships a substantial portion of its sand volumes in unit train
shipments, which minimizes its rail transportation cost and maximizes its rail car utilization.
Source’s Rail Fleet
Source operates a fleet of over 900 two pocket covered hopper cars that it uses to transport its product from
Wisconsin to its network of terminals in the WCSB. Source does not manage customers’ railcars. To support
anticipated volumes, Source expects its rail car fleet will increase to approximately 1,200 cars in early 2017 and to
approximately 1,600 cars by 2018. All of Source’s rail cars are leased for varying terms. Source believes that it has one
of the most efficient and lowest cost fleets in the industry.
Source’s Terminal Network
Source owns and operates seven frac sand terminals strategically located throughout the WCSB. Source believes
that its WCSB terminals are well positioned to capture growing demand for frac sand in the Montney, Duvernay and
Deep Basin. Nearly all of Source’s existing terminals have on-site storage that enables the Company to manage
in-basin inventory and respond to customer demand. All of Source’s terminals are serviced by the CN network.
Source Rail Terminals (Existing)
Source Rail Terminals (Expansion)
Horn River
Liard Basin
Fort Nelson
Montney
Duvernay
BRITISH
COLUMBIA
Deep Basin
CN Rail Network
Taylor
ALBERTA
Wembley
Grande Prairie
Fox Creek
Edmonton
Edson
Red Deer
Calgary
Vancouver
The Wembley Terminal, near Grande Prairie, Alberta, is Source’s highest volume terminal, with an estimated
throughput capacity of 1.6 million metric tonnes per annum and over 40,000 metric tonnes of storage capacity to
service high levels of activity in the Montney, Duvernay and Deep Basin. Source believes that this capacity will allow
it to meet peak demand through the combination of inventory and rapid material handling. The Wembley Terminal is
capable of unloading a dedicated unit train with 100 rail cars of frac sand in under 24 hours, which Source believes
makes it the highest throughput sand terminal in Canada. Together with Source’s other terminals, strategically located
near key producing regions in the WCSB, Source has over 90,000 metric tonnes (which Source expects will increase to
- 25 -
over 150,000 metric tonnes following planned expansions in 2017 and 2018; see “Business — Capital Budget”) of
in-basin storage capacity, which Source believes represents approximately four times the amount of its largest
competitor. Source also believes that its terminal network provides a distinct competitive advantage over its
competitors by providing industry leading coverage, significant reach for supply to all key plays, and rapid loadout
facilities. Source’s terminal network is fully integrated with its sand supply from Wisconsin and its last-mile delivery
capabilities, enabling the Company to ensure seamless deliveries of proppant.
Source has identified, and either secured or entered into agreements to secure, three additional locations suitable
for developing unit train capable terminals. Once developed, these additional terminals will allow Source to increase
the amount of sand sold to customers operating in the Montney and Duvernay. Source believes that finding unit train
capable locations that intersect both the CN Railway and highway infrastructure to be difficult and having such
locations serves as a competitive advantage.
Terminal
Wembley, AB
Grande Prairie, AB
Edson, AB
Fox Creek, AB
Red Deer, AB
Lampman, SK
Fort Nelson, BC
2016 Year End
Fox Creek, AB (Expansion)
Taylor, BC
Edson II, AB
2017 / 2018 Capacity Expansions
Total Including Currently Planned Expansions
Year
Constructed
Rail Road
2014
1999
2011
2015
1998
2009
2008
CN
CN
CN
CN
CP / CN
CN
CN
2017/18
2017/18
2017/18
CN
CN
CN
Storage
(MT)(3)
Throughput
Capacity / Yr
(MT)(3)
44,000
16,000
14,000
3,000
9,000
6,000
3,000
95,000
30,000
0
30,000
60,000
155,000
1,587,000
397,000
397,000
66,000
331,000
265,000
265,000
3,308,000
600,000
265,000
600,000
1,465,000
4,773,000
Notes:
(1) See “Business — Capital Budget”.
(2) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts
are accurate, and, as such, undue reliance should not be placed thereon. See “Forward-Looking Statements” and “Risk Factors”.
(3) Approximate values.
Logistics Services
Source’s logistics team works with third party trucking companies to efficiently coordinate deliveries of frac sand
from Source’s terminals to the wellsite. Source provides active dispatch monitoring which minimizes loading times and
pre-loading trailers. Source’s logistics service links Source’s terminals to the wellsite, increasing efficiency through the
proppant supply chain, and allows Source to capture additional value.
- 26 -
Sahara — Source’s Frac Sand Handling and Wellsite Storage Solution
Source has developed a proprietary mobile wellsite sand storage and handling system called the Sahara, which is
used to facilitate frac sand storage and handling at the wellsite. To date, Source has manufactured two Sahara units.
Each Sahara has a small physical footprint but has storage capacity of approximately 1,800 metric tonnes. Additionally,
Sahara can unload trucks delivering frac sand to the wellsite significantly faster than traditional pneumatic systems.
Sahara features a gravity-assisted handling system that eliminates frac sand damage typically caused by pneumatic
handling systems used by Source’s competitors. The Sahara’s 12 separate storage towers allow it to store up to 12
different sizes and types of proppant simultaneously. The Sahara solution is well suited to service the increase in
pad-focused development activity which requires more sand on location to efficiently execute completion programs.
Source believes that the system is recognized for its ability to reduce silica dust (a significant health concern), reduce
noise, and reduce truck traffic at the wellsite (a significant safety concern). Source has applied for a number of patents
in respect of Sahara in the United States, Canada and Mexico.
.
Other Services
Source also provides other services at a select number of terminals to generate additional revenue from its
terminal network. Currently Source provides transloading services for hydrochloric acid at Source’s Grande Prairie and
Red Deer terminals. Source also provides transloading services for resin coated proppants at a number of its terminals.
- 27 -
Source’s Business Model Relative to its Peers
Source has a differentiated business model relative to its peers enabling it to sell substantially all product in-basin
or at the wellsite. Source believes that selling more product in-basin rather than at the mine allows it to capture
additional value throughout the proppant supply chain. The figure below depicts how much of Source’s products are
sold in-basin relative to certain of its peers.
Percentage of Frac Sand Sold In-Basin(1)(2)
Q3 2015
Q3 2016
100%
Source sells substantially all product
in-basin whereas others sell at mine
80%
60%
Substantially
all frac sand
sold at mine
40%
20%
0%
Peer A
Peer B
Peer C
Peer D
Peer E
Source
Notes:
(1) Peers include Emerge Energy Services LP, Fairmount Santrol Holdings Inc., Hi-Crush Partners LP, Smart Sand, Inc. and U.S. Silica Holdings
Inc.
(2) In-basin sales and percentages derived from the related issuers’ public filings available from the Electronic Data Gathering, Analysis and
Retrieval system maintained by the United States Securities and Exchange Commission and the Fairmount Santrol Holdings Inc. Investor
Presentation dated December 2016.
Competitive Strengths
Source believes that the following competitive strengths help it to execute its business strategies of:
• Fully Integrated Network Positioned to Capture Value Throughout the Proppant Supply Chain. Source
believes it is the leading fully integrated supplier and distributer of frac sand in the WCSB providing an
end-to-end solution through its processing facilities, rail assets, leading terminal network and “last mile”
logistics capabilities. Source’s full service approach allows customers to rely on its logistics capabilities to
increase the reliability and timeliness of delivery of frac sand as part of their well completion programs.
Source’s integrated network enabled it to sell substantially all of its product in-basin and nearly 50% of its
product at its customers’ wellsites in 2016.
• Intrinsic Logistics Advantages Created Through First Mover Advantage. Source’s seven Canadian terminals,
strategically located within key producing regions in the WCSB, provide a competitive and first mover
advantage through extensive coverage and throughput capacity, enabling cost-effective delivery of frac sand
directly to customers’ wellsites. In northern Alberta and British Columbia, the number of potential terminal
locations is limited by the remoteness of the geography and challenging topography. Source has secured
locations that it believes are advantaged, where the CN and highway infrastructure intersect. With more than
90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned
expansions in 2017 and 2018; see “Business — Capital Budget”) of storage capacity, which Source believes
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represents approximately four times the amount of its largest competitor, Source is able to meet demand peaks
from its customer base and manage supply backlog associated with well completion delays.
• Direct Access to High-Quality Northern White Sand Supply through Strategically Located Mining and
Processing Facilities. The Sumner Facility and the Blair Facility are each situated on the CN and provide direct
rail access to the WCSB, including full unit train loading capability at the Weyerhaeuser Facility. With all of
Source’s mining and processing capacity situated on the CN, Source is able to create optimal origin-destination
pairs with its expansive WCSB terminal network, which is also situated on the CN.
• Trusted and Embedded Partner with Its Customers. Source is a trusted partner of, and has developed
significant relationships with, leading exploration and production companies and pressure pumpers in Canada.
Source believes that it has contributed to its reputation for dependability and high-quality products and services
through a long track record of timely delivery of frac sand to the wellsites according to customer specifications.
Source believes customers value Source’s substantial scale, extensive logistics network and wellsite solutions to
meet their frac sand demand for their well completion programs.
• Strong Balance Sheet and Ability to Capitalize on Opportunities to Reinforce Leading Position in the WCSB.
Source believes that, following the Offering, Source will have a strong balance sheet and ample liquidity to
pursue organic and external growth initiatives to build on its leading position in the WCSB. Source has a
demonstrated track record of pursuing external growth to expand throughout the proppant supply chain. Source
intends to continue this strategy, which will reinforce and expand Source’s leading market position in the
WCSB.
• Experienced Management Team with a Track Record of Delivering Results. Source’s experienced
Management has over 75 years of collective relevant experience, extensive industry knowledge and a proven
track record of operational success. Source’s Management has built Source into a leading fully integrated frac
sand supplier in Canada through mine development, capacity expansions and investments in logistics
infrastructure.
Business Strategies
Source’s principal business objective is to be a highly efficient and reliable supplier of delivered frac sand in the
WCSB. Key elements of Source’s strategy include:
• Capitalize on Trends in Increased Frac Sand Intensity. Source believes that its leading terminal network,
which Source believes is the largest of its kind in the WCSB, along with its focus on logistics and ability to
efficiently deliver sand directly to the wellsite, attractively position Source to capitalize on trends in increased
frac sand intensity. Exploration and production companies continue to increase well completion proppant
intensities such that in the Montney and Duvernay, for instance, proppant used per well has increased by
approximately 91% and 86%, respectively, from 2013 to the first quarter of 2016 according to the Well
Completions & Frac Database. As customers demand more proppant for well completions, Source believes that,
over time, customers will prefer to consolidate their purchases of frac sand to fully integrated suppliers with
robust logistics capabilities such as Source.
• Increase Leading Market Share Position in Growing WCSB Market. Source intends to continue to position
itself as the leading producer, supplier and distributor of high-quality Northern White frac sand into the WCSB.
Source intends to grow its WCSB position by identifying and executing on organic and external growth
opportunities. Source will continue to evaluate economically attractive proppant supply chain enhancement
opportunities, including additional terminals, Sahara units, mines and sand processing capacity.
• Focus on Offering Superior Logistics and Terminal Flexibility. Source believes it offers a superior logistics
solution to customers by providing substantially all of its product in-basin and over 50% of product at the
wellsite. Logistical capabilities have become an important differentiating factor for frac sand customers, who
increasingly seek convenient in-basin and/or at-the-wellsite proppant delivery capability from suppliers. Source
believes that its dedicated focus on offering a superior logistical solution directly caters to the needs of
exploration and production companies and oilfield service providers.
• Build-Out In-Basin Terminal Network. Source intends to continue to invest in terminals, storage, and rail
infrastructure to meet the growing proppant demand needs of customers. When evaluating new terminal
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locations, Source carefully considers their proximity to exploration and production companies’ drilling and
completion activities, as well as the anticipated frac sand intensity used in the development of these oil and
natural gas resources. Recently, Source has identified and entered into agreements to secure three additional
locations that are suitable for developing into unit train capable terminals. The development of these terminals
will allow Source to increase the amount of sand sold to customers operating in the Montney and Duvernay.
These additional terminals are expected to be placed into service in 2017 and Source believes these terminals
are well positioned to serve and meet the needs of customers.
• Expand Sahara Fleet and Increase Source’s Wellsite Presence. Source believes that its mine-to-wellsite
delivery service and proprietary wellsite mobile sand storage and handling system, Sahara, offers an attractive
value proposition to upstream customers. The increasing intensity of proppant completion designs and the
remote locations of WCSB wellsites has increased the need for proppant inventory management and wellsite
solutions to meet customer demand needs. Sahara addresses these challenges and Source intends to continue to
build out its Sahara fleet to meet the anticipated current and future demand.
• Match Production Capacity with Demand to Control Supply Chain. Source believes that reliable and timely
deliverability of product is a key competitive advantage. Source is able to ensure reliable and timely
deliverability via a fully vertically-integrated proppant supply chain. As demand for frac sand grows, Source
will actively evaluate additional sand resources and processing capacity to maintain its leading WCSB footprint
and market share.
• Maintain Financial Strength and Flexibility. Source plans to pursue a disciplined financial policy to maintain
financial strength and flexibility to enable the Company to actively evaluate new growth opportunities as they
arise. Source believes that, following the Offering, its cash on hand, borrowing base capacity and ability to
access debt and equity capital markets will provide the financial flexibility necessary to achieve its growth
objectives while maintaining a strong balance sheet.
Source’s Customers, Sales, Market Share and Competition
The level of activity in the oil and natural gas industry in the WCSB is influenced by seasonal weather patterns.
Spring breakup makes the ground unstable and less capable of supporting heavy weights. Consequently, municipalities
and transportation departments enforce road bans that restrict the movement of heavy equipment, thereby reducing
drilling and well servicing activity levels. Normally spring breakup begins in late March and restricts activity through
May. The length of spring breakup will depend on the moisture received in March through May.
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In late 2014, Source completed the construction of its mine and processing facilities and sold its first shipment of
sand to customers. During the year ended December 31, 2016, total sand sales were approximately 832,400 metric
tonnes, as compared to approximately 821,500 metric tonnes for the same period in 2015 and as compared to
approximately 727,200 metric tonnes for the same period in 2014. As indicated in the table below, Source’s sales
volumes represented estimated market share of the total frac sand market in the WCSB of 34%, 26%, and 20% in 2016,
2015, and 2014, respectively. Source’s latest monthly sales figures of approximately 130,000 metric tonnes in January
2017 compare to approximately 84,000 metric tonnes in January 2016. Source believes that its estimated terminal
throughput capacity representing over half of the total throughput capacity of all terminals located in the proppantintensive Montney, Duvernay and Deep Basin plays provides the capacity for Source to maintain and potentially
increase its market share of frac sand in the WCSB.
Estimated Source Market Share of Frac Sand in the WCSB(1)(2)
50%
40%
34%
30%
26%
20%
20%
10%
0%
0%
2013
2014
2015
2016
Notes:
(1) Estimated market share of the total frac sand market in the WCSB is based on Source’s historical sand sales volumes in metric tonnes divided
by the total market for sand estimated as follows: historical well count by play, based on data provided by geoSCOUT and the Well
Completions & Frac Database, multiplied by the average amount of proppant pumped per well, by play, in the indicated year based on data
provided by the Well Completions & Frac Database with the exception of 2016, which uses data for the first quarter of 2016 to calculate
proppant intensity due to more complete data.
(2) Although Source believes the above assumptions to be reasonable, there can be no assurance that these assumptions and forecasts are accurate,
and, as such, undue reliance should not be placed thereon. See “Forward-Looking Statements” and “Risk Factors”.
Source’s Customers
Source’s customers include exploration and production companies (such as Encana Corporation, Chevron Canada
Resources Ltd. and Seven Generations Energy Ltd.) and pressure pumping customers (such as Canyon Services Group,
Schlumberger Limited, Trican Well Services Ltd., Halliburton Company and Baker Hughes Incorporated) operating in
the WCSB. Each of Source’s pressure pumping customers in turn serves a number of exploration and production
companies, including specifically those with substantial operations in the Montney, Duvernay and Deep Basin,
providing Source with direct or indirect exposure to many of the key producers in those plays. Source’s goal is to
create long-term, partnership-oriented relationships with its customers. Accordingly, Source strives to solve its
customers’ frac sand supply, logistics, transportation and handling problems which Source believes has strengthened its
customer relationships.
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Source is a party to fixed-term contracts with numerous customers. Source’s customers are primarily exploration
and development companies and pressure pumping companies operating in the WCSB. Source’s goal is to create longterm relationships with its customers. Source’s fixed-term contracts with customers outline volume commitments and
in some cases fixed pricing, the terms of which vary from one to three years (provided that such contracts may be
suspended or terminated early by the customer). This mitigates the impact of any nonpayment or non-performance by,
or significant reduction in purchases by, any of these contracted customers. A significant number of our customers are
serviced on a spot basis where volume thresholds are not set and orders are serviced on an as-available basis at
prevailing market prices.
Source’s Competition
The frac sand industry is highly competitive with numerous participants. Source competes directly with both
producers of Northern White frac sand and Canadian domestic frac sand. These competitors provide varying levels of
service and product type. Source is a leading Northern White frac sand provider in the WCSB who offers a fully
integrated logistics service resulting in in-basin sales, which Source believes provides it with a distinct competitive
advantage over its competitors. Source does not currently compete with Brady Brown frac sand as it is uneconomic to
transport such sand to Canada for use in the WCSB.
Capital Budget
In addition to the Blair Facility Acquisition, Source intends to make approximately $28.673 million of capital
expenditures in 2017. For 2018, Source anticipates a capital expenditure budget of approximately $20 million. The
actual amount of capital expenditures may vary based on, among other things, market conditions, successful financing
activity and oil and gas activity in the WCSB. As a result, actual capital expenditures may differ materially from those
budgeted amounts. Source plans to direct most of its capital investment to the expansion of its logistics and
transportation infrastructure. The timing and amount of capital expenditures are largely discretionary and within
Source’s control. Details of the budget are included in the table below:
2017
Budgeted
amount
($000s)
2018
Budgeted
amount
($000s)
Production Expansion
Terminal Expansion/Improvements
Wellsite Solutions
Blair Facility Improvements
2,000
15,000
5,000
6,673
–
10,000
10,000
–
Total
28,673
20,000
Category:
Three-Year History
2016
On December 8, 2016, Source, by way of the Note Issuers, completed the Note Offering. The net proceeds of the
Note Offering, which amounted to approximately $125 million were used to repay the Previous Credit Facility in full,
to resolve certain other financings and for general corporate purposes. Concurrently with the Note Offering, Source, by
way of Source Canada LP, entered into the Credit Agreement providing for the Credit Facilities.
In early 2016, commodity prices remained low, causing most exploration and production companies to curtail
their capital budgets resulting in continued downward pressure on sand pricing for the period. In the third quarter of
2016, commodity prices began to improve which resulted in increased activity and improved sales volumes in the
fourth quarter of 2016, especially in the WCSB. Exploration and production companies continued to increase their sand
intensity per well to complete wells in the WCSB, which led to record quarterly Canadian sales volumes for Source in
the fourth quarter of 2016.
2015
In 2015, Source executed upon its renewed focus of selling sand directly to its upstream customers through its
processing facilities and terminal network. This however coincided with the dramatic downturn in the oil and gas
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industry which resulted in Source extending certain price concessions to customers in order to maintain its market
share. Source also implemented a general and administrative costs reduction program to withstand the economic
conditions affecting the oil and gas industry and that of its customers. In 2015, Source also completed its Eckville,
Alberta terminal.
2014
In January 2014, Source made its first sand sales and during the balance of 2014, it completed the construction of
the Sumner Facility and the Weyerhaeuser Facility (increasing total production capacity to approximately two million
tonnes per year), accumulated its leased rail car fleet and completed the Wembley Terminal. In the fourth quarter of
2014, Source was able to deliver sand to its customers at total capacity of its processing facilities and the logistics
network it had constructed. In 2014, Source also changed its business focus to its customers by moving away from
transloading sand for third parties and began focusing on direct sales to its customers through its newly completed
terminal network.
Historical
Source began operations in 1998, as a proppant transloading business. From 1998 to 2007, Source further
developed its geographic footprint by adding terminals in key oil and gas basins in Canada and the United States. In
2007, Source commenced developing mine and sand processing facilities at Chippewa Falls, Wisconsin, which it
subsequently sold to EOG Resources, Inc. before completion. In 2010, Source began developing the Sumner Facility
and Weyerhaeuser Facility. In October 2013, Source commercially launched the Sahara. Also in October 2013,
TriWest IV invested in the Source business and collectively became its majority unitholder. TriWest IV’s investment
facilitated the completion of the Sumner Facility, the Weyerhaeuser Facility and the Wembley Terminal.
Recent Developments
Industry Activity
Subsequent to September 30, 2016, Source has seen a significant increase in drilling and completion activity from
Source’s customers and across the WCSB. For the quarter ending December 31, 2016, Source sold 281,472 metric
tonnes of frac sand, compared to 171,624 metric tonnes in the quarter ending December 31, 2015 and 157,210 metric
tonnes in the quarter ending September 30, 2016. In the fourth quarter of 2016, Source set new volumetric records for
its own daily, monthly, and quarterly Canadian sales volumes. After seasonally slowing down near the end of the
fourth quarter of 2016, activity level has increased again in the first quarter of 2017 compared to the fourth quarter of
2016. The heightened level of sales is primarily driven by increased activity levels in the Montney and Duvernay
basins and increased frac sand intensity in the well completion programs of Source’s customers. Source believes that
this increased activity is well served by its Wembley, Edson, Grande Prairie and Fox Creek terminals. The changes in
sand sales noted above are not indicative of future performance. See “Forward-Looking Statements” and “Risk
Factors”.
Activity levels continue to be strong in the early part of 2017. In January 2017, Source sold approximately
130,000 metric tonnes of frac sand compared to 84,000 metric tonnes in January 2016. Source believes that this
increase in industry activity together with the addition of the Blair Facility (in the event the Blair Facility Acquisition is
completed) and Source’s plans to expand its logistical network will lead to increased production and volumes in 2017
compared to 2016.
Blair Facility Acquisition
On February 9, 2017, Source US LP entered into the Blair Purchase Agreement which Source expects will
significantly expand its Northern White frac sand processing capability by acquiring the newly constructed and fullypermitted Blair Facility, as well as the D95 Properties and certain option agreements to acquire adjacent properties.
The Blair Facility consists of a Northern White frac sand mine and related wet processing plant, dry processing plant
and unit train capable loadout facility located on the CN Railway in or around Blair, Wisconsin. The Blair Facility was
constructed on or around October 1, 2015 and has never been commercially operated.
The Blair Facility Acquisition provides a unique opportunity for Source to acquire newly constructed, unused high
quality assets that can be integrated into Source’s leading transportation and logistics network. Further, the Blair
- 33 -
Facility Acquisition will allow Source to expand its Mineral Resources and correspondingly its processing capacity
which will allow Source to reduce instances in which it has to purchase sand at spot prices in order to meet contractual
obligations for specific mesh sizes.
Information Concerning the Blair Facility Acquisition
Sand Resources
According to the Blair Apex Report, the Blair Facility has approximately 25 million metric tonnes of Inferred
Mineral Resources, on over 750 acres of land, as of February 12, 2017. See “Scientific and Technical Information” and
“Business — Descriptions of the Mineral Properties”.
Mining and Wet Processing
The sand resources at the Blair Facility will be mined via digging or ripping, sometimes after blasting, if required.
The sand will then be mechanically processed prior to entering the washing and sorting plant, which features a
dewatering cycle which minimizes water consumption, eliminates the need for settling or tailings ponds, and enhances
operational efficiency. The current capacity of the wet processing plant is 450 metric tonnes per hour which exceeds
the capacity of the Blair Facility’s dry processing plant to allow for enough washed inventory to be created during the
warmer months in Wisconsin such that the dry processing plant can be operated at its maximum capacity all year
round.
The first step in processing the mined sand is a mechanical processing at the front end of the wet processing plant.
In the event parts of the deposit are highly consolidated into sandstone, the sandstone is crushed into its
monocrystalline sand components for further processing. This includes crushing of raw material and the rough
mechanical sorting of crushed material to remove impurities. This processed material is then fed into the wet
processing facility, also located at the mine site, where any remaining impurities are removed and the process material
is sorted by size. Following this washing and sorting process, frac sand is stored on — site before being transported to
the dry processing facility, located on the east side of the property.
Dry Processing Plant and Rail Load Out
The dry processing plant will receive the washed and sorted process material and completely remove all moisture
from the material before sorting it into API specified mesh sizes. Once the material has been screened at the dry
processing plant, it will be transferred via conveyor to silos where it will be stored prior to being transferred to rail cars
for shipment. The Blair Facility has storage of approximately 9,000 metric tonnes of finished frac sand.
The Blair Facility rail load out has approximately five miles of track that is directly connected to a railway
serviced by the CN Railway, which is the only Class I railway that effectively services the Montney, Duvernay, and
Deep Basin. This rail load out has both manifest and unit train service with the CN, which will allow Source to
integrate this facility with its already established logistics and transportation network.
Ancillary Properties
Pursuant to the Blair Facility Acquisition, in addition to acquiring the Blair Facility, Source will also acquire an
additional land lease with a mining and extraction permit located approximately eight miles away from the Blair
Facility and option agreements to acquire adjacent lands next to the Blair Facility owned by two private owners. Source
expects to exercise the option to acquire such properties within six months of the Blair Facility Acquisition Closing
Date at a cost of approximately US$2.5 million (the “Blair Option Exercise”). See “Use of Proceeds”.
- 34 -
Blair Purchase Agreement
On February 9, 2017, Source US LP entered into the a purchase and sale agreement (the “Blair Purchase
Agreement”) with the Seller, Sand Products Wisconsin, LLC, SPC, VPC and Brown Gibbons Lang & Company
Securities Inc. to acquire all of the issued and outstanding membership interests of Sand Products which, through its
subsidiaries (Spartan Sand LLC and Sand Products Rail LLC), holds the assets forming the Blair Facility (the “Blair
Facility Acquisition”). The Blair Purchase Agreement establishes that the closing of the Blair Facility Acquisition will
occur within five days of the satisfaction of the conditions to closing described in the Blair Purchase Agreement being
satisfied or such earlier date as the parties may agree (the “Blair Facility Acquisition Closing Date”).
The summary of certain provisions of the Blair Purchase Agreement provided below does not purport to be
complete and is qualified in its entirety by reference to the provisions of the Blair Purchase Agreement, which has been
filed under the Company’s profile at www.sedar.com.
Purchase Price
The aggregate consideration under the Blair Facility Acquisition is US$45 million subject to adjustments upon
Source US LP’s discovery of any structural, mechanical or other condition that would have a significant adverse effect
on the value of the Blair Facility or which would adversely affect the normal life of the Blair Facility (a “Defect”)
provided such Defects must in the aggregate total at least US$100,000 and the total cumulative total of all adjustments
may not exceed US$2 million. Source US LP provided a deposit of US$100,000 (the “Earnest Money”) upon
execution of the Blair Purchase Agreement which will be credited to the purchase price at the time of the closing of the
Blair Facility Acquisition or returned to Source US LP in certain circumstances if the Blair Facility Acquisition is not
completed. The cash required to close the Blair Facility Acquisition will be funded from the net proceeds of the
Offering. See “Use of Proceeds”.
Representations and Warranties
The Blair Purchase Agreement includes customary representations and warranties from each of the parties for a
transaction of this nature in relation to, among other things, corporate existence, corporate authorization, no conflicts
and various representations and warranties specific to the assets of Sand Products or the Blair Facility, as applicable.
Closing Conditions
Completion of the Blair Facility Acquisition is subject to closing conditions as set forth in the Blair Purchase
Agreement. The following closing conditions are in favor of Source US LP: the accuracy of representations and
warranties, the delivery of appropriate corporate resolutions approving the Blair Facility Acquisition and all related
matters from the Seller, all necessary documents needed to comply with any and all requirement imposed by applicable
laws, rules or ordinances necessary to authorize and validate the Blair Facility Acquisition, compliance, in all material
respects, with all agreements and conditions required by the Blair Purchase Agreement, a title commitment for the real
property comprising the Blair Facility, the Offering has been completed, no permits, license of contracts of Sand
Products have been revoked, suspended or amended, all instruments of conveyance and warrant termination
documentation have been entered into in form and substance satisfactory to Source US LP and the Seller
Indemnification Parties have entered into a non-competition and non-solicitation agreement in the form attached to the
Blair Purchase Agreement. The following closing conditions are in favor of the Seller: the accuracy of representations
and warranties, the delivery of appropriate corporate resolutions approving the Blair Facility Acquisition and all related
matters from Source US LP, all necessary documents needed to comply with any and all requirement imposed by
applicable laws, rules or ordinances necessary to authorize and validate the Blair Facility Acquisition, Source US LP
having posted letters of credit for the Blair Facility and the D95 North Property, and Source US LP paying the purchase
price.
Termination
The Blair Purchase Agreement may be terminated at any time prior to the Blair Facility Acquisition Closing Date
by:
(a) mutual written consent of Source US LP and the Seller;
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(b) by Source US LP in the event it discovers a Defect which exceeds US$2 million and the Seller and Source
US LP have not entered into a corresponding reduction to the purchase price satisfactory to Source US LP;
(c) by Source US LP if it is not satisfied with the results of its due diligence investigation prior to February 15,
2017;
(d) by Source US LP or the Seller if any of their respective conditions precedent become incapable of fulfillment
other than as a result of a breach of the Blair Purchase Agreement by such party seeking termination pursuant
to this clause; or
(e) by Source US LP or the Seller if there has been a material violation or breach (a “Breach”) of any covenant,
representation or warranty which has caused or would cause, any of their respective condition precedents not
to be satisfied and any such violation or Breach is incapable of being cured by the breaching party within 15
days after written notice thereof.
In the event of Seller’s refusal to close the Blair Facility Acquisition on or after February 12, 2017, so long as
Source US LP has not committed a Breach and such Breach has not been cured by Source US LP within 10 days after
written notice thereof, Source US LP will have the following remedies available to it, which will be cumulative and not
exclusive: (a) the Earnest Money will be returned to Source US LP; (b) the Seller will pay to Source US LP a breakup
fee of US$10 million; (c) the Seller will pay to Source US LP the additional sum of US$10 million as liquidated
damages for the consequential damages resulting from the impact Seller’s default will have on the Offering, Source US
LP, and the Company’s and Source US LP’s related business operations; and (d) the Buyer may specifically enforce
the Blair Purchase Agreement, provided that such action is commenced within six months after such right arises.
Indemnification
The Seller Indemnification Parties, jointly and severally, agreed to indemnify and hold Source US LP, and its
partners, officers, directors and unitholders (the “Source Indemnified Parties”) harmless against and in respect of the
following (the “Source Indemnified Losses”): (a) all obligations and liabilities of the Seller, other than permitted
encumbrances, whether accrued, absolute, fixed, contingent, or otherwise, as of the closing of the Blair Facility
Acquisition not expressly assumed by Source US LP pursuant to the Blair Purchase Agreement; (b) any claim, liability,
or damage incurred or sustained by Source US LP as a result of any inaccuracy of or breach by the Seller or Sand
Products in any respect of any of its representations, warranties or obligations, or any breach of or failure by the Seller
to perform in any respect any of its covenants contained in the Blair Purchase Agreement, or in certificates, or other
documents delivered thereunder or pursuant thereto; (c) any claim by a third party arising from the use of the Blair
Facility or the operation of the Blair Facility prior to the closing of the Blair Facility Acquisition; (d) any liability
arising out of any employment benefit plan applicable to employees of Sand Products in existence prior to the closing
of the Blair Facility Acquisition, including any associated liability for funding, withdrawal, excise taxes, or penalties;
(e) any and all claims, demands or liabilities whatsoever, whether known or unknown or suspected to exist, arising
under federal, state, and local statutory or common law, which employees of Sand Products ever had or may now have
against Sand Products arising out of the employee’s employment with Sand Products prior to the closing of the Blair
Facility Acquisition; and (f) all reasonable costs and expenses (including reasonable attorneys’ fees) incurred by
Source US LP in connection with any third party action, suit, proceeding, demand, claim, assessment or judgment
incident to any of the matters indemnified against. Notwithstanding the foregoing, the total obligation of the Seller
Indemnification Parties for indemnification of Source Indemnified Parties is limited to Source Indemnified Losses that
exceed US$200,000 (the “Basket”) and then only to the extent of the amount in excess of the Basket. The Source
Indemnified Parties may not recover more than an aggregate of US$1 million (the “Indemnity Cap”) collectively from
the Seller Indemnification Parties for indemnification under the Blair Purchase Agreement.
Source US LP agreed to indemnify and hold the Seller, and its members, officers, directors and shareholders (the
“Seller Indemnified Parties”) harmless against and in respect of the following (the “Seller Indemnified Losses”): (a)
all obligations and liabilities of the Seller expressly assumed by Source US LP pursuant to the Blair Purchase
Agreement; (b) any claim, liability or damage incurred or sustained by the Seller as a result of any inaccuracy of or
breach by Source US LP in any material respect of any of its representations and warranties, or any breach of or failure
by Source US LP to perform in any material respect any of its covenants contained in the Blair Purchase Agreement, or
in certificates, or other documents delivered thereunder or pursuant thereto; and (c) all reasonable costs and expenses
(including reasonable attorneys’ fees) incurred by the Seller in connection with any third party action, suit, proceeding,
- 36 -
demand, claim, assessment or judgment incident to any of the matters indemnified against. Notwithstanding the
foregoing, Source US LP shall be obligated to indemnify the Seller Indemnified Parties only to the extent that the
aggregate amount of the Seller Indemnified Losses exceeds the Basket, and then only to the extent of the amount in
excess of the Basket. The Seller Indemnified Parties may not recover more than an aggregate of the Indemnity Cap
collectively from Source US LP for indemnification under the Blair Purchase Agreement.
The Source Indemnified Parties’ and the Seller Indemnified Parties’ right to seek indemnification under the Blair
Purchase Agreement will extend for a period of 12 months following the Blair Facility Acquisition Closing Date.
Descriptions of the Sumner Facility and the Blair Facility
A description of the characteristics of the Sumner Facility and the Blair Facility are included in this prospectus in
Appendix “A” — Descriptions of the Mineral Properties.
Other Business Information
Employees
Source employed over 220 employees as at December 31, 2016 in both Canada and the United States. None of its
employees are unionized or subject to collective bargaining agreements. Source considers all employee relations to be
in good standing.
Source further expects that if the Blair Facility Acquisition is completed, Source will need to hire approximately
75 additional employees in Wisconsin to operate the Blair Facility.
Foreign Operations
The Sumner Facility, the Weyerhaeuser Facility and the Blair Facility are each located in Wisconsin, United
States. As such, Source’s business is exposed to various degrees of political, economic, regulatory, legal and other risks
and uncertainties. See “Risk Factors — Risks Related to Source”.
Regulation
Source’s operations are subject to various federal, provincial, state and local laws affecting the mining and
mineral processing industry across Canada and the United States. These laws include those relating to employee health
and safety, environmental permitting and licensing, air and water emissions, wetlands, water pollution, waste
management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties,
hazardous materials, and natural resources in the jurisdictions where Source operates. Source and its customers are
required to adhere to these regulations and non-compliance can result in significant costs and liabilities. While Source
believes that its operations are in substantial compliance with these laws and regulations, and that continued
compliance with current requirements would not have a material adverse effect on Source, there is no assurance that
this degree of compliance will continue into the future. See “Risk Factors — Risks Related to the Company and Risks
Related to Environmental, Mining and Other Regulation”.
Source does not believe that compliance with federal, provincial, state or local laws and regulations will have a
material adverse effect on its business, financial position, or results of operations or cash flows. However, there can be
no assurance that future events, such as changes in existing laws or enforcement policies, the promulgation of new laws
or regulations, or the development or discovery of new facts or conditions adverse to its operations will not cause it to
incur significant costs.
Source’s customers are subject to extensive controls and regulations imposed by various levels of government.
These governments may regulate or intervene with respect to price, taxes, royalties, and exportation of oil and natural
gas. Such regulations may be changed from time to time in response to economic and political conditions and could
potentially have an adverse effect on Source’s customers and thus an effect on Source’s operations.
Insurance
Source believes that its insurance coverage is customary for the industries in which it operates and is adequate for
its business. As is customary in the frac sand and fuel processing and distribution industries, Source reviews its safety
- 37 -
equipment and procedures and carries insurance against most, but not all, risks of its business. Losses and liabilities not
covered by insurance would increase Source’s costs. To address the hazards inherent in Source’s business, Source
maintains insurance coverage that includes physical damage coverage, third-party general liability insurance,
employer’s liability, environmental and pollution and other coverage, although coverage for environmental and
pollution-related losses is subject to significant limitations.
- 38 -
SELECTED HISTORICAL FINANCIAL INFORMATION
The majority of Source’s revenue is derived from mining, processing and providing a full frac sand delivery
solution to customers in-basin or at the wellsite. In addition, Source generates revenue from related services including
terminal services, which involve transloading services, and wellsite solutions, which include wellsite storage and
logistics coordination at the wellsite. Source commenced material frac sand sales after completion of the Weyerhaeuser
Facility in June 2014, increasing sales volumes to approximately 280,000 metric tonnes in the fourth quarter of 2014
and achieving an Adjusted Gross Margin of $78 per metric tonne in the same period. As indicated below under
“Operating Data”, Source maintained its frac sand sales volumes through the recent downturn in commodity prices on
an annual basis and has been experiencing the effects of a recovery of frac sand sales in the fourth quarter of 2016.
Activity levels continue to be strong in the early part of 2017. In January 2017, Source sold approximately
130,000 metric tonnes of frac sand compared to approximately 84,000 metric tonnes in January 2016.
The following table sets out selected historical financial information as at and for the periods indicated. The
selected historical financial information below other than Adjusted Gross Margin and Adjusted EBITDA is extracted or
derived from Source’s audited financial statements. Investors should read the selected historical financial information
below in conjunction with Source’s management’s discussion and analysis, Source’s audited financial statements and
the accompanying notes included in this prospectus under Appendix “FS” — Financial Statements and Management’s
Discussion and Analysis.
Year Ended December 31,
(in $ thousands unless otherwise indicated)
2016
2015
2014
Combined Statements of Operations Data
Sales:
Sand revenue
Wellsite solutions revenue
Terminal services revenue
$ 112,962
$ 21,261
$ 4,976
$ 139,574
$ 6,208
$ 7,353
$ 118,755
$ 11,782
$ 15,969
$ 139,199
$ 153,135
$ 146,506
Expenses:
Cost of sales
$ 123,257
$ 116,364
$ 95,504
Adjusted Gross Margin
$ 15,942
$ 36,771
$ 51,002
Other Income
Other Expenses:
Operating and general and administrative expense
Foreign exchange loss/(gain)
Add:
Infrequent transaction and professional fees
$
$
$
$ 23,866
$ 2,059
$ 18,183 $ 18,913
($ 1,255) ($
64)
$
$
Adjusted EBITDA
($ 4,198) $ 22,385
Net Income (Loss)
($ 43,402) ($ 9,766) $ 17,035
Statements of Cash Flow Data
Cash provided by operating activities
Cash used in investing activities
Cash provided by financing activities
($ 9,453) $ 23,624 ($ 7,882)
($ 10,470) ($ 35,461) ($ 37,621)
$ 20,122 $ 10,970 $ 46,167
Other Financial Data
Capital expenditures
Long term debt (including current portion)(1)
Total assets(1)
$ 6,405
$ 124,351
$ 219,406
$ 38,901
$ 83,114
$ 231,112
$ 45,390
$ 63,797
$ 194,788
Operating Data
Sand sales volumes (metric tonnes)
Sand revenue / metric tonne ($/MT)
Gross Margin
Gross Margin / metric tonne ($/MT)
Adjusted Gross Margin / metric tonne ($/MT)
$
$
$
$
832,435
136
7,903
10
19
821,482
$
170
$ 29,638
$
36
$
45
727,213
$
163
$ 46,391
$
64
$
70
Notes:
(1) At year end.
- 39 -
4,859
926
1,796
746
$
420
229
$ 32,802
Reconciliation of EBITDA and Adjusted EBITDA to Net Income:
Year Ended December 31,
2016
2015
2014
(in $ thousands unless otherwise indicated)
Net income (loss)
Add:
Deferred tax
Current tax
Interest expense
Cost of sales — depreciation
Depreciation
($43,402) ($ 9,766) $ 17,035
($ 516)
$
4
$ 16,202
$ 8,039
$ 6,373
$
398
$
171
$ 12,079
$ 7,133
$ 5,674
$
379
$
58
$ 8,838
$ 4,611
$ 3,146
EBITDA
Add:
Finance expense excluding interest expense
Management Fee(1)
Fair value adjustment on SES Shareholder Loan(2)
Loss (gain) on asset disposal
Loss (gain) on impairment
Infrequent transaction and professional fees(3)
Loss (gain) on derivative liability
($13,300) $ 15,689
$ 34,067
$ 3,289
$ 1,043
–
$ 1,082
$ 1,852
$
926
$
910
$
160
$ 1,456
–
($ 3,110)
–
$
229
–
Adjusted EBITDA
($ 4,198) $ 22,385
$
267
$ 1,683
$ 3,906
$
94
–
$
746
–
$ 32,802
Notes:
(1) See “Corporate Structure — Source”.
(2) See management’s discussion and analysis in Appendix “FS”.
(3) Infrequent transaction and professional fees relate to certain transaction costs that Management considers infrequent in nature.
Reconciliation of Adjusted Gross Margin to Gross Margin:
Year Ended December 31,
2016
2015
2014
(in $ thousands unless otherwise indicated)
Gross Margin
Add:
Cost of sales — depreciation
$ 7,903
$29,638
$46,391
$ 8,039
$ 7,133
$ 4,611
Adjusted Gross Margin
$15,942
$36,771
$51,002
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s discussion and analysis of Source for the years ended December 31, 2016, 2015 and 2014 are
included in this prospectus in Appendix “FS” — Financial Statements and Management’s Discussion and Analysis.
DESCRIPTION OF SHARE CAPITAL
The authorized share capital of the Company as of the date hereof consists of an unlimited number of Common
Shares, an unlimited number of preferred shares, issuable in series, and an unlimited number Class B Shares. As of the
date of this prospectus, there is a single Common Share issued and outstanding. The following is a description of the
rights, privileges, restrictions and conditions attaching to Source’s share capital.
Common Shares
The Common Shares have the following rights, privileges, restrictions and conditions:
Voting Rights: Holders of Common Shares are entitled to receive notice of, to attend and to vote at all meetings of
Shareholders and are entitled to one vote per Common Share held at such meetings, except meetings of holders of
another class or one or more series of another class of shares who are entitled to vote separately as a class at such
meeting.
Dividends: Holders of Common Shares are entitled to receive dividends if, as and when declared by the Board,
such dividends or other distributions as may be declared thereon by the Board from time to time.
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Ranking: In the event of any voluntary or involuntary liquidation, dissolution or winding-up of Source or any
other distribution of Source’s assets among its shareholders for the purpose of winding-up its affairs (a
“Distribution”), holders of Common Shares, subject to the preferences accorded to holders of preferred shares
and any other shares of the Company ranking senior to the Common Shares from time to time with respect to
payment on a Distribution, to share equally, share for share, in the remaining property of the Company.
Preferred Shares
The preferred shares may at any time and from time to time be issued in one or more series, each series to consist
of such number of shares as may, before the issuance thereof, be determined by the Board. Subject to the provisions of
the ABCA, the Board shall fix, before issuance, the designation, rights, privileges, restrictions and conditions attaching
to each series of preferred shares including, without limitation, participation rights in respect of a Distribution (if any)
and dividend rights (if any). The preferred shares of each series will rank on parity with every other series of preferred
shares of the Company and shall have priority over the Common Shares and any other shares of the Company ranking
junior to the preferred shares with respect to redemption, the payment of dividends and any Distribution. Holders of
preferred shares will not be entitled to received notice of, attend or vote at any meetings of Shareholders.
Class B Shares
The Class B Shares have the following rights, privileges, restrictions and conditions:
Voting Rights: Holders of Class B Shares are entitled to receive notice of, to attend and to vote at all meetings of
Shareholders and are entitled to one vote per Class B Shares held at such meetings, except meetings of holders of
another class or one or more series of another class of shares who are entitled to vote separately as a class at such
meeting.
Dividends: Holders of Class B Shares are not entitled to dividends.
Ranking: In the event of a Distribution, holders of each series of Class B Shares are not entitled to share in the
remaining property of the Company.
Subdivision, Consolidation, etc.: If the Common Shares or preferred shares are at any time subdivided,
consolidated, converted or exchanged for a greater or lesser number of shares of the same or another class,
appropriate adjustment will be made in the rights and conditions attached to the Class B Shares so as to maintain
and preserve the relative rights of the holders of the Class B Shares. Further, any changes made to the rights and
conditions attached to the Common Shares shall correspondingly be made to the rights and conditions attached to
the Class B Shares so as to maintain and preserve the relative rights of the holders of the Class B Shares.
Pursuant to the Source Canada Exchange Agreement, TriWest IV US Fund LP will have to surrender each Class B
Share for each Common Share issued on an exchange of the Exchangeable LP Securities. See “Corporate Structure —
Reorganization”.
DESCRIPTION OF INDEBTEDNESS
The following is a summary of the material terms of certain indebtedness of Source. This summary does not
purport to be complete and is subject to, and is qualified in its entirety by reference to the full text of such agreements
and instruments. A copy of the Credit Agreement and the Note Indenture are available under the Company’s profile at
www.sedar.com.
Indebtedness outstanding following the Offering
Credit Facilities
General
Source is a party, by way of Source Canada LP, to the Credit Agreement providing for the Credit Facilities, which
mature on December 8, 2018. Source expects to increase the Revolver Limit to $50,000,000 (which would include a
swingline with a sublimit of $5,000,000) following the Closing.
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Interest Rates, Fees, Payments and Prepayments
Under the terms of the Revolver Commitment, margins charged on Canadian prime rate loans, U.S. base rate
loans, Libor loans, bankers’ acceptances, letters of credit and standby fees vary depending on the excess availability.
Margins on Canadian prime rate loans and U.S. base rate loans range from 1.00% per annum when the excess
availability is greater than 50% and up to 3.00% per annum when the excess availability is less than or equal to 20%.
Margins on Libor loans, bankers’ acceptances and letters of credit under the Revolver Commitment range from 2.50%
per annum when the excess availability is greater than 50% and up to 4.50% per annum when the excess availability is
less than or equal to 20%. Standby fees will range from 0.50% per annum when the excess availability is greater than
50% and up to 0.90% per annum when the excess availability is less than or equal to 20%. Margins on the SBLC
Facility are 1.50% per annum. The excess availability is calculated as (a) the lesser of (i) the borrowing base and
(ii) the Revolver Commitment minus (b) the aggregate outstanding principal amount under the Revolver Commitment,
or when expressed as a percentage, is the percentage equal to: [(a)–(b)] ÷ (a); provided that where the result of the
numerator is a negative number, the numerator shall be deemed to be zero (the “Line Cap”).
Loans bearing interest based on Canadian prime rate or U.S. base rate may be prepaid at any time without penalty
with written notice one to three days in advance; provided that Source Canada LP may repay a swingline loan without
any prior notice. Prepayment of outstanding letters of credit, bankers’ acceptances and LIBOR loans cannot be prepaid
but may be cash collateralized with the Bank Agent pursuant to the terms of the Credit Agreement.
Covenants
The Credit Agreement contains customary negative covenants including, but not limited to, restrictions on Source
Canada LP’s and each of the Credit Facilities Guarantors’ ability to make certain distributions, merge, consolidate and
amalgamate with other companies, incur indebtedness, make certain investments, undertake asset sales, use of the
proceeds under the Credit Facilities, provide certain forms of financial assistance, transact or have any outstanding
financial instruments other than permitted hedging instruments, hypothecate, charge, pledge or otherwise encumber
their assets other than certain permitted encumbrances, and prepay or amend the Notes.
The Credit Agreement contains customary affirmative covenants including, but not limited to, delivery of
financial and other information to the Lenders, notice to the Lenders upon the occurrence of certain material events,
maintenance of insurance, maintenance of existence, payment of taxes and other claims, maintenance of properties and
insurance, access to books and records by the Lenders (including the right to field exams and inventory appraisals),
compliance with applicable laws and regulations and further assurances.
The Credit Agreement includes a financial covenant that, at all times when Source’s excess availability is less
than 20% of the Line Cap, Source must maintain a minimum fixed charge coverage ratio equal to or greater than:
(a) 1.10:1.00, from the date the Line Cap is less than 20% to the end of the fiscal quarter ended June 30, 2017
and
(b) 1.25:1.00, at all times thereafter.
Source Canada LP is subject to a payment condition whereby in the event Source Canada LP’s excess availability
is greater than 20% of the Line Cap, on a pro forma basis, any Restricted Payments (as defined in the Note Indenture)
will be permitted.
Events of Default
The Credit Agreement provides that, upon occurrence of one or more events of default, Source’s obligations
thereunder may be accelerated, the lending commitments thereunder terminated and the security granted in favour of
the Bank Agent, on behalf of the Lenders, will become enforceable. Such events of default include payment defaults to
the Lenders, inaccuracies of representations and warranties, covenant defaults, change of control, bankruptcy
proceedings, material money judgments, material adverse effect and other customary events of default.
Security and Guarantees
The Credit Facilities are guaranteed by each member of the Restricted Group, Source LP GP and Source US LP
GP (collectively, the “Credit Facilities Guarantors”), Source Canada LP and such Credit Facilities Guarantors have
each provided a first-ranking security interest to the Bank Agent, for and on behalf of itself and the Lenders, in all
present and after-acquired inventory, accounts receivable, accounts (and the amounts therein) held at any financial or
- 42 -
deposit taking institutions (other than amounts which arise from the sale, license, assignment or other disposition of
priority collateral under the Notes) and proceeds of each of the foregoing and a second-ranking security interest on all
other present and after-acquired real and personal property, which are subject to the terms of an intercreditor agreement
among Computershare Trust Company of Canada (in its capacity as trustee and collateral agent for the holders of
Notes), the Bank Agent (as collateral agent under the Credit Facilities), the Note Issuers and the Credit Facilities
Guarantors.
Notes
General
On December 8, 2016, Source completed the Note Offering in which the Note Issuers issued $130,000,000
aggregate principal amount of 10.5% Senior Secured First Lien Notes due December 15, 2021. Interest is payable on
the Notes semi-annually on December 15 and June 15. The Notes are direct senior secured obligations of the Note
Issuers. As such, the Notes rank senior in right of payment of all future indebtedness of the Note Issuers. The Note
Issuers may, at their option, redeem all or part of the Notes at any time prior to December 15, 2018 at a make-whole
price set out in the Note Indenture and on or after December 15, 2018 at the redemption prices set forth in the Note
Indenture plus, in each case, accrued and unpaid interest, if any, to the redemption date. In addition, prior to
December 15, 2018, the Note Issuers may, at their option, redeem up to 35% of the aggregate principal amount of the
Notes with the net proceeds of equity offerings by Source at a redemption price of 110.500% of the principal amount of
the Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date (the “Notes 35% Optional
Redemption”). Source expects to exercise the Notes 35% Optional Redemption following the completion of the
Offering. See “Use of Proceeds”.
Security and Guarantees
The Notes and the guarantees of the Notes are secured (a) on a first-priority lien basis, subject to certain permitted
liens, by certain collateral comprised of substantially all of the tangible and intangible assets of each member of the
Restricted Group other than receivables and inventory of each member of the Restricted Group and certain related
rights and proceeds relating thereto which secure the Credit Facilities on a first-priority lien basis and (b) on a secondpriority lien basis, subject to certain permitted liens, by receivables and inventory of each member of the Restricted
Group and certain related rights and proceeds relating thereto which secure the Credit Facilities on a first-priority lien
basis, in each case, whether now owned or hereafter acquired, subject to certain exceptions, limitations and risks. The
Notes are guaranteed by each member of the Restricted Group.
Relevant Transaction Rights
The Note Indenture provides holders of Notes with the right to receive a cash payment in connection with certain
transactions involving the sale of assets or securities of Source on a consolidated basis or an initial public offering,
such as this Offering, on or prior to December 15, 2021.
In connection with the Offering, each $1,000 principal amount of Notes entitles the holder thereof to a payment in
cash equal to 125% of the value (the “Cash RTR Payment”) of the quotient (the “IPO Amount”) obtained by
dividing (a) 4.0% of the number of Common Shares outstanding (on a fully-diluted basis) immediately prior to the
consummation of the Offering (calculated without giving effect to the issuance of the Common Shares under the
Offering), being 1,136,220 and (b) 130,000. Notwithstanding the foregoing, the Note Issuers may, at their option, in
lieu of paying the Cash RTR Payment, issue a number of Common Shares that (based on the Offering Price) have an
aggregate value equal to 100% of the IPO Amount (the “Common Shares RTR Payment”). Source intends to satisfy
the aggregate of the Cash RTR Payments that will become owing upon Closing by providing the holders of Notes with
a Common Shares RTR Payment.
Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common
Shares RTR Payment will be deemed to have entered into a lock-up agreement the terms of which are substantially
similar to those of the Lock-Up Agreements.
Other Provisions
The Note Indenture contains the terms and provisions governing the Notes, including covenants respecting
limitations on restricted payments, limitations on additional indebtedness, limitations on liens, limitations on
- 43 -
transactions with affiliates, limitations on asset sales, limitations on conduct of business, provision of financial
information, limitations on amalgamations, mergers and consolidations and designation of restricted and unrestricted
subsidiaries.
Equipment Loans and Capital Leases
Source has entered into various capital lease and equipment loan agreements which are secured by the specific
assets under lease or loan. The interest rates for these obligations range from 4.25% to 12% per annum, while the
respective maturity dates of such obligations range between 2017 and 2018.
Indebtedness being repaid in connection with the Offering
Shareholder Loans
Source Canada LP has been advanced the following Shareholder Loans by way of unsecured promissory notes as
amended, from: (a) SES Canada LP issued on March 26, 2014 for $12.5 million bearing interest at 25% per annum
which, from October 26, 2016, is paid through in kind interest (the “SES Shareholder Loan”); (b) SES Canada LP
issued on December 21, 2015 for $7.5 million bearing interest at 18% per annum which, after October 21, 2016, is paid
through in kind interest, which interest increases to 25% per annum 18 months following the date of its advance (the
“SES II Shareholder Loan”); and (c) certain Shareholders, including SES Canada LP, issued on September 7, 2016
for $2 million bearing no interest, the repayment of which is due on September 7, 2026 (the “SES III Shareholder
Loans”).
Further, in connection with the Previous Credit Facility certain Shareholders, including SES Canada, provided
guarantees to the Previous Credit Facility syndicate in the aggregate of $5.5 million. The agreements governing such
guarantees stipulated that if the Previous Credit Facility was repaid, promissory notes for a corresponding amount and
on the same terms as the SES III Shareholder Loans would be issued to such Shareholders. The Previous Credit
Facility was repaid in connection with the Note Offering and accordingly, Source Canada LP issued such promissory
notes as of the closing of the Note Offering to those Shareholders for an aggregate of $5.5 million bearing no interest
(the “SES IV Shareholder Loans”), the repayment of which is expected to be due on the tenth anniversary of the date
of issue. The repayment of amounts due under the Shareholder Loans is subordinated to the Notes.
Sand Royalty Loan
Source Canada LP, as borrower, is a party to a loan agreement dated October 16, 2013 with Sand Royalty LP, as
lender, providing for a reducing term loan to a maximum not to exceed $10,150,000 (the “Sand Royalty Loan”). The
Sand Royalty Loan may be drawn down in maximum monthly draws of $350,000. Sand Royalty LP is a limited
partnership formed by Jim McMahon and the Class B Founder, two of the current unitholders of Source. The Sand
Royalty Loan is subordinated to the Notes and bears interest at 8% per annum and matures on March 1, 2022. The
Sand Royalty Loan is secured by a general security agreement from Source Canada LP and certain of its subsidiaries,
which security is subordinated to the security of the Notes.
DIVIDEND POLICY
Dividends and Dividend Policy
The Company has never declared or paid any dividends on the Common Shares and does not currently anticipate
paying any dividends on the Common Shares following completion of the Offering. The Company currently intends to
use its future earnings and other cash resources for the operation and development of its business, but may declare and
pay dividends in the future as operational circumstances permit. Any future determination to pay dividends on the
Common Shares will be at the sole discretion of the Board of Directors after considering a variety of factors and
conditions existing from time to time, including current and future commodity prices, foreign exchange rates, the
Company’s hedging program, current operations including production levels, operating costs and debt service
requirements, available investment opportunities and the satisfaction of the liquidity and solvency tests imposed by the
ABCA for the declaration and payment of dividends.
Under the Credit Agreement, Source and the Credit Facilities Guarantors are restricted from making any
distributions (including dividends) to or for the benefit of Shareholders or persons associated with Shareholders (within
the meaning of the ABCA) in any amount which would cause a breach of a provision of the Credit Agreement.
- 44 -
In addition, the payment of dividends by a corporation is governed by the liquidity and insolvency tests described
in the ABCA. Pursuant to the ABCA, after the payment of a dividend, the Company must be able to pay its liabilities
as they become due and the realizable value of its assets must be greater than its liabilities and the legal stated capital
of its outstanding securities.
CONSOLIDATED CAPITALIZATION
The following table sets forth the cash and consolidated capitalization of Source as at December 31, 2016 before and
after giving effect to the Treasury Offering and the use of the proceeds therefrom as described in “Use of Proceeds”.
This table must be read in conjunction with Source’s management’s discussion and analysis and Source’s historical
financial statements and accompanying notes contained in this prospectus.
Cash
Debt
Credit Facilities(1)
Notes(2)
Finance lease obligations and other long-term debt
Shareholder Loans(3)
Sand Royalty Loan(4)
Preferred shares obligation
Shareholder’s Equity
Partner’s Equity
Shareholder’s equity
As at December 31, 2016, before
giving effect to the Treasury Offering
(unaudited)
($000,
except share amounts)
–
As at December 31, 2016, after
giving effect to the Treasury Offering(5)(6)
(unaudited)
($000,
except share amounts)
86,195
12,291
110,171
1,889
36,770
4,599
70,513
12,291
80,578
1,889
–
–
–
(59,219)
–
–
243,777
Notes:
(1) See “Description of Indebtedness — Indebtedness outstanding following the Offering — Credit Facilities”. As at March 1, 2017,
approximately $23.5 million was outstanding under the Credit Facilities. The borrowing base under The Credit Facilities was determined to be
$34,758,326 as of January 31, 2017.
(2) See “Description of Indebtedness — Indebtedness outstanding following the Offering — Notes”.
(3) See “Description of Indebtedness — Indebtedness being repaid in connection with the Offering — Shareholder Loans”.
(4) See “Description of Indebtedness — Indebtedness being repaid in connection with the Offering — Sand Royalty Loan”.
(5) Assumes the issuance of 1,136,220 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to
satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing. See “Description of Indebtedness —
Indebtedness outstanding following the Offering — Notes — Relevant Transaction Rights”.
(6) After deducting the Underwriters’ Commission of $16.5 million and estimated expenses of the Treasury Offering of $3.5 million (after
estimated tax effects). See “Options to Purchase Securities” and “Executive Compensation — Option Plan”.
OPTIONS TO PURCHASE SECURITIES
The following table sets forth certain information in respect of Options to purchase Common Shares that are
anticipated to be outstanding at Closing. Options will be issued to executive officers and certain employees of the
Company in connection with the Reorganization at an exercise price equal to the Offering Price. See also “Executive
Compensation — Option Plan”.
Group (Number in Group)
Executive officers of the Company (Š persons)
Employees of the Company (Š persons)
Total
Common Shares
Under Option (#)
Exercise Price per
Common Share(1)
($)
Market Value of
Common Shares
Under Option(2)
($)
Expiration Date(3)
Š
Š
Š
Š
Š
Š
–
–
–
Š—Š
Š—Š
Š—Š
Notes:
(1) The exercise price of all Options will be the Offering Price.
(2) Given the exercise price will be the Offering Price, the value of Options upon the Closing is nil.
(3) This column discloses the applicable expiry dates. The expiry dates for the Options are based on a set expiry of five years from the date of
grant.
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PRIOR SALES
On February 7, 2017, a single Common Share of the Company was issued to Brad Thomson in connection with
the incorporation of the Company (the “Initial Common Share”). An aggregate of 28,831,686 Common Shares and
1,395,778 Class B Shares will be issued pursuant to the Reorganization and the Initial Common Share will be
cancelled. See “Corporate Structure — Reorganization”. No other Common Shares or Class B Shares were issued
during the 12 months preceding the date hereof.
Pursuant to the Note Indenture, each $1,000 principal amount of Notes entitles the holder thereof to a Cash RTR
Payment, which the Note Issuers may satisfy by providing such holder with a Common Shares RTR Payment. Source
intends to satisfy the aggregate of the Cash RTR Payments that will become owing upon Closing by providing the
holders of Notes with Common Shares RTR Payments, resulting in the issuance of 1,136,220 Common Shares
(assuming no applicable withholdings) to the holders of Notes shortly after the Closing. See “Description of
Indebtedness — Indebtedness outstanding following the Offering — Notes — Relevant Transaction Rights”.
ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL
RESTRICTION ON TRANSFER
The following table sets forth the number of securities of each class of securities of Source that, to the knowledge
of Source, are anticipated to be in escrow or subject to a contractual restriction on transfer at Closing and the
percentage that number represents of the outstanding securities of that class.
Number of Securities Held in Escrow or that
are Subject to a Contractual Restriction on
Transfer(1)
Designation of Class
Common Shares
30,008,333
Percentage of Class
64.91%(2)(3)
Note:
(1) The Underwriters and the Company will enter into Lock-Up Agreements with each of the Locked-Up Shareholders representing, in the
aggregate, 28,872,113 Common Shares (including any Common Shares that may be acquired on exchange of Exchangeable LP Securities),
representing approximately 62.45% of the outstanding Common Shares after giving effect to the Offering. Subject to certain exceptions
(including the Locked-Up Shareholders’ rights to transfer or distribute Common Shares to certain affiliates, family members, trust and RRSPs,
to transfer Common Shares pursuant to a take-over bid for securities of the Company and the ability of the Class B Founder and any of his
affiliated entities that hold Common Shares to sell up to 443,729 Common Shares per month), the terms of the Lock-Up Agreements provide
that, for a period commencing on the date of filing of this preliminary prospectus and continuing to and including the date that is 180 days
following Closing, the Locked-Up Shareholders will not, directly or indirectly, without the prior written consent of the Lead Underwriters,
which consent shall not be unreasonably withheld, on behalf of the Underwriters, sell, offer or grant any option, warrant or other right to
purchase or agree to sell, or otherwise lend, transfer, assign, pledge or dispose of (including without limitation by making any short sale,
engaging in any hedging, monetization or derivative transaction or entering into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Common Shares or other securities of the Company, whether or not cash
settled), in a public offering or by way of a private placement or otherwise, any equity securities of the Company or other securities convertible
into, exchangeable for, or otherwise exercisable into Common Shares or other equity securities of the Company, or agree to do any of the
foregoing or publicly announce any intention to do any of the foregoing.
(2) Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be
deemed to have agreed to the terms of a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements.
(3) Following the completion of the Offering.
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PRINCIPAL SHAREHOLDERS
The following table sets out the shareholdings of the Major Shareholders and those Shareholders that, to the
knowledge of Source, beneficially own, directly or indirectly, or exercise control or direction over, any class of voting
securities carrying in aggregate more than 10% or more of the votes attached to such issued and outstanding voting
securities, both before and after giving effect to the Offering. To the knowledge of Source, no person or company will,
as of the Closing, beneficially own, directly or indirectly, or exercises control or direction over, any class of voting
securities carrying in aggregate 10% or more of the votes attached to such issued and outstanding voting securities,
except for the Major Shareholders, as set out below:
Name
TriWest IV
Jim
McMahon(4)
Brad Thomson(5)(6)
Ownership
Of Record and
Beneficial
Of Record and
Beneficial and
Control or
Direction
Of Record and
Beneficial and
Control or
Direction
Number and
Percentage of
Common Shares
Upon the
Reorganization(1)
Number of
Common Shares
Being Offered in
the Secondary
Offering (or if the
Over-Allotment
Option is exercised
in full)
Number and
Percentage of
Common
Shares After
Giving Effect to
the Offering(1)
Number and
Percentage of
Common Shares
After Giving Effect to
the Offering and the
Over- Allotment
Option(1)(2)(3)
13,627,256
(45.08%)
8,277,899
(27.39%)
683,876
(1,914,853)
415,422
(1,163,181)
12,943,380
(28.00%)
7,862,477
(17.01%)
11,712,403
(25.34%)
7,114,718
(15.39%)
3,645,990
(12.06%)
179,937
(503,823)
3,466,053
(7.50%)
3,142,167
(6.80%)
Notes:
(1) On a fully-diluted basis, at the applicable date.
(2) Assumes the issuance of 1,136,220 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to
satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing. See “Description of Indebtedness —
Indebtedness outstanding following the Offering — Notes — Relevant Transaction Rights”.
(3) Assumes exercise of the Over-Allotment Option in full.
(4) Includes Common Shares held by the MFT 2 Family Trust, 2024747 Alberta Ltd. and 2024748 Alberta Ltd.
(5) Messrs. Newell, Melbourn and Jackson and 792763 Alberta Inc. (a company controlled by Mr. Thomson and his spouse) each have contracting
arrangements with each of the Major Shareholders or their affiliates, which may entitle such officers and such company to receive payments
from such Major Shareholders depending on the amount of the proceeds ultimately received by such Major Shareholders on their investments
in Source, to a maximum payment (as of the date of this prospectus) to each of Messrs. Newell, Melbourn and Jackson of approximately
$1.894 million (and to 792763 Alberta Inc. of $1.538 million) from TriWest IV and affiliates and of approx. $1.132 million (and to 792763
Alberta Inc. of $0.919 million) from Mr. McMahon and affiliates, where such payments will be calculated and owing on or before
December 31, 2023.
(6) Includes Common Shares held by Sand Ventures LP, 2024749 Alberta Ltd., by Mr. Thomson’s spouse and by 2024751 Alberta Ltd., a
corporation owned by Mr. Thomson’s spouse.
Distribution and Nomination Rights
Upon the Reorganization, the Company and the Distribution Rights Shareholders will enter into the Distribution
Rights Agreement and the Company will enter into the TriWest Nomination Agreement with TriWest IV and the
McMahon Nomination Agreement with Jim McMahon. The following descriptions of certain provisions of the
Distribution Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement, as the
case may be, are summaries only, are not comprehensive and are qualified in their entirety by reference to the full text
of the Distribution Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement,
as the case may be, copies of which will be available under the Company’s profile at www.sedar.com.
Distribution Rights Agreement
The Distribution Rights Agreement provides each Distribution Rights Shareholder who (collectively with its
affiliates) holds or exercises control or direction over not less than an aggregate of 10% of the outstanding Common
Shares (in the case of TriWest IV, assuming the exchange of the Exchangeable LP Securities) with the right to require
the Company to qualify Common Shares held by such Distribution Rights Shareholder for distribution by way of a
secondary offering prospectus prepared in accordance with Applicable Securities Laws (a “Demand Distribution”) at
any time after the date that is six months following the date the Company becomes a “reporting issuer” under
Applicable Securities Laws in any jurisdiction in Canada. Each Distribution Rights Shareholder is entitled to a
- 47 -
maximum of four Demand Distributions in total, and a maximum of one Demand Distribution in any six month period;
provided, however, that the number of Common Shares specified in each request for a Demand Distribution by a
Distribution Rights Shareholder (a “Demanding Shareholder”) must have an aggregate market value of no less than
$50 million (or, if less than such amount, then such securities must represent at least 50% of the total number of
Common Shares then held by such Demanding Shareholder) and the Company is not required to fulfill more than one
Demand Distribution in any six month period or, in the case of the fifth and any subsequent Demand Distribution, more
than one Demand Distribution in any one year period. To the extent permitted by applicable law, the Company will pay
all expenses in connection with the Demand Distribution initiated by that Demanding Shareholder, except that each
Demanding Shareholder shall pay all fees and expenses of such Demanding Shareholder’s counsel and the
underwriting discounts, commissions and similar fees, and transfer taxes applicable to the Common Shares of such
Demanding Shareholder in such Demand Distribution. The Demanding Shareholder shall have the right to select the
underwriter(s) to administer the offering of the Common Shares which are the subject of the Demand Distribution,
subject to the Company’s approval, which will not be unreasonably withheld.
The Distribution Rights Agreement provides each Distribution Rights Shareholder with the right to require the
Company to include Common Shares held by a Distribution Rights Shareholder in any qualification or registration of
the Company’s Common Shares under Applicable Securities Laws (a “Piggyback Distribution”). The Company must
cause to be included in the Piggyback Distribution all Common Shares a Distribution Rights Shareholder (a
“Participating Shareholder”) requests to be included in the Piggyback Distribution; provided, however, that: (a) if a
Piggyback Distribution is to occur in conjunction with a distribution of securities by the Company and the managing
underwriters advise that the total number of securities requested to be included in the distribution exceeds the number
which can be sold in an orderly manner in such offering within a price range acceptable to the Company, acting
reasonably, the Company will use its reasonable commercial efforts to cause the distribution of securities to occur in
the following order of priority: (i) first, the previously unissued securities that the Company proposes to distribute,
(ii) second, the Participating Shareholder’s Common Shares requested to be qualified for distribution (provided that if
more than one Distribution Rights Shareholder desires to participate, each such Distribution Rights Shareholder shall
be entitled to include its pro rata share of Common Shares based on each Distribution Rights Shareholder’s overall
relative ownership of issued and outstanding Common Shares), and (iii) third, other Common Shares requested to be
qualified for distribution; and (b) if a Piggyback Distribution is to occur in conjunction with a secondary distribution on
behalf of another Shareholder and the managing underwriters advise that the total number of securities requested to be
included in the distribution exceeds the number which can be sold in an orderly manner in such offering within a price
range acceptable to that other Shareholder, the Company will use its reasonable commercial efforts to cause the
distribution of securities to occur in the following order of priority: (i) first, the Distribution Rights Shareholder’s
Common Shares of each Distribution Rights Shareholder requested to be qualified for distribution, on a pro rata basis
based on overall relative ownership of issued and outstanding Common Shares of the Company and (ii) second, other
securities requested to be qualified for distribution. The Company shall have the right to select the investment
banker(s) and manager(s) to administer the offering from treasury and of the Common Shares which are subject to the
Piggyback Distribution. The expenses pursuant to the Piggyback Distribution will be paid by the Company to the
extent permitted by applicable law, except that each Participating Shareholder shall be responsible for its own fees and
expenses of its counsel, the underwriting discounts, commissions and similar fees, and transfer taxes applicable to the
Common Shares of such Participating Shareholder included in such Piggyback Distribution.
Upon receipt of a request from a Distribution Rights Shareholder for a Demand Distribution or a request from a
Distribution Rights Shareholder for a Piggyback Distribution, as the case may be, and subject to the execution and
delivery of an underwriting agreement in form and content satisfactory to the Company, acting reasonably, the
Company will use its reasonable commercial efforts to effect the distribution of the Common Shares which are the
subject of a Demand Distribution or Piggyback Distribution.
Pursuant to the Distribution Rights Agreement, the Company is obligated to indemnify each Demanding
Shareholder and Participating Shareholder (and their managers, partners, officers, directors, employees and agents of
itself and its manager, and each person that controls such Demanding Shareholder or Participating Shareholder or its
manager) for any untrue statement or alleged untrue statement of a material fact contained in any prospectus, offering
circular or other document, or any amendment or supplement thereto, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make any statement therein not misleading, or any
violation or alleged violation by the Company of any rule or regulation promulgated under Applicable Securities Laws
- 48 -
in connection with any distribution of such Demanding Shareholder’s or Participating Shareholder’s Common Shares
pursuant to the Distribution Rights Agreement. Pursuant to the Distribution Rights Agreement, each Demanding
Shareholder or Participating Shareholder, as the case may be, is obligated to indemnify the Company for any untrue
statement or alleged untrue statement of a material fact contained in any prospectus, offering circular or other
document, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make any statement therein not misleading, or any violation or alleged
violation by such Demanding Shareholder or Participating Shareholder, as the case may be, of any rule or regulation
promulgated under Applicable Securities Laws applicable to such Demanding Shareholder or Distribution Rights
Shareholder, as the case may be, in connection with any such registration.
The Distribution Rights Shareholders may also sell Common Shares other than by way of a prospectus pursuant to
the Distribution Rights Agreement under available exemptions from the prospectus requirements of Canadian
securities legislation, where applicable.
TriWest Nomination Agreement
At Closing, the Company expects to enter into an agreement with TriWest IV under which the Company would
undertake, subject to certain conditions, to: (a) in the event TriWest IV and its affiliates beneficially own or exercise
control or direction over at least 15% of the aggregate issued and outstanding Common Shares and Class B Shares, put
forward two nominees of TriWest IV upon the slate of directors proposed by the Company at any meeting of the
Shareholders at which directors are to be elected, and (b) in the event TriWest IV and its affiliates beneficially own or
exercise control or direction over less than 15% but more than 7.5% of the aggregate issued and outstanding Common
Shares and Class B Shares, put forward one nominee of TriWest IV upon the slate of directors proposed by the
Company at any meeting of the Shareholders at which directors are to be elected. In the event TriWest IV and its
affiliates beneficially own or exercise control or direction over less than 7.5% of the aggregate issued and outstanding
Common Shares, the Company will not be obligated to include any nominee of TriWest IV upon the slate of directors
proposed by the Company at any meeting of the Shareholders at which directors are to be elected.
McMahon Nomination Agreement
At Closing, the Company expects to enter into an agreement with the Jim McMahon under which the Company
would undertake, subject to certain conditions, to in the event Jim McMahon and his affiliates beneficially own or
exercise control or direction over at least 7.5% of the aggregate issued and outstanding Common Shares and Class B
Shares, put forward Jim McMahon upon the slate of directors proposed by the Company at any meeting of the
Shareholders at which directors are to be elected. In the event Jim McMahon and his affiliates beneficially own or
exercise control or direction over less than 7.5% of the aggregate issued and outstanding Common Shares, the
Company will not be obligated to include Jim McMahon upon the slate of directors proposed by the Company at any
meeting of the Shareholders at which directors are to be elected.
Indemnification of Source Selling Shareholders
The Company has agreed to indemnify each Source Selling Shareholder (and, if applicable, their managers,
directors, officers, employees, shareholders, partners and agents) for any untrue or alleged untrue statement of a
material fact contained in this prospectus, or any amendment hereto, or any omission or alleged omission to state
hereto a material fact required to be stated herein or necessary to make any statement herein not misleading. Each
Source Selling Shareholder may agree to indemnify the Company for any untrue statement or alleged untrue statement
of a material fact contained in this prospectus, or any amendment hereto, relating solely to such Source Selling
Shareholder’s statement furnished to the Company in writing by the Source Selling Shareholder and stated to be
specifically for use in this prospectus, or any omission or alleged omission to state herein a material fact relating to
such Source Selling Shareholder required to be stated herein or necessary to make any statement herein not misleading.
- 49 -
USE OF PROCEEDS
Proceeds from Treasury Offering
The following table sets forth the principal purposes for which the Company proposes to use the net proceeds of
the Treasury Offering:
Proceeds to Source
($000s)
Gross proceeds raised pursuant to the Treasury Offering
Underwriters’ Commission
Expenses and costs relating to the Treasury Offering
275,000
16,500
3,500
Total estimated net proceeds pursuant to the Treasury Offering
Purchase price related to the Blair Facility Acquisition
Estimated transaction costs related to the Blair Facility Acquisition
Blair Option Exercise
Repayment of Shareholder Loans
Repayment of Sand Royalty Loan
Notes 35% Optional Redemption
Class B Founder Payment
Prior EEPP Unit Holders Payment
Capital expenditure program
General corporate purposes
255,000
60,057(1)
1,000
3,334(1)
37,617
4,677
51,770
16,994
1,733
48,673
29,145
Note:
(1) By applying the noon rate of exchange for Canadian dollars in terms of United States dollars, as quoted by the Bank of Canada on March 1, 2017.
Due to the nature of the frac sand industry and the oil and gas industry, budgets are regularly reviewed with
respect to the success of the expenditures and other opportunities which become available to Source. Accordingly,
while it is currently intended by Management that the net proceeds of the Treasury Offering will be expended as set
forth above, actual expenditures may differ from these amounts and allocations. See “Business–Blair Facility
Acquisition” and “Business–Capital Budget”.
The principal purpose for which the indebtedness under the SES Shareholder Loan, the SES II Shareholder Loan
and the SES III Shareholder Loans was incurred in order to complete capital projects such as the Sumner Facility, the
Weyerhaeuser Facility and the Wembley Terminal. The principal purpose for which the indebtedness under the SES IV
Shareholder Loan was incurred was to satisfy an obligation under a guarantee provided by certain Shareholder to the
syndicate of the Previous Credit Facility. The principal purpose for which the indebtedness under the Notes was
incurred was to repay the Previous Credit Facility and the Prepayment Note. See “Description of Indebtedness–
Indebtedness to be repaid in connection with the Offering”, “Legal Proceedings and Regulatory Matters” and
Appendix “FS”–Financial Statements and Management’s Discussion and Analysis.
Source had negative cash flow from operating activities in its most recently completed financial year for which
financial statements have been included in this prospectus. Source does not expect to use any of the net proceeds of the
Offering to fund negative cash flow from operations. See “Risk Factors–Risks Related to Source”.
Business Objectives and Milestones
The principal purposes for the net proceeds from the Offering as described above are consistent with Source’s
business objectives and strategic goals relating to becoming the most efficient and most reliable supplier of frac sand in
the WCSB by servicing the entire frac sand supply chain.
By its nature, the frac sand business and corresponding oil and natural gas business is dynamic and requires
constant review, analysis, and determination of prudent allocations of capital spending. Depending on the degree of
success achieved from Source’s planned activities, Source will assess, and may establish, additional objectives and
milestones to be met.
Proceeds from Secondary Offering
The TriWest Selling Shareholders will receive aggregate net proceeds of the Secondary Offering of approximately
$12.7 million ($35.4 million if the Over-Allotment Option is exercised in full), after deducting the Underwriters’
Commission applicable to the Secondary Offering and their portion of the expenses of the Offering. The Source Selling
Shareholders will receive aggregate net proceeds of the Secondary Offering of approximately $11.0 million ($30.8 million
if the Over-Allotment Option is exercised in full), after deducting the Underwriters’ Commission applicable to the
Secondary Offering and their portion of the expenses of the Offering. The Company will not receive any of the proceeds
from the Secondary Offering.
- 50 -
DIRECTORS AND OFFICERS
Summary Information
The following table sets forth certain summary information in respect of the Company’s directors and officers as
of the Closing.
Name, Province and
Country of Residence
Position Held
Brad Thomson(2)
Calgary, AB
Canada
Chief Executive
Officer and
Director
James (Jim)
McMahon(2)(4)(5)
Calgary, AB
Canada
Cody Church(2)(4)
Calgary, AB
Canada
Jeff Belford(2)(3)
Calgary, AB
Canada
Neil Cameron(2)(3)(4)(5)
Saskatoon, SK
Canada
Director
Marshall McRae(2)(3)(4)
Calgary, AB
Canada
Director
Stew Hanlon(2)(3)(4)(5)
Calgary, AB
Canada
Derren Newell
Calgary, AB
Canada
Director
Scott Melbourn
Calgary, AB
Canada
Joe Jackson Frisco,
Texas United States
Chief Operating
Officer
Director (Chair)
Director
Director
Chief Financial
Officer
Senior VicePresident,
Commercial
Development
Principal Occupation
for the Last Five Years
Director of the
Company Since
(Director of
Source Since)
Common
Share and
Class B Share
Ownership
and
Percentage(1)
President and Chief Executive Officer and a Director of
Source, roles he has held since June 2012. Prior to joining
Source, Mr. Thomson was the President of ZEEP Canada
from April 2009 to April 2012.
Director of Source since October 2013. Previously,
Mr. McMahon was Executive Vice-President, Director and
Secretary of Source, roles he held from May 2009 to
December 2013.
Senior Managing Director, TriWest Capital since 2012,
and in senior roles with TriWest Capital Partners Inc. and
its related companies since September, 1997.
Senior Managing Director, TriWest Capital since 2012,
and in senior roles with TriWest Capital Partners II
(2003) Inc. and its related companies since October, 2013.
President and Chief Executive Officer of NSC Minerals
Ltd., a position he has held since May 2014. Prior to such
appointment, he was the Chief Operating Officer and VicePresident Operations of NSC Minerals Ltd. positions he
held since September 2010.
Mr. McRae served as interim Chief Financial Officer and
Executive Vice-President of Black Diamond Group
Limited from October 2013 to August 2014, and as interim
Executive Vice-President of Black Diamond Group
Limited from August 2014 to December 2014. Mr. McRae
has also been an independent financial and management
consultant since August 2009.
President, Chief Executive Officer and Director of Gibson
Energy Inc., a position he has held since April 2009.
February 7, 2017
(June 1, 2012)
3,466,053 (6)
(7.69%)
February 7,
2017 (October 16,
2013)
7,862,477 (7)
(17.44%)
February 7,
2017 (October 2013)
- (8) (-%)
February 7,
2017 (October 16,
2013)
N/A
- (8) (-%)
N/A
Nil
N/A
Nil
Chief Financial Officer of Source, a role he has held since
July 2013. Prior to joining Source, Mr. Newell was the
Chief Financial Officer of CE Franklin between June 2011
and July 2012. Prior to that Mr. Newell was Corporate
Controller of CE Franklin from September 2010 to June
2011.
Chief Operating Officer of Source, a role he has held since
October 2013. Mr. Melbourn has been with Source since
October 2011 in a series of roles.
Senior Vice-President, Commercial Development of
Source, a role he has held since December 2013.
Mr. Jackson has been with Source since December 2010 in
a series of roles.
N/A
402,665 (9)(12)
(0.96%)
N/A
481,127 (10)(12)
(1.07%)
N/A
481,127 (11)(12)
(1.07%)
Nil
Notes:
(1) Assuming completion of the Offering before giving effect to the Over-Allotment Option.
(2) Mr. Thomson, Mr. McMahon, Mr. Church and Mr. Belford are directors as of the date of this prospectus. The elections and/or appointments of
each of Mr. Cameron, Mr. McRae and Mr. Hanlon are expected to be effective immediately prior to Closing and, as such, these individuals
have no liability for this prospectus as directors pursuant to Applicable Securities Laws.
(3) Expected member of the Audit Committee.
(4) Expected member of the Compensation and Corporate Governance Committee
(5) Expected member of the Health, Safety and Environment Committee.
(6) Includes Common Shares held by Sand Ventures LP, 2024749 Alberta Ltd, by Mr. Thomson’s spouse and by 2024751 Alberta Ltd., a
corporation owned by Mr. Thomson’s spouse.
(7) Includes Common Shares held by the MFT 2 Family Trust.
(8) Messrs. Church and Belford are each Senior Managing Directors of TriWest Capital, the general partner of the limited partnerships comprising
TriWest IV, which exercises control or direction over 11,547,602 Common Shares and 1,395,778 Class B Shares.
(9) Includes Common Shares held by 2024750 Alberta Ltd.
(10) Includes Common Shares held by 2024750 Alberta Ltd.
(11) Includes Common Shares held by 2024750 Alberta Ltd.
(12) Messrs. Newell, Melbourn and Jackson are each shareholders of 2024750 Alberta Ltd.
- 51 -
All of the Company’s directors’ terms of office will expire at the earliest of their resignation, the close of the next
annual Shareholder meeting called for the election of directors, or on such other date as they may be removed
according to the ABCA. Each director will devote the amount of time as is required to fulfill his obligations to the
Company. The Company’s officers are appointed by and serve at the discretion of the Board of Directors.
Directors and Officers — Biographies
The following are brief profiles of the directors and officers of the Company, including a description of each
individual’s principal occupation within the past five years.
Cody Church — Director (Chair)
Mr. Cody Church is a Senior Managing Director of TriWest Capital. Mr. Church co-founded TriWest Capital
Partners Inc. in 1997. Since 1997, Mr. Church has been deeply involved in the TriWest Capital funds’ portfolio
investments, with special emphasis on the valuation, financing, structuring and negotiation of these investments. From
1995 to 1997, Mr. Church was with EXOR America, a New York-based private equity firm. Prior to joining EXOR,
Mr. Church was a member of the Leveraged Finance Group of Credit Suisse First Boston, where he worked with
financial buyers in areas of acquisition and divestiture, high-yield bonds, initial public offerings and refinancings from
1993 to 1995. Mr. Church graduated cum laude with a Bachelor of Economics from Harvard University.
Jeff Belford — Director
Mr. Jeff Belford is a Senior Managing Director of TriWest Capital and joined the TriWest Capital Partners Group
at the inception of TriWest Capital Fund II in 2003 from Swiss Water Decaffeinated Coffee Company Inc. (“Swiss
Water”), a former TriWest Capital fund portfolio company. Mr. Belford contributes both financial and operations
experience to the TriWest Capital team. Mr. Belford gained significant financial and operating experience before
joining the TriWest Capital Partners Group. He was Chief Financial Officer of Swiss Water from 2000 to 2003; and
participated in the remarkable success of the company during his tenure. Swiss Water was subsequently listed on the
TSX as an Income Trust. From 1996 to 2000, Mr. Belford was Director of Finance and Operations for Descente North
America, an international sportswear company. Mr. Belford holds a Bachelor of Commerce degree from the University
of Toronto and is a member of the Canadian Institute of Chartered Professional Accountants.
Jim McMahon — Director
Mr. James (Jim) McMahon is the former Owner, Executive Vice President, Director and Secretary of Source’s
predecessor entity. Mr. McMahon previously provided day-to-day direction as a consultant to Source through his
consulting corporation, McMahon Enterprises Ltd. Prior to joining Source, Mr. McMahon was Vice President Business
Development for CCS Corporation (now Tervita) (“CCS”), a large Canadian based multinational oilfield services
company with its primary business in oilfield waste management. At CCS, Mr. McMahon led the company to enter the
frac sand mining and processing business. Mr. McMahon left CCS in May 2009 to purchase an interest in Source.
Mr. McMahon has 20 years of oilfield experience primarily in the midstream sector. Prior to working in the oilfield
sector, Mr. McMahon had a varied background in numerous business fields including time as a Marketing
Representative with IBM and as a Second Lieutenant in the Canadian Forces. Mr. McMahon has a Bachelor of Science
in Electrical Engineering and a Master of Business Administration both from the University of Saskatchewan.
Neil Cameron — Proposed Director
Mr. Neil Cameron is the President and Chief Executive Officer of NSC Minerals Ltd., a leading supplier in
de-icing products in Western Canada and Mid-Western United States. Mr. Cameron joined NSC Minerals Ltd. as Vice
President of Operations in 2010, responsible for the assets and production of the company. In 2013, he was promoted
to Chief Operating Officer, taking over the responsibility for logistics and sales. Prior to joining NSC Minerals Ltd.,
Mr. Cameron was President and Chief Executive Officer of Peters’ Excavating Ltd., a Saskatoon, Saskatchewan based
excavating company serving the commercial and municipal customers in and around Saskatoon, Saskatchewan. Prior
to working in the excavating business, Mr. Cameron spent 25 years working in the road construction and related
materials business going through two sale events eventually ending up with Lafarge Canada Inc. Mr. Cameron spent
time working in operations, estimating, project management, as divisional manager and ending up as General Manager
of Northern Saskatchewan. Mr. Cameron has a Business Administration Certificate from the University of
Saskatchewan.
- 52 -
Marshall L. McRae — Proposed Director
Mr. Marshall McRae has been an independent financial and management consultant since August 2009. Prior
thereto, Mr. McRae was Chief Financial Officer of CCS Inc., administrator of CCS Income Trust and its successor
corporation, CCS since August 2002. Mr. McRae has over 30 years of experience in senior operating and financial
management positions with a number of publicly traded and private companies, including CCS Inc., Versacold
Corporation, Mark’s Work Wearhouse Limited and Black Diamond Group Limited. Mr. McRae is a director and the
Chair of the audit committee of Athabasca Oil Corporation and Gibson Energy Inc. and a director of Black Diamond
Group Limited. Mr. McRae obtained a Bachelor of Commerce degree, with Distinction, from the University of Calgary
in 1979, and a Chartered Professional Accountant — Chartered Accountant Designation from the Institute of Chartered
Accountants of Alberta in 1981.
Stew Hanlon — Proposed Director
Mr. Stew Hanlon joined Gibson Energy Inc. in April 1991 as Controller of Canwest Propane and, in his 24-year
tenure with Gibson Energy Inc., has filled senior roles in finance, business development and operations culminating in
his role as Executive Vice President and Chief Operating Officer, a position he held from 2007 to April 2009, when he
was appointed President and Chief Executive Officer. Mr. Hanlon was named as a member of the board of directors of
Gibson Energy ULC in October 2008 and Gibson Energy Holding ULC in December 2008. Mr. Hanlon holds a
Bachelor of Commerce degree (Finance and Accounting) from the University of Saskatchewan, is a Chartered
Professional Accountant and was admitted to the ICAS (Saskatchewan) in 1989 and ICAA (Alberta) in 1990.
Brad Thomson — Chief Executive Officer and Director
Mr. Brad Thomson joined Source in June 2012 at the invitation of the founding owners to become a partner and to
provide executive leadership for the substantial growth initiatives of Source. Mr. Thomson has extensive experience in
fast growth organizations as a founder, officer and director of a number of business success stories. Mr. Thomson has
over 25 years of leadership experience. Mr. Thomson was a Principal and the Chief Financial Officer of the Northridge
Group of Companies (“Northridge”) which among other things, built one of North America’s largest private
petroleum and natural gas marketing and trading companies. Northridge had operations in seven provinces and twentyfive states. He was also a founder and officer of an oil and gas investment fund (now AGF Resource Capital) and
Metronet Communications (now Allstream Canada). Mr. Thomson also served as a senior officer of TransCanada
Corporation (“TransCanada”) where he was responsible for its growth program. While at TransCanada, he spearheaded the creation of TransCanada Power LP (which is now traded as Capital Power Corporation). In addition,
Mr. Thomson has served as a Director of a number of oil and gas exploration companies as well as CCS Income Fund,
CE Franklin Limited and Bruce Power Ltd. Mr. Thomson is a Chartered Professional Accountant — Chartered
Accountant Designation and has received his ICD.D designation from the Canadian Institute of Corporate Directors.
Derren Newell — Chief Financial Officer
Mr. Derren Newell is Chief Financial Officer of Source with responsibility for the execution of all aspects of
Source’s Finance, Information Technology and Human Resources operations. He has over 20 years of finance
experience in the distribution, oil and gas and energy industries. Prior to joining Source, Mr. Newell was the Chief
Financial Officer of CE Franklin, a leading distributor of pipes, valves and fittings to the energy industry. Mr. Newell
has also been the Vice President Finance and Chief Financial Officer of a group of wind power companies. Prior to
that, he was senior member of the Superior Plus Inc. finance team, where he held various positions covering all aspects
of Finance and Risk Management. Mr. Newell has a Chartered Professional Accountant — Chartered Accountant
Designation and has a Bachelor of Commerce Degree from the University of Alberta.
Scott Melbourn — Chief Operating Officer
Mr. Scott Melbourn is Chief Operating Officer of Source with responsibility for the execution of all aspects of
Source’s operations. He has over 16 years of operations, financial and business development experience, primarily in
the oilfield services industry. Prior to joining Source, Mr. Melbourn held a number of positions with CCS, including
Director of Business Development & Strategy (for the Concord Well Services division), and Manager of Corporate
Business Development. During Mr. Melbourn’s time at CCS, he completed numerous strategic acquisitions and
- 53 -
divestitures. Mr. Melbourn left CCS in October 2011 to join Source. Prior to working in oilfield services,
Mr. Melbourn held financial and business development positions with Telus Communications and Verizon Information
Services. Mr. Melbourn holds the Chartered Financial Analyst designation and has a Bachelor of Commerce in Finance
from the University of Calgary. He is a member of the Calgary Society of Chartered Financial Analysts.
Joe Jackson — Senior Vice President of Commercial Development
Mr. Joe Jackson is Senior Vice President of Commercial Development for Source with responsibility for
execution of all sales and commercial development activities within Source. He has over 10 years of business
development and sales experience in the midstream and oilfield services industries. Prior to joining Source,
Mr. Jackson worked at CCS and was responsible for the mergers and acquisitions function of CCS’ growing business
in the United States. At Keyera Facilities Income Fund, Mr. Jackson held various positions in business development
and in risk management. Mr. Jackson holds the Chartered Financial Analyst designation and has a Bachelor of
Commerce in Marketing from the University of Calgary. He is a member of the Dallas Society of Chartered Financial
Analysts.
Share Ownership by Directors and Officers
As a group and as at the date of the Closing, the Company’s officers and directors are expected to beneficially
own or exercise control or direction over, directly or indirectly, 24,241,052 Common Shares and 1,395,778 Class B
Shares, representing approximately 55.46% of the aggregate number of issued and outstanding Common Shares and
Class B Shares after giving effect to this Offering.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Cease Trade Orders and Bankruptcies
Except as described below, to the knowledge of the Company, no director or executive officer of the Company
(nor any personal holding company of any of such persons) is, as of the date of this prospectus, or was within ten years
before the date of this prospectus, a director, chief executive officer or chief financial officer of any company
(including the Company), that: (a) was subject to a cease trade order (including a management cease trade order), an
order similar to a cease trade order or an order that denied the relevant company access to any exemption under
securities legislation, in each case that was in effect for a period of more than 30 consecutive days (collectively, an
“Order”), that was issued while the director or executive officer was acting in the capacity as director, chief executive
officer or chief financial officer; or (b) was subject to an Order that was issued after the director or executive officer
ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred
while that person was acting in the capacity as director, chief executive officer or chief financial officer.
Except as described below, to the knowledge of the Company no director or executive officer of the Company
(nor any personal holding company of any of such persons), or Shareholder holding a sufficient number of securities of
the Company to affect materially the control of the Company: (a) is, as of the date of this prospectus, or has been
within the ten years before the date of this prospectus, a director or executive officer of any company (including the
Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that
capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject
to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets; or (b) has, within the ten years before the date of this prospectus, become bankrupt,
made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to
hold the assets of the director, executive officer or Shareholder.
Mr. Derren Newell, the Chief Financial Officer of the Company, was Vice President and Chief Financial Officer
of EarthFirst Canada Inc. (“EarthFirst”) from June 2006 to March 2010. On November 4, 2008 EarthFirst commenced
proceedings in the Court of Queen’s Bench of Alberta under the Companies’ Creditors Arrangement Act (“CCAA”).
On March 2, 2010, EarthFirst was amalgamated with Maxim Power Corp. by way of a plan of arrangement approved
by the Court of Queen’s Bench of Alberta under the CCAA procedures.
Mr. Cody Church, a director of the Company, was a director of Concreate USL (GP) Inc., the general partner of
Concreate USL Limited Partnership from February 2011 until an interim receiver in bankruptcy was appointed over its
- 54 -
and certain of its affiliates’ assets on April 12, 2012 pursuant to the Bankruptcy and Insolvency Act (“BIA”). On
April 12, 2013, Concreate USL Limited Partnership and Concreate USL (GP) Inc. were adjudged bankrupt and a
trustee in bankruptcy was appointed. The Court of Queen’s Bench issued a discharge order in respect of these matters
on July 14, 2015 under the BIA procedures.
Penalties or Sanctions
To the knowledge of the Company, no director or executive officer of the Company (nor any personal holding
company of any of such persons), or Shareholder holding a sufficient number of securities of the Company to affect
materially the control of the Company, has been subject to: (a) any penalties or sanctions imposed by a court relating to
securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities
regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be
considered important to a reasonable investor in making an investment decision.
Conflicts of Interest
Certain officers and directors of the Company are also officers and/or directors of other companies engaged in the
mining and the oil and natural gas businesses generally. As a result, situations may arise where the interest of such
directors and officers conflict with their interests as directors and officers of other companies. The resolution of such
conflicts is governed by applicable corporate laws, which require that directors act honestly, in good faith and with a
view to the best interests of the Company. Conflicts, if any, will be handled in a manner consistent with the procedures
and remedies set forth in the ABCA. The ABCA provides that in the event that a director has an interest in a material
contract or material transaction, whether made or proposed, the director shall disclose his interest in such contract or
transaction to the Company and shall refrain from voting on any matter in respect of such contract or agreement unless
otherwise provided by the ABCA.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following discussion describes the expected significant elements of the Company’s executive compensation
program upon Closing, with particular emphasis on the process for determining compensation payable to the Named
Executive Officers. For the year ended December 31, 2017, the Named Executive Officers are expected to be: (a) Brad
Thomson (CEO); (b) Derren Newell (CFO); (c) Scott Melbourn (Chief Operating Officer); (d) Joe Jackson (Senior
Vice-President, Commercial Development); and (e) Jason Allen (General Manager, Wisconsin Operations).
Compensation Philosophy and Objectives
The Company’s approach to executive compensation will be to “pay for performance”. Accordingly, salary will
generally be positioned near market median levels, while variable compensation opportunity (short and long-term
incentives) will be structured to provide above-market total compensation for high levels of corporate performance.
Compensation elements will be designed to balance the following compensation objectives:
• total compensation realization will be aligned with the overall performance of the Company;
• compensation programs will encourage a long-term view to Shareholder value creation as a significant portion
of each executive’s variable pay will be equity-based and executives will be required to have a significant
personal financial interest in the Company; and
• compensation programs will facilitate the attraction, retention and motivation of experienced and talented
executives who will, in turn, drive Shareholder value creation.
Compensation Benchmarking
The Compensation and Corporate Governance Committee will, as part of its annual compensation review process,
benchmark the compensation levels and practices of companies that can be considered reasonably similar to the
Company. See “Statement of Corporate Governance Practices–Board Committees–Compensation and Corporate
Governance Committee” for a more detailed description of the Compensation and Corporate Governance’s
Committee’s mandate.
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In selecting a group of companies and/or sectors to benchmark, the Compensation and Corporate Governance
Committee will consider characteristics and variables such as:
• Canadian-based, publicly-traded organizations operating in the oilfield services sector;
• organizations of similar size and with a similar scope of operations; and
• organizations from which future executives may reasonably be expected to be recruited from or to which the
Company could reasonably expect to otherwise be in competition with for senior level talent.
The compensation benchmark information derived from such sources will not necessarily be directly acted upon
by the Compensation and Corporate Governance Committee, but will be one of a number of factors the Compensation
and Corporate Governance Committee will consider from time to time in its review of executive compensation. In
order to assist the Compensation and Corporate Governance Committee with the preliminary thinking surrounding
compensation structure and magnitude for the Company, the following list of oilfield services companies has been
developed:
Calfrac Well Services Ltd.
Canadian Energy Services &
Technology Corp.
Canyon Services Group Inc.
Gibson Energy Inc.
Mullen Group Inc.
Secure Energy Services Inc.
Trican Well Service Ltd.
Newalta Corp.
Notes:
(1) Although used for the determination of compensation structure, not all of these companies will be used in the determination of compensation
levels as the Compensation and Corporate Governance Committee does not deem all companies to be of comparable size.
Share-Based Compensation Arrangements
Option Plan
Source will adopt the Option Plan in connection with the Reorganization to provide additional long-term
incentives to executive officers and other employees of Source. Options will be granted based on the same criteria as
base salary, with a greater emphasis on the applicable employee’s performance during the year. Previous grants will be
considered when contemplating new grants of Options. Options will be granted to provide additional compensation to
employees when Source performs well. This element of incentive compensation is not only designed to reward
employees for past-performance, but is also designed to provide increased incentive to continue to strive to improve
Source’s success. See “Executive Compensation–Option Plan”.
LTIP
Source will adopt the LTIP in connection with the Reorganization to provide additional long-term incentives to
directors, executive officers and employees of Source. Pursuant to the LTIP, participants will be entitled to receive
RSUs, PSUs and/or DSUs, which will fluctuate with the market price of the Common Shares and are therefore aligned
with the interests of the Shareholders. Such RSUs, PSUs and DSUs, which will be equity based awards and settled in
cash and therefore non-dilutive to Shareholders. Previous grants will be considered when contemplating new grants of
RSUs, PSUs or DSUs. Executive officers and employees will be eligible to receive RSUs and PSUs while only
non-executive directors will be eligible to receive DSUs.
Prior Employee Equity Participation Plan
On October 16, 2013, Source Canada LP adopted the Prior Employee Equity Participation Plan and thereafter
issued the Prior EEPP Units to executive officers and employees of Source Canada LP in order to support the
successful execution of Source Canada LP’s business plan and long term strategy at the time. Each Prior EEPP Unit
vested as to one-third on each of the first, second and third anniversaries of their grant date. The Prior EEPP Units are
solely exercisable upon a “Change of Control” as defined in the Prior Employee Equity Participation Plan. The Prior
EEPP Units are anticipated to be surrendered and terminated in connection with the Reorganization. See “Corporate
Structure–Reorganization”.
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Compensation Components
The Company’s executive compensation program will consist primarily of the following elements.
Compensation
Element
Form
Purpose of Element
Determination
Base Salary Cash
Forms
a
baseline
level
of
compensation for role fulfillment
commensurate with the experience,
skills and market demand for the
executive role and/or incumbent.
Salaries will be based on relevant marketplace
information, experience, individual performance and
level of responsibility. Actual salary levels will be set
in relation to the Company’s compensation philosophy
and relative to the emphasis on other compensation
program elements. The Company generally intends to
pay salaries near market median levels and will
increase salaries commensurate with the growth and
complexity of the Company and the position in
question.
Annual
Cash
Performance
Incentive
To recognize short-term (typically
annual)
efforts
and
milestone
achievement that are aligned with the
long-term success of the Company.
Initially, in the early stages of the Company’s
development, annual performance incentive payments
will be determined by the Compensation and Corporate
Governance Committee based upon a discretionary
assessment of individual and corporate performance.
Based on this discretionary assessment of performance,
incentive payments from 0% to 100% of base salary
for the CEO and 0% to 50% of base salary for the
remaining NEOs could be payable. As the Company
matures, a more formal target-setting and performance
assessment process will be implemented.
LTIP
Designed to motivate executives and
employees to create and grow
sustainable Shareholder total return
over
successive
three-year
performance cycles, through the use
of RSUs and PSUs. The LTIP will
also serve to align the interests of
non-executive
directors
with
Shareholders through the provision of
DSUs.
RSUs are anticipated to vest ratably over three years
and may be subject to other performance restrictions,
subject to the determination of the Compensation and
Corporate Governance Committee. PSU awards will be
limited to the executive and senior-managerial levels in
the Company and the Compensation and Corporate
Governance Committee anticipates the vesting of these
units to be subject to the achievement of various
performance targets, including, but not limited to,
relative “Total Shareholder Return” targets and
financial and/or operational performance targets.
RSUs, PSUs and DSUs accounts shall be credited with
additional units in accordance with the LTIP in the
event dividends on the Common Shares are paid by the
Company.
Option Plan Common Promotes
a
share
ownership
Shares
perspective
among
executives,
encourages
executive
retention,
encourages executives to generate
sustained share price growth over the
longer term (i.e. five years) and aligns
Management’s
interests
with
Shareholders’
interests
through
participation
in
share
price
appreciation.
It is expected that grants of Options under the Option
Plan will be made upon the commencement of an
executive’s employment with the Company and will be
based on the executive’s experience, skill set and level
of responsibility within the Company. Additional
grants may be made annually at the discretion of the
Board and are based on the individual’s contribution to
corporate performance, as well as the overall
competitiveness of the executive compensation
package.
Cash
The Board will determine the exercise price of Options
at the time of grant, provided that the exercise price
will not be permitted to be lower than the Market
- 57 -
Compensation
Element
Form
Purpose of Element
Determination
Price. It is intended that the exercise price of the first award
of Options will be at the Offering Price.
The Board will also have the discretion to determine the
term of Options, which is not expected to exceed five years,
and vesting provisions, which are generally expected to
vest as to one-third on each of the first, second and third
anniversaries of the grant date.
Pension, Benefits and Perquisites
The Company does not currently have a pension plan or post-employment compensation and benefits in place for
any of its employees. The Compensation and Corporate Governance Committee will annually review the benefits
provided to NEOs, which will generally be the same as those provided to other employees of the Company. The
Company offers only limited perquisites to the Named Executive Officers, and only where the Company believes such
perquisites are market competitive and promote the retention of the Named Executive Officers or promote the efficient
performance of the Named Executive Officers’ duties. The Company does not believe that perquisites and benefits
should represent a significant portion of the compensation package for Named Executive Officers. In 2017, Named
Executive Officers’ perquisites and benefits are expected to total less than $50,000, representing less than 10% of total
compensation for the Named Executive Officers.
Risks of Compensation Policies and Practices
The Company’s compensation program will be designed to provide executive officers incentives for the
achievement of near-term and long-term objectives, without motivating them to take unnecessary risk. The Board will
provide regular oversight of the Company’s risk management practices, and may delegate to the Compensation and
Corporate Governance Committee the responsibility to provide risk oversight of Source’s compensation policies and
practices, and to identify and mitigate compensation policies and practices that could encourage inappropriate or
excessive risk taking by members of Management. As part of its review and discussion of expected executive
compensation, the Board noted the following factors that will discourage the Company’s executives from taking
unnecessary or excessive risk:
• the Company’s approach to performance evaluation and compensation will provide greater rewards to an
officer achieving both short-term and long-term agreed-upon objectives;
• executive officers and directors will be required to hold a minimum amount of Common Shares under the
Company’s share ownership guidelines;
• Board discretion with respect to incentive awards and payouts in the event incentives will understated or
overstated due to extraordinary circumstances or conditions;
• a commitment to a periodic evaluation and testing by the Compensation and Corporate Governance Committee
of variable compensation plan metrics;
• a cap on bonus payments, subject to the discretion of the Board;
• a balanced mix of post-Closing equity incentive awards in the form of Options and RSUs, PSUs and DSUs;
• a formal clawback policy specifying the recoupment of incentive compensation applicable to the executive
officers upon material financial restatements and misconduct; and
• the Board has retained a compensation consultant that is independent of Management and provides no advice to
Management.
Based on this review, the Board believes that the Company’s total executive compensation program will not
encourage executive officers to take unnecessary or excessive risk.
- 58 -
Compensation Governance
Hedging Prohibition
The Company is of the view that its securities should be purchased by its directors, offices and employees for
investment purposes only. Pursuant to the Company’s disclosure, trading and confidentiality policy, transactions that
could be perceived as speculative or influenced by positive or negative perceptions of Source’s prospects, including the
use of puts, calls, collars, spread bets, contracts for difference and hedging transactions are not considered to be in
Source’s best interests and must be avoided. In particular, directors, officers and employees of Source are prohibited
from engaging in hedging activities of any kind respecting Source’s securities or related financial instruments
including, without limitation, selling a call or buying a put on the Company’s securities or purchasing the Company’s
securities with the intention of reselling them within six months or selling the Company’s securities with the intention
of buying them within six months (other than the sale of Company securities shortly after they were acquired through
the exercise of securities granted under a share-based compensation arrangement). Notwithstanding the foregoing, the
above-mentioned restrictions will not be applicable to any of the Company’s securities held by a representative of the
Company that are in excess of the required ownership thresholds under the Company’s director share ownership
guidelines or the Company’s executive share ownership guidelines, as the case may be.
Share Ownership Guidelines
The Company will adopt the following share ownership guidelines in connection with the Reorganization,
pursuant to which the Company’s executive officers and any other employee specified by the Board are required to
hold, directly or indirectly, Common Shares with an aggregate value as follows:
Participant
Share Ownership Guideline
CEO
CFO
Other Officers
3x base salary
1.5x base salary
1.5x base salary
Common Shares are valued at the higher of: (a) value at the time of award or acquisition; and (b) the current
market price of the Common Shares. Each officer will have five years from the later of the introduction of the
executive share ownership guidelines and the date of their election or appointment as an officer to achieve this
minimum share ownership requirement.
Clawback Policy
The Board will adopt a clawback policy specifying the consequences with respect to incentive awards in the event
of gross negligence, fraud or willful misconduct resulting in a restatement of the Company’s financial statements. The
clawback policy will provide that where there is a restatement of the financial results of Source for any reason other
than a restatement caused by a change in applicable accounting rules or interpretations, and, in connection with such
restatement an executive officer engaged in gross negligence, fraud or willful misconduct, the Board or the
Compensation and Corporate Governance Committee may: (a) require that the executive officer return or repay to
Source, or reimburse Source for, all or part of the after-tax portion of any excess compensation; and/or (b) cause all or
part of any awarded and unpaid or unexercised performance-based compensation (whether vested or unvested) that
constitutes excess compensation for an executive officer to be cancelled.
In determining whether to require any cancellation, repayment or reimbursement under the clawback policy, the
Board or the Compensation and Corporate Governance Committee shall have regard to, in its sole discretion and in
light of the circumstances, the best interests of Source. In making such determination, the Board may take into account
any considerations it deems appropriate, including, without limitation: (a) the applicable governing law including the
likelihood of success and the cost of pursuing recovery; (b) any prejudice to the interests of Source, including in any
related proceeding or investigation; and (c) the participation of the executive officer in the circumstances relating to the
financial restatement, including his or her involvement in any gross negligence, fraud or willful misconduct.
For purposes of the clawback policy, “excess compensation” means the difference between the amount or value of
any performance-based compensation actually paid or awarded to an executive officer subsequent to the effective date
of the policy and the amount or value that would have been paid or awarded as calculated or determined based on the
- 59 -
financial statements of Source as restated (and shall include an entire amount or value of an award or payment where it
is determined that no award or payment would have been made based on the financial statements of Source as
restated), and “performance-based compensation” includes all bonuses and other incentive compensation that is paid or
awarded to any executive officer, the award, amount, payment and/or vesting of which was calculated or determined
having regard to or based in whole or in part on the application of performance criteria or financial metrics measured
during the three years preceding the applicable restatement and includes incentive compensation awarded or paid in
any form, including cash or equity-based, whether vested or unvested.
Compensation Consultants
In January 2017, Source engaged Lane Caputo Compensation Inc. to assist with the development of a go-forward
compensation program for the Company. As at the date of this prospectus, Lane Caputo Compensation Inc. has
provided its preliminary recommendations, with work expected to continue until completion of the Reorganization.
2017 Compensation Details
Summary Compensation Table
Based on the information available as of the date of this prospectus, 2017, the following table sets forth
information concerning the expected initial annualized compensation of the Named Executive Officers for the 2017
year.
Sharebased
Awards
($)(2)
Optionbased
Awards
($)(3)
Non-equity incentive
plan compensation
($)
Longterm
Annual
Incentive Incentive
(4)
Plans
Plans
Pension
Value
($)
All other
Compensation
($)(5)
Total
Compensation
($)
–
–
Š(6)
Š
62,500
–
–
Š(6)
Š
Š
62,500
–
–
Š(6)
Š
–
Š
62,500
–
–
Š(6)
Š
–
Š
27,000
–
–
Š(6)
Š
Name and
Principal Position
Year
Salary
($)(1)
Brad Thomson
CEO
2017
350,000
–
Š
175,000
Derren Newell
CFO
2017
250,000
–
Š
Scott Melbourn
Chief Operating
Officer
2017
250,000
–
Joe Jackson
Senior VP
2017
333,650(7)
Jason Allen
General Manager,
Wisconsin
Operations
2017
180,171(7)
Notes:
(1) In connection with the Offering, the Compensation and Corporate Governance Committee will review the 2017 salaries of its executive officers
and, as such, these amounts are subject to change.
(2) Share-based awards for 2017 have yet to be determined, but will be determined in accordance with the LTIP. See “Executive Compensation–
Compensation Discussion and Analysis–Share-Based Compensation Arrangements–LTIP”.
(3) Options are anticipated to be issued in connection with the Reorganization. See “Options to Purchase Securities”. Additional Options may be
issued in 2017, however, such determination has not yet occurred. In the event such determination does occur, it will be determined in
accordance with the Option Plan. See “Executive Compensation–Option Plan”.
(4) The amount of bonuses to be paid or payable in or with respect to 2017 has yet to be determined; however, each of the NEOs will be eligible
for an annual cash bonus to be determined in accordance with the Company’s annual performances incentive program to be implemented in
connection with the Reorganization.
(5) The NEOs receive minimal perquisites and other benefits. However, none of the NEOs are entitled to perquisites or other personal benefits
which, in the aggregate, are worth over $50,000 or over 10% of their base salary.
(6) In connection with the surrender of the Prior EEPP Units, Mr. Thomson will receive $Š in cash and Š Common Shares, Mr. Newell will receive
$Š in cash and Š Common Shares, Mr. Melbourn will receive $Š in cash and Š Common Shares, Mr. Jackson will receive $Š in cash and Š
Common Shares and Mr. Allen will receive $Š in cash and Š Common Shares. Such Common Shares are valued using the Offering Price.
(7) By applying the noon rate of exchange for Canadian dollars in terms of United States dollars, as quoted by the Bank of Canada on March 1,
2017.
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Incentive Plan Awards
Outstanding Share-Based Awards and Option-Based Awards
Based on the information available as of the date of this prospectus, the following table sets forth information
concerning all awards expected to be issued to NEOs for the 2017 year.
Option-Based Awards
Name
Brad Thomson
Derren Newell
Scott Melbourn
Joe Jackson
Jason Allen
Share-Based Awards
Number of
Common
Shares
Underlying
Unexercised
Options (#)
Options
Exercise
Price ($)
Option
Expiration
Date
Value of
Unexercised
in-the-money
Options ($)(1)
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
Š
–
–
–
–
–
Number of
Shares or
Units of
Shares
that have
not Vested
(#)
Market or Payout
Value of ShareBased Awards that
have not Vested
($)
Market or Payout Value
of Vested Share-Based
Awards not Paid out or
Distributed ($)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Notes:
(1) The exercise price of all Options will be the Offering Price and accordingly the value of unexercised Options will be nil as of the Closing Date.
Incentive Plan Awards–Value Vested or Earned During the Year
None of the expected Options to be issued in connection with the Reorganization will vest during 2017 and none
of the RSUs, PSUs or DSUs that may be issued during 2017 are expected to vest during 2017. Accordingly, no value is
attributed to such Options and share-based awards for 2017.
Option Plan
In connection with the Reorganization, Source will adopt the Option Plan, which will allow for the grant of
Options to officers, employees and consultants of the Company with the objective of providing an incentive to Option
Plan participants to achieve the longer-term objectives of the Company and attract and retain the talent required for the
Company to execute its long-term strategy. Non-executive directors will not be permitted to participate in the Option
Plan.
The maximum number of Common Shares reserved for issuance, in the aggregate, under the Option Plan and all
other security-based compensation arrangements of the Company, will be 10% of the aggregate number of outstanding
Common Shares and Class B Shares from time to time (calculated on a non-diluted basis). The Option Plan will
provide that: (a) the maximum number of Common Shares issuable to insiders and their associates at any time under all
security-based compensation arrangements of the Company shall not exceed 10% of the aggregate number of issued
and outstanding Common Shares and Class B Shares from time to time (calculated on a non-diluted basis); and (b) the
maximum number of Common Shares that may be issued to insiders and their associates within any one year period
under all security-based compensation arrangements of the Company shall not exceed 10% of the aggregate number of
issued and outstanding Common Shares and Class B Shares from time to time (calculated on a non-diluted basis),
provided that for the purpose of the foregoing limits, any Option granted
pursuant to the Option Plan, or securities issued under any other incentive plan of the Company, prior to the
holder becoming an insider shall be excluded for the purposes of the limits set out in (b) and (c) above.
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The Option Plan will be administered by the Board, which may delegate authority over the administration and
operation of the Option Plan to a committee. The Board will have the authority to determine the terms and conditions
of any grant of Options, provided that:
• the exercise price per Common Share of each Option must not be less than the Market Price of the Common
Shares at the time of the grant;
• unless otherwise determined by the Board and except as otherwise provided by the Option Plan, all Options will
expire on the fifth anniversary of the date of grant, subject to earlier termination in the event the holder ceases
to be an officer, employee or consultant of the Company or if the Board determines, in its sole discretion, to
accelerate the expiry time in connection with a “change of control” (as defined in the Option Plan);
• Options will vest as to one-third of the total grant on each of the first three anniversaries of the grant date, or as
otherwise set out by the Board in the applicable grant agreement;
• except as otherwise provided by the Option Plan, upon the occurrence of a change of control, vesting of Options
will accelerate only if: (a) the continuing or successor entity fails to substitute or replace the Options with stock
options or other similar awards of such continuing or successor entity on the same terms and conditions as the
Options; or (b) within 12 months of the change of control, the service, consulting arrangement or employment
is terminated other than for cause or the holder of the Options resigns for good reason; and
• vested options held by a holder who ceases to be an eligible participant under the Option Plan: (a) due to
termination for cause terminate on the last date the holder was actively at work for the Company; (b) due to
death or disability terminate 180 days after the last date the holder was actively at work for the Company; and
(c) for any reason other than termination for cause, death or disability, terminate 30 days after the last date the
holder was actively at work for the Company.
The Option Plan also contains provisions which effect appropriate adjustments to the number and kind of shares
or other securities to be received upon exercise of outstanding Options, or to the exercise price per Common Shares of
outstanding Options, in the event of a subdivision, redivision, consolidation, reclassification of shares of the Company,
in the event of any special distribution to all Shareholders, in the event of any consolidation, amalgamation, merger
with or into another corporation and in the event of any transfer of the entirety or substantially the entirety of the
undertaking or assets of the Company to another corporation.
Options may not be transferred or assigned other than by bequeath or the laws of descent and distribution. The
Company may not provide financial assistance to the holder of an Option in connection with the exercise of Options.
Subject to the applicable rules of the TSX, the Board may from time to time, in its absolute discretion and without
the approval of the Shareholders, make amendments to the Option Plan or any Option including, without limitation, the
following:
• any amendment to the vesting provisions of the Option Plan and any option agreement, including to accelerate,
conditionally or otherwise, on such terms as it sees fit, the vesting date of an Option;
• any amendment to the Option Plan or an Option as necessary to comply with applicable law or the requirements
of the TSX or any other regulatory body having authority over the Company, the Option Plan or the
Shareholders;
• any amendment to the Option Plan and any option agreement to permit the conditional exercise of any Option;
• any amendment of a “housekeeping” nature, including, without limitation, to clarify the meaning of an existing
provision of the Option Plan, correct or supplement any provision of the Option Plan that is inconsistent with
any other provision of the Option Plan, correct any grammatical or typographical errors or amend the
definitions in the Option Plan regarding administration of the Option Plan;
• any amendment respecting the administration of the Option Plan; and
• other amendment to the Option Plan or any option agreement that does not require the approval of
Shareholders.
Approval of the Shareholders will be required for the following amendments to the Option Plan or any Option:
• any increase in the number of Common Shares reserved for issuance under the Option Plan;
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• any amendment to the insider participation limits set forth in the Option Plan;
• any reduction in the exercise price per Common Share of an Option, cancellation and reissue of Options or
substitution of Options with cash or other awards on terms that are more favourable to the holders of Options;
• any extension of the expiry of an Option, except as otherwise provided by the Option Plan;
• an amendment that would permit Options to be transferable or assignable other than for normal estate
settlement purposes;
• any amendment that would materially modify the eligibility requirements for participation in the Option Plan,
including any amendment which would allow non-executive directors to participate in the Option Plan;
• an amendment to any of the amending provisions of the Option Plan; and
• such other matters in respect of which the TSX may require approval by the Shareholders.
Subject to the foregoing amendment provisions, the Board may, at any time and from time to time, without the
approval of the Shareholders, suspend, discontinue or amend the Option Plan or an Option; provided that the Board
may not suspend, discontinue or amend the Option Plan or amend any outstanding Option in a manner that would
materially adversely affect any Option previously granted to a grantee under the Option Plan, and any such suspension,
discontinuance or amendment of the Option Plan or amendment to an Option shall apply only in respect of Options
granted on or after the date of such suspension, discontinuance or amendment.
Termination and Change of Control Benefits
Employment agreements with each of the NEOs are currently being finalized and expected to be entered into in
connection with the Reorganization. It is expected that these agreements will provide for certain severance
arrangements such that if: (a) there is a change of control of the Company and such officer’s employment is terminated
by the Company or by the officer as a result of a materially detrimental change in the terms of employment; or (b) the
services of such officer are terminated by the Company without cause or by the officer as a result of a materially
detrimental change in the terms of employment, the NEO will receive:
• in the case of the CEO, a severance payment equal to 24 months’ salary plus the annualized value of the most
recent performance incentive received by the CEO (less applicable withholdings);
• in the case of the CFO, a severance payment equal to 18 months’ salary plus the annualized value of the most
recent performance incentive received by the CFO (less applicable withholdings); and
• in the case of the remaining NEOs, a severance payment equal to 12 months’ salary plus the annualized value
of the most recent performance incentive received by each incumbent (less applicable withholdings).
In the event that the services of an NEO are terminated by the Company for cause, such NEO will be entitled to
any pro rata base salary, vacation pay and expenses earned or due, but not yet paid, up to and including the termination
date paid as a lump sum. Any annual performance incentive will be forfeited.
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DIRECTOR COMPENSATION
Source’s directors’ compensation program has been designed to attract and retain the most qualified individuals to
serve on its Board. The Compensation and Corporate Governance Committee is responsible for reviewing and
approving any changes to director compensation arrangements. Unlike compensation for the Named Executive
Officers, the directors’ compensation program is not designed to pay for performance; rather, directors receive
retainers for their services in order to help ensure unbiased decision-making.
General
Non-executive directors of the Company will be paid an annual Board retainer fee of $45,000 ($75,000 for the
Chair), with committee chair fees paid as follows: Audit Committee Chair–$15,000; Compensation and Corporate
Governance Committee Chair–$7,500; Health, Safety & Environment Committee Chair–$7,500. Non-executive
directors will also receive a meeting fee of $1,350 for each Board meeting attended. Retainers will be prorated for
2017. Pursuant to the LTIP, each eligible director would receive an annual grant of DSUs. The timing and grant of
DSUs granted to non-executive directors will be determined by the Board, upon recommendation by the Compensation
and Corporate Governance Committee. Under the LTIP, each non-executive director may elect, once each calendar
year, to receive all or a portion of his or her annual Board retainer fee compensation in DSUs, including any fees paid
to such non-executive director for attendance at meetings of the Board or committees thereof. DSUs are expected to
vest on the date the non-executive director ceases to be a director and are paid out only at such time. Dividend
equivalents are earned at the same rate as cash dividends paid on the Common Shares.
Share Ownership Guidelines
The Company will adopt the share ownership guidelines for non-executive directors in connection with the
Reorganization to demonstrate their commitment to the achievement of long-term success and alignment of their
interests with shareholders. Pursuant to the non-executive director share ownership guidelines, the Company’s
non-executive directors are required to hold, directly or indirectly, an aggregate number of Common Shares and
Class B Shares with an aggregate value equal to three times his or her annual base retainer. Common Shares, Class B
Shares or DSUs held for purposes of the non-executive director share ownership guidelines are valued at the higher of
value at the time of award or acquisition and the current market price of the Common Shares.
Each director will have five years from the later of the introduction of the share ownership guidelines and the
dated of their election or appointment as a director to achieve this minimum share ownership requirement.
Director Compensation Table
Based on the information available as of the date of this prospectus, the following table sets forth information
concerning the expected initial annualized compensation of the directors (other than Brad Thomson, who will receive
no compensation in his capacity as a director) for the 2017 year.
Name
Fees
Earned
($)(3)
Share-Based
Awards
($)(4)
OptionBased
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Pension
Value
($)
All Other
Compensation
($)(5)
Total
($)
Cody Church(1)
Jeff Belford(1)
Jim McMahon
Neil Cameron(2)
Marshall McRae(2)(6)
Stew Hanlon(2)
75,000
45,000
45,000
52,500
75,000
52,500
90,000
90,000
90,000
90,000
90,000
90,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
165,000
135,000
135,000
142,500
165,000
142,500
Notes:
(1) Fees earned by Messrs. Church and Belford will be held by such individuals for the benefit of TriWest IV.
(2) Messrs. Cameron, McRae and Hanlon are not currently directors, but are expected to be appointed to the Board at or prior to Closing.
(3) Anticipated annual retainers for 2017. Fees will be prorated for 2017.
(4) Determined in accordance with the LTIP.
(5) Does not include meeting fees.
(6) Mr. McRae will receive an additional $15,000 a year for being the designated lead director if a conflict of interests in respect of the Chair of the
Board arises.
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Outstanding Share-Based Awards–Directors
Based on the information available as of the date of this prospectus, the following table sets forth information
concerning all awards expected to be issued to directors (other than Brad Thomson, who will receive no compensation
in his capacity as a director) for the 2017 year.
Name
Number of Shares or
Units that have not Vested (#)(3)
Market or Payout Value of
Share-Based Awards
that have not Vested ($)(3)
4,865
4,865
4,865
4,865
4,865
4,865
90,000
90,000
90,000
90,000
90,000
90,000
Cody Church(1)
Jeff Belford(1)
Jim McMahon
Neil Cameron(2)
Marshall McRae(2)
Stew Hanlon(2)
(1)
(2)
(3)
Awards granted to Messrs. Church and Belford will be held by such individuals for the benefit of TriWest IV.
Messrs. Cameron, McRae and Hanlon are not currently directors, but are expected to be appointed to the Board at or prior to Closing.
Based on the Offering Price.
Incentive Plan Awards — Value Vested or Earned During the Year — Directors
Given DSUs will only be initially issued in 2017, no DSUs are expected to vest during 2017. Accordingly, no
value is attributed to such DSUs for 2017.
Indemnity Agreements for Directors and Officers
Source has entered into indemnity agreements with each of the directors and officers pursuant to which Source has
agreed to indemnify such directors and officers from liability arising in connection with the performance of their
duties. Such indemnity agreements conform to the provisions of the ABCA.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
The Company is not aware of any individuals who are either current or former executive officers, directors or
employees of the Company, or any of its subsidiaries and who have indebtedness outstanding as at the date hereof
(whether entered into in connection with the purchase of securities of the Company or otherwise) that is owing to:
(a) the Company or any of its subsidiaries, or (b) another entity where such indebtedness is the subject of a guarantee,
support agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of
its subsidiaries.
Except for: (a) indebtedness that has been entirely repaid on or before the date of this prospectus, and (b) ”routine
indebtedness” (as defined in Form 51-102F5 of the Canadian Securities Administrators), the Company is not aware of
any individuals who are, or who at any time since inception were, a director or executive officer of the Company, a
proposed nominee for election as a director or an associate of any of those directors, executive officers or proposed
nominees who are, or have been since the beginning of the most recently completed financial year, indebted to the
Company or any of its subsidiaries, or whose indebtedness to another entity is, or at any time since the beginning of the
most recently completed financial year has been, the subject of a guarantee, support agreement, letter of credit or other
similar arrangement or understanding provided by the Company.
AUDIT COMMITTEE
Audit Committee Mandate
The Board has adopted a written mandate for the Audit Committee, which sets out the Audit Committee’s
responsibility for (among other things) reviewing the Company’s financial statements and the Company’s public
disclosure documents containing financial information and reporting on such review to the Board, ensuring the
Company’s compliance with legal and regulatory requirements, overseeing qualifications, engagement, compensation,
performance and independence of the Company’s external auditors and reviewing, evaluating and approving the
internal control and risk assessment systems that are implemented and maintained by Management. A copy of the
Audit Committee mandate is attached to this prospectus as Appendix “C”.
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Composition of the Audit Committee and Relevant Education and Experience
The Audit Committee will consist of Messrs. McRae (Chair), Cameron, Hanlon and Belford. Each of the members
of the Audit Committee is considered “financially literate” and “independent” within the meaning of NI 52-110.
The Company believes that each of the members of the Audit Committee possesses: (a) an understanding of the
accounting principles used by the Company to prepare its financial statements; (b) the ability to assess the general
application of such accounting principles in connection with the accounting for estimates, accruals and provisions;
(c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or
more individuals engaged in such activities; and (d) an understanding of internal controls and procedures for financial
reporting.
For a summary of the education and experience of each member of the Audit Committee that is relevant to the
performance of his responsibilities as a member of the Audit Committee, see “Directors and Officers”.
Pre-Approval Policies and Procedures for the Engagement of Non-Audit Services
The Audit Committee must pre-approve all non-audit services to be provided to the Company by its external
auditors, PricewaterhouseCoopers LLP. The Audit Committee may delegate such pre-approval authority, if and to the
extent permitted by law.
External Audit Service Fees
The following table summarizes the fees paid by Source to its external auditors, PricewaterhouseCoopers LLP, for
external audit and other services during the period indicated. The amounts disclosed exclude administrative charges.
2016
($)
2015
($)
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees
80,000
120,000
130,772
–
80,000
–
208,246
–
Total
325,000
353,000
Notes:
(1)
(2)
(3)
Represents the aggregate fees for services related to the audit of annual financial statements and review of quarterly financial statements.
Represents aggregate fees for services provided in connection with equity and debt financings, including review of offering documents,
completion of comfort letters for underwriters and attendance at due diligence meetings.
Represents the aggregate fees billed for tax compliance, tax advice and tax planning.
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STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Following the completion of the Offering, the Board may ultimately determine to implement governance
practices, policies, structure and mechanisms which differ from those noted below.
Board of Directors
Under NI 58-101, a director is considered to be independent if he or she is independent within the meaning of NI
52-110. Pursuant to NI 52-110, the independent director is a director who is free from any direct or indirect relationship
which could, in the view of the Board, be reasonably expected to interfere with a director’s independent judgment.
Based on information provided by each director concerning his background, employment and affiliations, the Board
has determined that: (a) Mr. Church, Mr. Belford, Mr. McMahon, Mr. Cameron, Mr. McRae and Mr. Hanlon are
independent within the meaning set out in NI 58-101; and (b) Mr. Thomson is not independent within the meaning set
out in NI 58-101 as he is the CEO.
Mr. Church and Mr. Belford are each Senior Managing Directors of TriWest Capital, the general partner of the
limited partnerships comprising TriWest IV, and Mr. McMahon is a significant shareholder of Source. See “Principal
Shareholders”. Notwithstanding the significant ownership of each of their respective organizations in the Company,
the Board has determined that each of Mr. Church, Mr. Belford and Mr. McMahon are independent within the meaning
set out in NI 58-101. The Board has also specified in the Board’s mandate that in the event the Chair of the Board is
not independent with respect to a particular matter, a majority of the Board’s independent directors will appoint an
independent lead director who will be responsible for ensuring that the Board approaches its responsibilities in respect
of such matter in an independent and conflict free manner. See “Statement of Corporate Governance Practices
— Board Mandate”.
The Board believes that given its size and structure, it is organized properly, functions effectively and is able to
facilitate independent judgment in carrying out its responsibilities, including those set forth in the mandate of the
Board, and will continue to do so after Closing. To enhance such independent judgement, while the Company’s
independent directors may not hold regularly scheduled meetings at which the non-independent directors and
Management are not in attendance, at the end of, or during, each Board meeting, the members of Management who are
present at such meeting, including Mr. Thomson will leave the meeting in order that the independent directors can
discuss any necessary matters without Management and the non-independent directors being present.
The following directors or proposed directors of the Company are presently directors of other issuers that are
reporting issuers (or the equivalent):
Name of Director
Name of Other Reporting Issuers
Cody Church
Marshall McRae
Stew Hanlon
EdgeFront Real Estate Investment Trust
Athabasca Oil Corporation, Black Diamond Group Limited and Gibson Energy Inc.
Gibson Energy Inc.
The Company does not have a formal policy on board interlocks. A board interlock occurs when two of the
Company’s directors also serve together on the board of another reporting issuer. As of the date of this prospectus,
there are no board interlocks among the Board members, however, upon Closing, there will be a board interlock as
Mr. Hanlon and Mr. McRae both serve on the board of directors of Gibson Energy Inc.
Majority Voting Policy
In accordance with the requirements of the TSX, Source will adopt a majority voting policy, which requires that
any nominee for director who receives a greater number of votes withheld than for his or her election shall tender his or
her resignation to the chair of the Board following the meeting of shareholders at which the directors were elected. This
policy applies only to uncontested elections, meaning elections where the number of nominees for director is equal to
the number of directors being elected. The Compensation and Corporate Governance Committee and the Board shall
consider the resignation, and whether or not it should be accepted. In doing so, the Compensation and Corporate
Governance Committee may consider any stated reasons as to why shareholders withheld votes from the election of the
relevant director, the length of service and the qualifications of the director, the director’s contributions to the
Company, the effect such resignation may have on the Company’s ability to comply with any applicable governance
rules and policies, the dynamics of the Board, and any other factors that the members of the Compensation and
Corporate Governance Committee consider relevant. The nominee shall not participate in any committee or Board
deliberations until after the resignation offer. Resignations are expected to be promptly accepted except in situations
where extraordinary circumstances warrant the applicable director continuing to serve as a member of the Board. The
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Board shall disclose its election decision, via press release, within 90 days of the applicable meeting at which directors
were elected. If a resignation is accepted, the Board may appoint a new director to fill the vacancy created by the
resignation. If a director nominee that is an employee of the Company receives a greater number of votes withheld than
in favour during an uncontested election of directors and is required to tender his or her resignation as director pursuant
to the majority voting policy, then to the extent that no events or circumstances have otherwise occurred that would be
grounds for termination for cause, such individual may opt to be deemed to have been terminated from his or her
employment without cause and be entitled to the rights and benefits arising under the terms of his or her employment
agreement or that may otherwise arise pursuant to applicable laws.
Board Mandate
The Board, either directly or through its committees, is responsible for the supervision of management of the
Company’s business and affairs with the objective of enhancing Shareholder value. A copy of the mandate of the
Board of Directors is attached to this prospectus as Appendix “B”.
Meeting Attendances
Since the Company’s incorporation, the Board has held one Board meeting and each of Mr. Church, Mr. Belford,
Mr. McMahon and Mr. Thomson attended such meeting.
Board Committees
The Board has three committees, the Audit Committee, the Compensation and Corporate Governance Committee
and the Health, Safety and Environment Committee.
Audit Committee
See “Audit Committee” above.
Compensation and Corporate Governance Committee
The members of the Compensation and Corporate Governance Committee will be: Messrs. Hanlon (Chair),
McRae, Cameron, McMahon and Church. Each of the members of the Compensation and Corporate Governance
Committee is independent within the meaning of NI 58-101. The Compensation and Corporate Governance
Committee’s mandate is to, among other things, assess and formulate and make recommendations to the Board in
respect of corporate governance, compensation issues related to Source’s officers and employees, compensation and
other issues relating to the Company’s directors. In addition to any other duties and authorities delegated to it by the
Board from time to time, the Compensation and Corporate Governance Committee’s mandate includes:
• reviewing and recommending to the Board, on a non-binding basis, changes to its mandate, as considered
appropriate from time to time;
• reviewing and making recommendations to the Board on Source’s general compensation philosophy and
overseeing the development and administration of compensation programs;
• overseeing the preparation of and recommending to the Board any required disclosures of governance practices
to be included in any disclosure document of Source, as required;
• reviewing the senior management and Board compensation policies and/or practices followed by Source and
seeking to ensure such policies are designed to recognize and reward performance and establish a compensation
framework, which results in the effective development and execution of a Board-approved strategy;
• seeking to ensure that base salaries are competitive relative to the industry and that bonuses, if any, reflect
industry-competitive cash composition relative to corporate performance and considering individual
performance in the context of the overall performance of Source;
• developing, for review and approval of the Board, a written position description for the CEO;
• annually evaluating Source’s and the senior executives’ performance by the degree that Source’s strategy (as
proposed and justified by Management and modified and approved by the Board) and value growth
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performance (as compared to its peers including other Canadian public companies of a similar size and other
Canadian mining or oilfield services companies of a similar size in general and also the Canadian mining or
oilfield services companies with the most similar scope of business) differentiate;
• annually reviewing and recommending to the Board an evaluation of the performance of senior executives and
providing recommendations for annual compensation based on such evaluation and other appropriate factors;
• administering any share-based compensation plan and such other compensation plans or structures for nonsenior executive employees as are adopted by Source from time to time in accordance with the terms of the
applicable plan or structure, including the recommendation to the Board of the grant of Options or other
compensation in accordance with the terms of the applicable plan or structure;
• regularly reviewing all incentive compensation plans and share-based plans and, in its discretion, making
recommendations to the Board for consideration;
• reviewing employee benefit plans and reports and, in its discretion, making recommendations to the Board for
consideration;
• providing risk oversight in respect of Source’s compensation policies and practices;
• identifying any compensation plans or practices that could encourage senior executives or other individuals in a
principal business unit or a division of Source to take inappropriate or excessive risks;
• identifying any other risks that may arise from Source’s compensation policies and practices that are reasonably
likely to have a material adverse effect on Source;
• overseeing and approving a report prepared by Management on senior executive compensation on an annual
basis in connection with the preparation of the annual management information circular or as otherwise
required pursuant to Applicable Securities Laws;
• reviewing in advance all proposed executive compensation disclosure;
• reviewing and recommending to the Board the compensation of the Board members, including annual retainer,
meeting fees, share-based compensation and other benefits conferred upon the Board members;
• reviewing annually the effectiveness of the CEO and, in consultation with the CEO, other senior management
and other executive officers, including their contributions, performance and qualifications;
• considering such other human resource matters as are delegated to the Compensation and Corporate
Governance Committee by the Board, for review or recommendation, as considered appropriate from time to
time;
• reviewing, on a periodic basis, the size and composition of the Board, making recommendations as to the
number of independent directors and advising the Board on filling vacancies;
• facilitating the independent functioning of the Board, including by assessing which directors are independent
directors and which independent directors serve the Board as a matter of duty to a third-party and identifying
areas of conflict of interest between Source and any such third parties, and seeking to maintain an effective
relationship between the Board and senior management of the Company;
• reviewing, annually, the mandates of the Board and its committees and the position descriptions for the Chair of
the Board and the Chair of each committee and recommending to the Board such amendments to those
mandates and position descriptions as it believes are necessary or desirable;
• assessing, annually, the effectiveness of the Chair of the Board, the Board as a whole, all committees of the
Board and the contribution, competency, skill and qualification and, if applicable, position distributions, of
individual directors, including making recommendations where appropriate that a sitting director be removed or
not be re-appointed;
• reviewing, on a periodic basis, the Company’s code of business conduct and ethics, recommending to the Board
any changes thereto as considered appropriate from time to time, ensuring that management has established a
system to monitor compliance with the code of business conduct and ethics, and reviewing management’s
monitoring of Source’s compliance with the code of business conduct and ethics;
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• establishing a process for direct communications with Shareholders and other stakeholders, including through
the Company’s whistleblower policy;
• developing processes to address any conflict of interest and to periodically review such processes;
• reviewing, on a periodic basis, senior management succession plans;
• reviewing and submitting to the Board, as a whole, recommendations concerning executive and board
compensation, compensation plan matters and corporate governance;
• reviewing with the Board the Compensation and Corporate Governance Committee’s judgment as to the quality
of the Company’s governance and suggesting changes to the Company’s operating governance guidelines and
deemed appropriate;
• as necessary or appropriate, establishing qualifications for directors and procedures for identifying possible
nominees who meet these criteria;
• considering, in recommending to the Board suitable candidates to be nominated for election as directors at the
next annual meeting of Shareholders: (a) the competencies and skills considered necessary for the Board, as a
whole, to possess, (b) the competencies and skills of the existing members of the Board, (c) the needs of the
Board and the competencies and skills each new nominee will bring to the boardroom, and (d) whether or not
each new nominee can devote sufficient time and resources to his or her duties as a member of the Board; and
• periodically reviewing the policy on mandatory share ownership for directors and senior officers of the
Company and, in its discretion, recommending any changes to the Board for consideration.
Consultants may be periodically retained to assist the Compensation and Corporate Governance Committee in
fulfilling its responsibilities. Further particulars of the process by which compensation for the Company’s directors and
officers is determined can be found under the heading “Executive Compensation”.
Health, Safety and Environment Committee
The members of the Health, Safety and Environment Committee will be Messrs. Cameron (Chair), Hanlon and
McMahon. Each of the members of the Health, Safety and Environment Committee is independent within the meaning
of NI 58-101. The Health, Safety and Environment’s Committee’s mandate is to oversee Source’s policies and
management systems, which are designed to cause it to comply with applicable laws and regulations, and evaluate the
performance of Source with respect to: (a) the protection of the health and safety of all persons associated with
Source’s operations; (b) the protection of the biological and physical environments; and (c) the relationship of Source
with the communities nearest its operations. In addition to any other duties and authorities delegated to it by the Board
from time to time, the Health, Safety and Environment’s Committee’s mandate includes:
• reviewing, annually, and recommending to the Board changes to its mandate, as considered appropriate from
time to time;
• monitoring changes to applicable laws, regulations and rules and industry standards in regard to health, safety
and environmental matters;
• monitoring on a regular basis, the existing health, safety and environmental practices, procedures and policies
of Source as prepared by and updated from time to time by management to ensure that they comply with
applicable laws, regulations and rules, conform to industry standards and prevent or mitigate losses and, in its
discretion, directing changes to such practices, procedures and policies;
• reviewing periodically the relationship of Source with the communities affected by its business and operations;
• considering and implementing policies for the improvement of the relationship of Source with the communities
affected by its business and operations;
• evaluating the effectiveness of the implementation of Source’s policies relating to health, safety and
environmental matters;
• directing the preparation of, and reviewing and considering reports and recommendations issued by
management or by external advisors relating to health and safety issues, compliance matters and the interaction
of Source with the communities affected by its business and operations, together with management’s response
to those reports and recommendations;
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• from time to time, touring Source’s operations, interviewing the senior officers of Source responsible for
operations and a sampling of the operating personnel reporting to the Board on such meetings;
• reviewing periodically Source’s emergency response plan, if any, and state of readiness to respond to crisis
situations;
• reviewing any civil or criminal occupational health and safety or environmental proceedings, claims, orders,
actions or government investigation contemplated or threatened against Source;
• reviewing circumstances involving any emergency that forces the indefinite shut-down of operations, loss of
safe operating control, serious injuries or fatalities among employees, contractors or the public, extensive
damage to property or a serious harm to the environment;
• reviewing health, safety, and environmental programs implemented by Management for any of Source’s
employees; and
• submitting to the Board, as a whole, reports concerning health, safety and environmental matters
Orientation and Continuing Education
The Compensation and Corporate Governance Committee is responsible for the orientation and continuing
education of the members of the Board. As new directors join the Board, they are provided with, among other things,
corporate policies, historical information about Source, information on Source’s performance and its strategic plan and
an outline of the general duties and responsibilities entailed in carrying out their duties.
Source encourages directors to attend, enroll or participate in courses and/or seminars dealing with financial
literacy, corporate governance and related matters. Each director of Source has the responsibility for ensuring that he or
she maintains the skill and knowledge necessary to meet his or her obligations as a director.
Ethical Business Conduct
The Board encourages and promotes an overall culture of ethical business conduct by promoting compliance with
applicable laws, rules and regulations, providing guidance to Management to help them recognize and deal with ethical
issues, promoting a culture of open communication, honesty and accountability and ensuring awareness of disciplinary
action for violations of ethical business conduct. In connection with its commitment to ensuring the ethical operation of
Source, the Board has adopted a code of business conduct and ethics, a copy of which will be made available under the
Company’s profile at www.sedar.com. Any reports of variance from the code of business conduct and ethics are to be
reported to the Board.
The Board monitors compliance with the code of business conduct and ethics through reports of Management to
the Board and requires that all directors, officers and designated employees provide an annual certification of
compliance with the code. A director who has a material interest in a matter before the Board or any committee on
which he or she serves is required to disclose such interest as soon as the director becomes aware of it. In situations
where a director has a material interest in a matter to be considered by the Board or any committee on which he or she
serves, such director may be required to absent himself or herself from the meeting while discussions and voting with
respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the
ABCA regarding conflicts of interest.
The Board has also adopted a whistleblower policy which provides employees, clients and contractors with the
ability to report, on a confidential and anonymous basis, any violation within Source including (but not limited to),
criminal conduct, falsification of financial records or unethical conduct. The Board believes that providing a forum for
employees, clients, contractors, officers and directors to raise concerns about ethical conduct and treating all
complaints with the appropriate level of seriousness fosters a culture of ethical conduct.
Nomination of Directors
The Compensation and Corporate Governance Committee is responsible for selecting nominees for election to the
Board. The Compensation and Corporate Governance Committee is responsible for recommending suitable candidates
for nomination for election or appointment as director, and recommending the criteria governing the overall
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composition of the Board and governing the desirable characteristics for directors. In making such recommendations,
the Compensation and Corporate Governance Committee considers: (a) the competencies and skills that the Board
considers to be necessary for the Board, as a whole, to possess; (b) the competencies and skills that the Board considers
to be necessary for each existing director to possess; (c) the competencies and skills that each new nominee will bring
to the Board; and (d) whether or not each new nominee can devote sufficient time and resources to his or her duties as a
member of the Board.
The Compensation and Corporate Governance Committee also reviews on a periodic basis the composition of the
Board, and analyzes the needs of the Board and recommends nominees who meet such needs.
Notwithstanding the foregoing, pursuant to the TriWest Nomination Agreement, for so long as TriWest IV and its
affiliates collectively own or exercises control or direction over 7.5% or more of the aggregate outstanding Common
Shares and Class B Shares, TriWest IV will have the right to nominate one representative to stand for appointment and
election as a director of the Company and for so long as TriWest IV and its affiliates own or exercise control or
direction over 15% or more of the aggregate outstanding Common Shares and Class B Shares, TriWest IV will have
the right to nominate two representatives to stand for appointment and election as directors of Source, and such
nominees will be included in any slate of directors proposed by Source. Further, pursuant to the McMahon Nomination
Agreement, for so long as the Jim McMahon and his affiliates collectively own or exercises control or direction over
7.5% or more of the aggregate outstanding Common Shares and Class B Shares, Jim McMahon will have the right to
nominate himself as representative to stand for appointment and election as a director of the Company.
See “Principal Shareholders — Distribution and Nomination Rights — TriWest Nomination Agreement” and “—
McMahon Nomination Agreement”.
Compensation
The Compensation and Corporate Governance Committee is currently responsible for determining the
compensation for Source’s directors and officers.
See “Executive Compensation — Compensation Discussion and Analysis”.
Board Assessments
To date, a formal process of assessing the Board and its committees, or the independent directors has not been
implemented and the Board has satisfied itself that the Board, its committees and individual directors are performing
effectively through informal discussions.
Following Closing, the Compensation and Corporate Governance Committee will establish and implement
procedures to evaluate the performance and effectiveness of the Board, its committees and the contributions of
individual directors. The Compensation and Corporate Governance Committee will also take reasonable steps to
evaluate and assess, on an annual basis, directors’ performance and the effectiveness of the Board, its committees, the
individual directors, the Chair and the committee chairs. The assessment will address, among other things, individual
director independence, individual director and overall Board skills and individual director financial literacy. The Board
will receive and consider the recommendations from the Compensation and Corporate Governance Committee
regarding the results of such evaluations.
Position Descriptions
The Board has approved written position descriptions or terms of reference for the Chair of the Board and the
Chair of each of the Audit Committee, the Compensation and Corporate Governance Committee and the Health, Safety
and Environment Committee. The Board has also developed a written position description for the CEO.
Director Term Limits and Board Renewal
The Board has not adopted director term limits or other mechanisms of board renewal because:
• Source has found that having long standing directors on its Board does not negatively impact board
effectiveness and instead contributes to boardroom dynamics such that Source has for many years had a
consistently high performing Board;
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• the imposition of director term limits implicitly discounts the value of experience and continuity amongst Board
members and runs the risk of excluding experienced and potentially valuable Board members as a result of an
arbitrary determination;
• it is important to retain directors who hold significant investments in the Company, such that their interests are
aligned with the interests of the Shareholders;
• it is important to ensure that directors with significant and unique business experience in Source’s industry are
retained;
• directors with the level of understanding of Source’s business, history and culture acquired through long service
on the Board provide additional value; and
• term limits have the disadvantage of losing the contribution of directors who have been able to develop, over a
period of time, increasing insight into Source and its operations and thereby may provide an increasing
contribution to the Board as a whole.
Consideration of Gender in Director Nominations and Executive Appointments
As at the date of this prospectus, there are no women on the Board and none of the Company’s executive officers
are female. The Company has not adopted formal targets regarding the number of women to be elected to the Board or
to be appointed to executive officer positions and the Company does not have written policies regarding the
identification and nomination of female director candidates for election to the Board. The Compensation and Corporate
Governance Committee considers the level of representation of women on the Board as one of many factors when
seeking candidates for nomination. Similarly, the Company considers the level of representation of women in executive
officer positions as one of many factors when making executive officer appointments.
The Compensation and Corporate Governance Committee is focused on finding the most qualified individuals
available with skills and experience that will complement the Board and assist it in providing strong stewardship for
the Company, with gender being only one of many factors taken into consideration when evaluating individuals as
potential directors. The Company is similarly focused on seeking the most qualified individuals with skills and
experience that will be of greatest benefit to the Company, with gender being only one of many factors taken into
consideration when evaluating individuals for senior management positions. This approach is believed to be in the best
interests of the Company and its stakeholders.
ELIGIBILITY FOR INVESTMENT
In the opinion of Stikeman Elliott LLP, counsel to the Company, and Blake, Cassels & Graydon LLP, counsel to
the Underwriters, based on the provisions of the Tax Act in force on the date hereof, provided the Common Shares are
listed on a designated stock exchange (which currently includes the TSX) on the Closing Date, the Common Shares
will on that date be “qualified investments” under the Tax Act for Deferred Plans.
Notwithstanding the foregoing, an annuitant under an RRSP or RRIF or the holder of a TFSA, as the case may be,
that holds Common Shares will be subject to a penalty tax if the Common Shares are a “prohibited investment” (as
defined in the Tax Act) for the RRSP, RRIF or TFSA, as the case may be. The Common Shares will generally not be a
prohibited investment provided that the annuitant under the RRSP or RRIF or the holder of the TFSA, as the case may
be, deals at arm’s length with the Company for the purposes of the Tax Act and does not have a “significant interest”
(within meaning of the Tax Act) in the Company. In addition, the Common Shares will not be a prohibited investment
if the Common Shares are “excluded property” (as defined in the Tax Act for purposes of the prohibited investment
rules) for the RRSP, RRIF or TFSA.
Prospective investors who intend to hold the Common Shares in Deferred Plans should consult their own
tax advisors regarding their particular circumstances and requirements and rules regarding holding and
transferring securities therein.
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PLAN OF DISTRIBUTION
The Company and the Selling Shareholders are offering the Common Shares described in this prospectus through
the Underwriters. Of the Common Shares to be sold, Š Common Shares are being sold by the Company and an
aggregate of Š Common Shares are being sold by the Selling Shareholders. The Company and the Selling Shareholders
have entered into the Underwriting Agreement dated Š, 2017 with the Underwriters. Subject to the terms and
conditions of the Underwriting Agreement, each of the Underwriters has severally agreed to purchase the Common
Shares offered hereby.
Closing is expected to occur on or about Š, 2017 or such later date as the Company, the Selling Shareholders and
the Underwriters may agree, but in any event not later than Š, 2017, at a price of $Š per Common Share payable in cash
to the Company or the applicable Selling Shareholder, as applicable, against delivery of the Common Shares. The
Common Shares offered under this prospectus are to be taken up by the Underwriters, if at all, on or before a date not
later than 42 days after the date of the receipt for the final prospectus.
The Offering Price of the Common Shares offered under the Offering will be determined by negotiation between
the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand. The Company
and the Selling Shareholders have agreed to pay a fee to the Underwriters in the amount of $Š per Common Share sold
pursuant to the Offering, being an aggregate fee of $Š ($Š if the Over-Allotment Option is exercised in full). The
Underwriter’s fee is payable on Closing. The Company and the Selling Shareholders have also agreed to reimburse the
Underwriters for their reasonable expenses in connection with the Offering. The Underwriting Agreement also
provides that the Company and the Selling Shareholders will indemnify the Underwriters, their respective affiliates and
each of their respective directors, officers, employees, partners, agents and each other person, if any, controlling an
Underwriter or any of its subsidiaries against certain liabilities, claims, actions, complaints, losses, costs, fines,
penalties, taxes, interest, damages and expenses in connection with the Offering.
The obligations of the Underwriters are several and neither joint nor joint and several, and may be terminated at
their discretion on the basis of their assessment of the state of the financial markets and may also be terminated upon
the occurrence of certain stated events. If an Underwriter fails to purchase the Common Shares which it has agreed to
purchase, the remaining Underwriters may terminate their obligation to purchase their allotment of Common Shares, or
may, but are not obligated to, purchase the Common Shares not purchased by the Underwriter or Underwriters which
fail to purchase; provided, however, that if the aggregate number of Common Shares not so purchased is not more than
10% of the Common Shares agreed to be purchased by the Underwriters, then each of the other Underwriters shall be
obliged to purchase severally the Common Shares not taken up, on a pro rata basis or in such other proportions as they
may agree among themselves. The Underwriters are, however, obligated to take up and pay for all of the Common
Shares if any of the Common Shares are purchased under the Underwriting Agreement. The Underwriters are not
required to take or pay for the Common Shares covered by the Over-Allotment Option described below.
The Common Shares are offered subject to a number of conditions, including receipt and acceptance of the
Common Shares by the Underwriters and the Underwriters’ right to reject orders in whole or in part and compliance by
the Company and the Selling Shareholders with industry-standard closing conditions.
The Underwriters propose to offer the Common Shares initially at the Offering Price specified on the cover page
of this Prospectus. After the Underwriters have made a reasonable effort to sell all of the Common Shares at such price,
the Offering Price may be decreased and may be further changed from time to time to an amount not greater than such
price, and the compensation realized by the Underwriters will be decreased by the amount that the aggregate price paid
by purchasers for the Common Shares is less than the gross purchase price paid by the Underwriters to the Company
and the Selling Shareholders for the Common Shares. Any such reduction in price will not affect the proceeds received
by the Company and the Selling Shareholders.
In connection with the Offering, certain of the Underwriters or other securities dealers may distribute prospectuses
electronically.
The Offering is being made in each of the provinces and territories of Canada through those Underwriters or their
affiliates who are registered to offer the Common Shares for sale in such provinces and territories and such other
registered dealers as may be designated by the Underwriters. Subject to applicable law and the provisions of the
Underwriting Agreement, the Underwriters may offer the Common Shares outside of Canada.
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The Common Shares offered hereby have not been and will not be registered under the U.S. Securities Act, and
may not be offered or sold in the United States, except in transactions exempt from registration under the U.S.
Securities Act and under the securities laws of any applicable state. The Underwriters have agreed that they will not
sell the Common Shares within the United States except in accordance with Rule 144A under the U.S. Securities Act
and in compliance with applicable U.S. state securities laws. In connection therewith, the Underwriting Agreement
permits the Underwriters to resell the Common Shares to “qualified institutional buyers” (as defined in Rule 144A
under the U.S. Securities Act) in the United States, provided such sales are made in accordance with Rule 144A under
the U.S. Securities Act and applicable U.S. state securities laws. Moreover, the Underwriting Agreement provides that
the Underwriters will sell Common Shares outside the United States only in accordance with Rule 903 of Regulation S
under the U.S. Securities Act.
In addition, until 40 days after the commencement of the Offering, an offer or sale of Common Shares within the
United States by any dealer (whether or not participating in the Offering) may violate the registration requirement of
the U.S. Securities Act if such offer or sale is made otherwise than in accordance with an exemption from the
registration requirement of the U.S. Securities Act.
Upon the completion of the Offering, the Company expects to have a total of Š outstanding Common Shares and Š
outstanding Class B Shares. All of the Common Shares sold in the Offering will be freely tradable in Canada without
restriction or further registration under applicable Canadian securities laws.
Prior to the Offering, there will be no public market for the Common Shares. The sale of a substantial number of
the Common Shares in the public market after the Offering, or the belief that such sales may occur, could adversely
affect the prevailing market price of the Common Shares. Furthermore, because some of the Common Shares will not
be available for sale after the Closing due to the contractual restrictions on resale described above under “Escrowed
Securities and Securities Subject to Contractual Restriction on Transfer”, the sale of a substantial number of Common
Shares in the public market after these restrictions lapse could adversely affect the prevailing market price of the
Common Shares and the Company’s ability to raise equity capital in the future.
Subscriptions for Common Shares will be received subject to rejection or allotment in whole or in part and the
Underwriters reserve the right to close the subscription books at any time without notice. Common Shares sold pursuant to
the Offering will be registered in the name of CDS and electronically deposited with CDS on the Closing Date. Purchasers of
Common Shares will receive only a customer confirmation from the Underwriter or other registered dealer who is a CDS
participant and from or through whom a beneficial interest in the Common Shares is acquired.
Cowen and Company, LLC is not registered to sell securities in any Canadian jurisdiction and, accordingly, will
only sell Common Shares outside of Canada. This prospectus does not qualify any Common Shares sold to investors in
any jurisdiction outside of Canada by Cowen and Company, LLC pursuant to the Offering.
Over-Allotment Option
The TriWest Selling Shareholders and the Source Selling Shareholders have each, pro rata to their participation in
the Secondary Offering, granted to the Underwriters the Over-Allotment Option, exercisable at the Underwriters’ sole
discretion, in whole or in part, from time to time, for a period of 30 days after Closing, to purchase from the Selling
Shareholders up to an additional Š Common Shares (representing 15% of the Offering) at the Offering Price and on the
same terms as set forth above, for the purpose of covering over-allocations, if any. If the Over-Allotment Option is
exercised in full, the total “Price to the Public”, “Underwriters’ Commission” and “Net Proceeds to the Selling
Shareholders” (before deducting the expenses of the Offering) will be $Š, $Š and $Š, respectively. The Company has
agreed to pay the Underwriters a fee equal to $Š per Common Share for each Common Share purchased from them
(respectively) on exercise of the Over-Allotment Option.
This prospectus also qualifies the grant of the Over-Allotment Option and the distribution of the Common Shares
to be delivered upon the exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming
part of the Underwriters’ over-allocation position acquires such Common Shares under this prospectus, regardless of
whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or
secondary market purchases.
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Price Stabilization, Short Positions and Passive Market Making
In connection with the Offering, the Underwriters may over–allocate or effect transactions which stabilize or
maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open
market, including:
• stabilizing transactions;
• short sales;
• purchases to cover positions created by short sales;
• imposition of penalty bids; and
• syndicate covering transactions.
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or slowing a decline in the
market price of the Common Shares while the Offering is in progress. These transactions may also include making
short sales of the Common Shares, which involve the sale by the Underwriters of a greater number of Common Shares
than they are required to purchase in the Offering. Short sales may be “covered short sales”, which are short positions
in an amount not greater than the Over-Allotment Option, or may be “naked short sales”, which are short positions in
excess of that amount. The Underwriters may close out any covered short position either by exercising the OverAllotment Option, in whole or in part, or by purchasing Common Shares in the open market. In making this
determination, the Underwriters will consider, among other things, the price of Common Shares available for purchase
in the open market compared with the price at which they may purchase Common Shares through the Over-Allotment
Option. The Underwriters must close out any naked short position by purchasing Common Shares in the open market.
A naked short position is more likely to be created if the Underwriters are concerned that there may be downward
pressure on the price of the Common Shares in the open market that could adversely affect purchasers who purchase in
the Offering.
In addition, in accordance with rules and policy statements of certain Canadian securities regulators, the
Underwriters may not, at any time during the period of distribution, bid for or purchase Common Shares. The
foregoing restriction is, however, subject to exceptions where the bid or purchase is not made for the purpose of
creating actual or apparent active trading in, or raising the price of, the Common Shares. These exceptions include a
bid or purchase permitted under the by-laws and rules of applicable regulatory authorities and the applicable stock
exchange, including the Universal Market Integrity Rules for Canadian Marketplaces, relating to market stabilization
and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was
not solicited during the period of distribution.
As a result of these activities, the price of the Common Shares may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time.
The Underwriters may carry out these transactions on any stock exchange on which the Common Shares are listed, in
the over-the-counter market, or otherwise.
Pricing of the Offering
Prior to the Offering, there was no public market for the Common Shares. It is anticipated that the Offering Price
will be between $17 and $20 per Common Shares for aggregate gross proceeds of approximately $300 million. Gross
proceeds from the Treasury Offering and Secondary Offering are expected to be approximately $275 million and
$25 million, respectively. The final Offering Price will be negotiated between the Company, the Selling Shareholders
and the Underwriters.
Expenses Related to the Offering
It is estimated that the total expenses of the Offering, not including the Underwriters’ Commission, will be
approximately $3.5 million. It is expected that the Selling Shareholders’ portion of the expenses of the Offering will
not be a material portion of the aggregate expenses of the Offering.
Lock-Up Arrangements
Pursuant to the Underwriting Agreement, the Company has agreed that it will not, directly or indirectly, without
the prior written consent of the Lead Underwriters, on behalf of all of the Underwriters, such consent not to be
unreasonably withheld, file in any jurisdiction any prospectus or registration statement, sell, offer to sell, issue, grant
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any option, warrant or other right for the sale or issuance of, or otherwise lend, transfer, assign or dispose of, in a
public offering or by way of private placement or otherwise (or agree to any of the foregoing or publicly announce any
intention to do so) any Common Shares or other equity securities of the Company, or any securities convertible,
exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, for a period
commencing on the Closing Date and ending 180 days after the Closing Date, subject to certain exemptions, including,
without limitation, the issuance of Common Shares upon the exchange of the applicable Exchangeable LP Securities
and the corresponding surrender of Class B Shares.
It is a condition of Closing that each of the Shareholders upon the Reorganization, including the Selling
Shareholders, and holders of any securities convertible, exchangeable or otherwise exercisable into Common Shares or
other equity securities of the Company, as well as each of the Company’s directors, officers and senior management
(together with their respective associates and affiliates), will enter into Lock-Up Agreements under which they will
agree not to, directly or indirectly, for a period commencing on the Closing Date and ending on the date that is 180
days following the Closing Date, subject to certain exceptions, without the prior written consent of the Lead
Underwriters, on behalf of the Underwriters, such consent not to be unreasonably withheld, (a) file in any jurisdiction
any prospectus or registration statement, or exercise any demand rights, with respect to the Common Shares or other
equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common
Shares or other equity securities of the Company, (b) sell, offer to sell, grant any option, right or warrant for the sale of,
or otherwise lend, transfer or dispose of any Common Shares or other equity securities of the Company, or any
securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the
Company, owned by such holder; (c) make any short sale, engage in any hedging transaction, or enter into any swap,
monetization, securitization or other arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of any of the Common Shares or other equity securities of the Company, or any securities
convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company,
owned by such holder, (d) secure or pledge any Common Shares or other equity securities of the Company, or any
securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the
Company, or (e) agree to or announce any intention to do any of the foregoing; provided, however, that the Class B
Founder and any of his affiliated entities that hold Common Shares will be permitted to sell up to 443,729 Common
Shares per month without the prior written consent of the Lead Underwriters. See “Escrowed Securities and Securities
Subject to Contractual Restriction on Transfer”.
Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common
Shares RTR Payment will be deemed to have agreed to the terms of a lock-up agreement the terms of which are
substantially similar to those of the Lock-Up Agreements.
RELATIONSHIP AMONG THE COMPANY AND CERTAIN UNDERWRITERS
BMO is an affiliate of Bank of Montreal which is the sole Lender pursuant to the Credit Agreement to which the
Company is currently indebted. Scotia is an affiliate of The Bank of Nova Scotia which is expected to become a Lender
following the Offering in connection with the planned increase of the Revolver Limit. Accordingly, the Company may
be considered a connected issuer of BMO and Scotia under Applicable Securities Laws.
As at March 1, 2017, approximately $23.5 million was outstanding under the Credit Facilities. See “Consolidated
Capitalization”. Source is in compliance with all materials terms of the Credit Agreement and the Lender has not
waived any breach by Source thereunder since its execution. Source’s financial position has not materially changed, in
an adverse manner, since the indebtedness was incurred under the Credit Facilities. See “Description of Indebtedness
— Indebtedness outstanding following the Offering — Credit Facilities” for a description of the Credit Facilities,
including its corresponding security arrangements.
The decision to distribute the Common Shares offered hereunder and the determination of the terms of the
distribution were made through negotiations primarily between the Underwriters. Bank of Montreal and The Bank of
Nova Scotia did not have any involvement in such decision or determination, but have been advised of terms thereof.
As a consequence of this issuance, BMO and Scotia will receive their respective shares of the Underwriters’
Commission. In addition, Bank of Montreal and The Bank of Nova Scotia and their respective affiliates have, from
time to time, performed, and may in the future perform, various financial advisory and investment banking services for
the Company, for which they received or will receive customary fees.
MARKET FOR SECURITIES
There is currently no market through which the Common Shares may be sold and purchasers may not be able to
resell the Common Shares purchased under this prospectus. See “Risk Factors — Risks Related to the Offering”.
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RISK FACTORS
An investment in Common Shares is speculative and involves a high degree of risk that should be considered by
potential investors. A potential investor should carefully consider the following risk factors in addition to the other
information contained in this prospectus before purchasing Common Shares. The risks and uncertainties set out
below are not the only ones Source faces. There are additional risks and uncertainties that Source does not
currently know about or that Source currently considers immaterial which may also impair Source’s business
operations and cause the price of the Common Shares to decline. If any of the following risks actually occur,
Source’s business may be harmed and its financial condition and results of operations may suffer significantly. In
that event, the trading price of the Common Shares could decline, and a purchaser of Common Shares may lose all
or part of his or her investment.
Risks Related to Source
Source’s operations are subject to operating risks that are often beyond its control and could adversely affect
production levels and costs.
Source’s mining, processing and production facilities, its logistics operations and any future properties it develops
or may acquire in the future are and will be subject to risks normally encountered in the frac sand industry. These risks
include:
• changes in the price and availability of transportation;
• inability to obtain necessary production equipment or replacement parts;
• inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
• unanticipated ground, grade or water conditions;
• inability to acquire or maintain necessary permits or mining or water rights;
• late delivery of supplies;
• changes in the price and availability of natural gas or electricity that Source uses as fuel sources for its frac sand
plants and equipment;
• technical difficulties or failures;
• cave-ins or similar pit wall failures;
• environmental hazards, such as unauthorized spills, releases and discharges of wastes, tank ruptures and
emissions of unpermitted levels of pollutants;
• industrial accidents;
• changes in laws and regulations (or the interpretation thereof) related to the mining and oil and natural gas
industries, silica dust exposure or the environment;
• inability of Source’s customers or distribution partners to take delivery;
• reduction in the amount of water available for processing;
• fires, explosions or other accidents; and
• facility shutdowns in response to environmental regulatory actions.
The occurrence of any of these events could have a material adverse effect on Source’s business, financial
position, results of operations and cash flows.
Source’s business may be adversely affected by changing economic conditions beyond its control, including
decreases in oil and natural gas development
Source’s revenue is closely tied to conditions in the oil and natural gas industry in which its customers operate,
and more broadly to general economic conditions. Source’s product and services are used primarily in oil and gas
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exploration and production in Western Canada and the United States. Consequently, economic downturns and
particularly weakness in the oil and natural gas market may lead to a significant decrease in demand for Source’s
products and services or depress utilization rates and the prices for the products and services Source sells. During
periods of expansion in Source’s respective end markets, Source generally has benefited from increased demand for its
products and services. However, during recessionary periods in Source’s end markets, Source may be adversely
affected by reduced demand for its products and services. Weakness in Source’s end markets, such as a decline in oil
and natural gas exploration and production, may in the future lead to a decrease in the demand for Source’s products
and services or the price Source can charge for its products and services, which could adversely affect Source’s
operating results by decreasing revenues and profit margins. Deterioration in the oil and natural gas industry could
have a material adverse effect on Source’s business, financial position, results of operations and cash flows in the
future.
Source’s business and financial performance depend on the level of activity in the oil and natural gas industry
Substantially all of Source’s revenues are derived from the sale of proppant to companies in the oil and natural gas
industry. As a result, Source’s operations are dependent on the levels of activity in oil and natural gas exploration,
development and production. More specifically, the demand for the proppants Source produces is closely related to the
number of oil and natural gas wells completed in geological formations that Source serves and where sand-based
proppants are used in hydraulic fracturing activities. These activity levels are affected by both short and long term
trends in oil and natural gas prices, among other factors.
In recent years, oil and natural gas prices and, therefore, the level of exploration, development and production
activity, have experienced a sustained decline from the highs in the latter half of 2014. Beginning in September 2014
and continuing through to the end of 2016, increasing global supply of oil, including a decision by the OPEC to sustain
its production levels in spite of the decline in oil prices, in conjunction with weakened demand from slowing economic
growth in the Eurozone and China, created downward pressure on crude oil prices resulting in reduced demand for
Source’s products and pressure to reduce its product prices. Although such conditions have slightly improved recently,
if conditions deteriorate and persist, this will adversely impact Source’s operations. Furthermore, the availability of key
resources that impact drilling activity has experienced significant fluctuations and could impact demand for the
Company’s products.
A prolonged reduction in oil and natural gas prices would generally depress the level of oil and natural gas
exploration, development, production and well completion activity and would result in a corresponding decline in the
demand for the proppants Source produces. Such a decline would have a material adverse effect on Source’s business,
results of its operations, and its financial condition. Furthermore, the commercial development of economically viable
alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect.
Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the
passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and
drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on Source’s
business and financial condition, even in a stronger oil and natural gas price environment.
Continued downturn in business could result in potential impairment of property, plant and equipment
Although commodity prices have recently improved, the decrease in commodity prices since 2014 has had, and
may continue to have, a negative impact on industry drilling and well completion activity, which affects the demand
for frac sand. Should energy industry conditions deteriorate, there is a possibility that property, plant and equipment
may be impaired in a future period. Any resulting non-cash impairment charges to earnings may be material. Specific
uncertainties affecting Source’s estimated fair value include the impact of competition, the prices of frac sand, future
overall activity levels and demand for frac sand, the activity levels of Source’s significant customers, and other factors
affecting the rate of Source’s future growth. These factors will continue to be reviewed and assessed going forward.
Additional adverse developments with regard to these factors could have a further negative impact on Source’s fair
value.
Source relies on a small number of customers for the majority of its revenue
Source relies on a small number of large customers for most of its revenue, and the loss of one or more such
customers would adversely affect Source’s results of operations and cash flows. Source’s five largest customers
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accounted for 78% and 87%, respectively, of its revenue for the years ended December 31, 2015 and December 31,
2016. Although a significant percentage of Source’s customers are under contract, certain contracts do not provide for
guaranteed volumes and can be terminated on short notice and, on occasion, certain customers may demand to
renegotiate a contract prior to the end of its term. There can be no assurance that Source’s current customers will
continue their relationships with Source or that contracts that come up for renewal will be renewed or, if they are
renewed, that customers will contract for the same amounts or that they will pay the same prices as they have in the
past. The loss of one or more major customers, the failure to renew customer contracts, or any decrease in products or
services purchased or prices paid or any other changes to the terms of service under renewed contracts could have a
material adverse effect on Source’s business, financial position, results of operations and cash flows. A substantial
portion of Source’s customer contracts, including contract renewals, are subject to competitive tender processes, and
there can be no assurance that Source will be successful in acquiring new business or retaining existing business
subject to competitive tender.
As a result of the limited number of customers that Source currently serves, Source’s operations are subject to
counterparty risk. The ability or willingness of each of Source’s customers to perform its obligations under an
agreement with Source will depend on a number of factors that are beyond Source’s control and may include, among
other things, the overall financial condition of the counterparty, the condition of the Canadian and United States oil and
natural gas exploration and production industry, the continuing use of frac sand in hydraulic fracturing operations and
general economic conditions. In addition, in depressed market conditions, Source’s customers may no longer need the
amount of frac sand for which they have indicated or agreed to, or may be able to obtain comparable products at a
lower price. If Source’s customers experience a significant downturn in their business or financial condition, they may
attempt to renegotiate Source’s agreements. In addition, as agreements expire, depending on market conditions at the
time, Source’s customers may choose not to extend, or to adjust the terms of, these agreements which could lead to a
significant reduction of sales volumes and corresponding revenues cash flows and financial condition if Source is not
able to replace these expected sales volumes with new sales volumes. Additionally, even if Source were to replace any
lost volumes, under current market conditions, lower prices for its product could materially reduce its revenues, cash
flow and financial condition.
Negative Cash Flow From Operating Activities
Source had negative cash flow from operating activities in its most recently completed financial year. Source’s
cash flow from operating activities is subject to a number of factors, including oil and gas developments and market
pricing. Source does not anticipate that it will continue to have negative operating cash flow from operating activities
in the near term; however, there can be no assurance that Source will generate earnings, operate profitably or provide a
return on investment in the future.
Certain of Source’s long-term contracts may preclude Source from taking advantage of increasing prices for frac
sand or mitigating the effect of increased operational costs during the term of its long-term contracts
Certain long-term supply contracts Source has may negatively impact Source’s results of operations. Source’s
long-term contracts require its customers to pay a specified price for a specified volume of frac sand each month. As a
result, in periods with increasing prices, Source’s sales will not keep pace with market prices. Additionally, if Source’s
operational costs increase during the terms of its long-term supply contracts, Source will not be able to pass any of
those increased costs to its customers. If Source is unable to otherwise mitigate these increased operational costs, its net
income and available cash for distributions could decline.
Certain of Source’s contracts contain provisions requiring it to deliver minimum amounts of frac sand or purchase
minimum amounts of services. Non-compliance with these contractual obligations may result in penalties or
termination of the agreement
In certain instances, Source commits to deliver products, under penalty of non-performance. Source’s inability to
meet the minimum contract requirements may permit the counterparty to terminate the agreements or require Source to
pay a fee. The amount of the fee would be based on the difference between the minimum amount contracted for and the
amount delivered or purchased. In such events, Source’s business, financial condition and results of operations may be
materially adversely affected.
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A majority of Source’s contracts are cancelable at the option of Source’s customers and are not a guarantee of
continued revenues
A majority of the contracts Source enters into with Source’s customers do not guarantee Source any volumes or
revenues and are generally cancelable by Source’s customers without cause. Source’s contracts generally provide the
terms under which Source will provide proppant, but do not obligate Source’s customers to purchase any specific
amount of proppant, nor do the contracts prohibit Source’s customers from purchasing a competitor’s proppant. As a
result, if Source’s customers elect to delay or forego completions programs, or to purchase frac sand from a competitor,
Source’s product will not be needed.
Source faces significant competition that may cause it to lose market share
The proppant industry is highly competitive. The proppant market is characterized by a small number of large,
national producers and a larger number of small, regional or local producers. Competition in this industry is based on
price, consistency and quality of product, site location, distribution capability, customer service, reliability of supply,
breadth of product offering and technical support.
Some of Source’s competitors have greater financial and other resources than Source does. In addition, Source’s
larger competitors may develop technology superior to Source’s or may have production facilities that offer lower cost
transportation to certain customer locations than Source does. When the demand for hydraulic fracturing services
decreases or the supply of proppant available in the market increases, prices in the frac sand market can materially
decrease. Furthermore, oil and natural gas exploration and production companies and other providers of hydraulic
fracturing services have acquired and in the future may acquire their own frac sand reserves to fulfill their proppant
requirements, and these other market participants may expand their existing frac sand production capacity, all of which
would negatively impact demand for Source’s frac sand. In addition, increased competition in the proppant industry
could have an adverse impact on Source’s ability to enter into long term contracts or to enter into contracts on
favourable terms.
Seasonality may have an adverse effect on Source’s results and business
The level of activity in the oil and gas industry is influenced by seasonal weather patterns. The spring breakup
makes the ground unstable and less capable of supporting heavy weights. Consequently, municipalities and
transportation departments enforce road bans that restrict the movement of heavy equipment, thereby reducing drilling
and well servicing activity levels. Source could therefore be adversely affected by a spring breakup that is longer in
duration than usual. In addition, in any geography in which Source operates, during excessively rainy periods,
equipment moves may be delayed, thereby adversely affecting revenues.
There is greater demand for certain of Source’s services in the winter season when freezing permits the movement
and operation of heavy equipment. Activity in Source’s business tends to increase in the fall and peak in the winter
months of November through March. However, if an unseasonably warm winter prevents sufficient freezing, Source
may not be able to access certain customer sites and Source’s operating results and financial condition may therefore
be adversely affected. Seasonal volatility can therefore create unpredictability in activity, which could have a material
adverse effect on Source’s business, financial position, results of operations and cash flows.
Source’s proppant sales are subject to fluctuations in market pricing
A majority of Source’s supply agreements involving the sale of frac sand contain market-based pricing
mechanisms. Accordingly, in periods with decreasing prices, Source’s results of operations may be lower than if
Source’s agreements had fixed prices. During these periods Source’s customers may also elect to reduce their
purchases from Source and seek to find alternative, cheaper sources of supply. In periods with increasing prices, these
agreements permit Source to increase prices; however, these increases are generally calculated on a quarterly basis and
do not increase on a dollar for dollar basis with increases in spot market pricing. Furthermore, certain volume-based
supply agreements may restrict the ability to fully capture current market pricing. These pricing provisions may result
in significant variability in Source’s results of operations and cash flows from period to period.
Changes in supply and demand dynamics could also impact market pricing for proppants. A number of existing
proppant providers and new market entrants have recently announced reserve acquisitions, processing capacity
expansions and greenfield projects. In periods where sources of supply of frac sand exceed market demand, market
prices for frac sand may decline and Source’s results of operations and cash flows may correspondingly decline, be
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volatile, or otherwise be adversely affected. For example, beginning in September 2014 and continuing through 2016,
increasing global supply of oil, in conjunction with weakened demand from slowing economic growth in the Eurozone
and China, created downward pressure on crude oil prices resulting in reduced demand for hydraulic fracturing services
leading to a corresponding reduced demand for Source’s products and pressure to reduce prices.
Source may be adversely affected by decreased demand for frac sand due to the development of effective alternative
proppants or new processes to replace hydraulic fracturing
Frac sand is a proppant used in the completion and recompletion of oil and natural gas wells to stimulate and
maintain oil and natural gas production through the process of hydraulic fracturing. Frac sand is the most commonly
used proppant and is less expensive than other proppants, such as resin coated sand and manufactured ceramics. A
significant shift in demand from frac sand to other proppants, or the development of new processes to make hydraulic
fracturing more efficient could replace frac sand altogether, could cause a decline in the demand for the frac sand
Source produces and result in a material adverse effect on Source’s business, results of operations and financial
condition.
An increase in the supply of frac sand having similar characteristics as the frac sand Source produces could make
it more difficult for Source to renew or replace its existing contracts on favourable terms, or at all.
If significant new reserves of frac sand are discovered and developed, and those frac sands have similar
characteristics to the frac sand Source produces, Source may be unable to renew or replace its existing sales on
favourable terms, or at all. Specifically, if high quality frac sand becomes more readily available, Source’s customers
may demand lower prices, which could have a material adverse effect on Source’s business, results of operations and
financial condition.
Fluctuations in exchange rates may adversely affect Source’s financial position, results of operations, cash flows or
Source’s ability to make payments on its indebtedness
A significant portion of Source’s financial activities are currently, and are expected to continue to be, transacted
or denominated in or referenced to both Canadian and U.S. dollars. Source generates revenues and incur expenses and
capital expenditures in Source’s operations in both Canadian and U.S. dollars. Fluctuations in exchange rates between
the U.S. and Canadian dollar, could have a material adverse effect on Source’s financial position, results of operations,
cash flows or Source’s ability to make payments on Source’s indebtedness. Since Source presents Source’s combined
financial statements in Canadian dollars, any change in the value of the Canadian dollar relative to the U.S. dollar
during a given financial reporting period would result in a foreign currency loss or gain on the translation of Source’s
U.S. dollar assets into Canadian dollars. Consequently, Source’s reported earnings could fluctuate materially as a result
of foreign exchange translation gains or losses. In addition, as world oil prices and many other resource prices are
quoted in U.S. dollars, fluctuations in the Canada/U.S. dollar exchange rate could also have an impact on Source’s
customers, which could affect the demand for Source’s services and have a material adverse impact on us.
Source is and may continue to be subject to various litigation and other proceedings
In the normal course of Source’s business, Source may become involved in, be named as a party to, or be the
subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions, related to
personal injuries, property damage, property tax, the environment and contract disputes. Litigation in general can be
expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. Responding to lawsuits brought against Source, or legal actions that Source may initiate, can
often be expensive and time-consuming. Unfavourable outcomes from these claims and/or lawsuits could adversely
affect Source’s business, results of operations or financial condition, and Source could incur substantial monetary
liability and/or be required to change Source’s business practices. In addition, Source’s business exposes it to claims
for personal injury, death or property damage resulting from the sale of proppant and other employee related matters.
The outcome of outstanding, pending or future proceedings cannot be predicted with certainty and may be determined
adversely to Source and, as a result, could have a material adverse effect on Source’s business, financial position,
results of operations and cash flows.
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Changes resulting from the 2016 U.S. presidential election may result in legislative and regulatory changes that
could have an adverse effect on Source
There may be uncertainty as to the position the United States will take with respect to world affairs and events
following the 2016 U.S. presidential election and related change in political agenda, coupled with the transition of
administrations. This uncertainty may include such issues as United States support for existing treaty and trade
relationships with Canada. This uncertainty may adversely impact (a) the ability or willingness of Canadian companies
to transact business with companies such as Source whose products are being exported from the United States,
(b) Source’s profitability if the Government of Canada imposes any restrictions on imports from the United States if
the United States imposes any “border adjustment taxes” that would impose taxes of goods imported to the United
States, (c) regulation and trade agreements affecting the United States and Canada, (d) global stock markets (including
the TSX), and (e) general global economic conditions. All of these factors are outside of Source’s control, but may
nonetheless cause Source to adjust its strategy in order to compete effectively in global markets.
Source is subject to numerous environmental laws and regulations that may result in Source incurring
unanticipated liabilities, which could have an adverse effect on Source’s operating performance
Federal, provincial, state and local authorities subject Source’s facilities and operations to requirements relating to
environmental protection. These requirements can be expected to change and expand in the future, and may impose
significant capital and operating costs on Source’s business. Environmental laws and regulations govern, among other
things, the discharge of substances into the air, water and land, impact on wetlands, the handling, storage, use and
disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants. If Source violates
environmental laws or regulations, Source may be required to implement corrective actions and could be subject to
civil or criminal fines or penalties. There can be no assurance that Source will not have to make significant capital
expenditures in the future in order to remain in compliance with applicable laws and regulations or that Source will
comply with applicable environmental laws at all times. Such violations or liability could have an adverse effect on
Source’s business, financial condition and results of operations. Source holds numerous environmental and other
governmental permits and approvals authorizing operations at each of Source’s facilities. A decision by a government
agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially
modify an existing permit or approval, or a determination that Source has violated a law or permit as a result of a
governmental inspection of its facilities could have a material adverse effect on Source’s ability to continue operations
at its facilities and on Source’s business, financial condition, results of operations and cash flows.
Environmental laws also impose obligations and liability for the investigation and cleanup of properties affected
by hazardous substance spills or releases. Source can be subject to liability for the disposal of substances which Source
generates and for substances disposed of on property which Source owns or operates, even if such disposal occurred
before Source’s ownership or occupancy. Accordingly, Source may become liable, either contractually or by operation
of law, for investigation, remediation and monitoring costs even if the contaminated property is not presently owned or
operated by us, or if the contamination was caused by third parties during or prior to Source’s ownership or operation
of the property. In addition, because environmental laws frequently impose joint and several liability on all responsible
parties, Source may be held liable for more than Source’s proportionate share of environmental investigation and
cleanup costs. Contamination and exposure to hazardous substances can also result in claims for damages, including
personal injury, property damage, and natural resources damage claims.
Future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently
unknown contamination, may give rise to remediation liabilities or other claims that may be material. Environmental
requirements may become stricter or be interpreted and applied more strictly in the future. In addition, Source may be
required to indemnify other parties for adverse environmental conditions that are now unknown to Source. These future
changes or interpretations, or the indemnification for such adverse environmental conditions, could result in
environmental compliance or remediation costs Source has not anticipated, which could have a material adverse effect
on Source’s business, financial position, results of operations and cash flows. Climate change legislation or regulations
restricting emissions of greenhouse gases could result in increased operating costs on Source and its customers and
reduced demand for the oil, natural gas and natural gas liquids that Source’s customers produce, which ultimately may
cause an adverse effect on Source’s business, financial position, results of operations and cash flows.
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Source faces distribution and logistical challenges in its business
Transportation and logistical operating expenses comprise a significant portion of the costs incurred by Source to
deliver frac sand to the customer at the wellhead, which could favour suppliers located in close proximity to the
customer. As oil and natural gas prices fluctuate, Source’s customers may shift their focus to different resource plays,
some of which may be located in geographic areas that do not have well developed transportation and distribution
infrastructure systems. Serving Source’s customers in these less developed areas presents distribution and other
operational challenges that may affect Source’s sales and negatively impact Source’s operating costs. Any delays
Source experiences in optimizing Source’s logistics infrastructure or developing additional origination and destination
points may adversely affect Source’s ability to renew existing contracts with customers seeking additional delivery and
pricing alternatives. Disruptions in transportation services, including shortages of rail cars, lack of developed
infrastructure, weather related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts,
bottlenecks or other events could affect Source’s ability to timely and cost effectively deliver to Source’s customers
and could temporarily impair Source’s ability to deliver proppant to Source’s customers. Additionally, increases in the
price of transportation costs, including freight charges, fuel surcharges, transloading fees, terminal switch fees and
demurrage costs, could negatively impact operating costs if Source is unable to pass those increased costs along to
Source’s customers. Source is also dependent on rail infrastructure, and if there are disruptions of the rail transportation
services utilized by Source or its customers, and Source is unable to find alternative transportation providers to
transport Source’s products, Source’s business and results of operations could be adversely affected.
All of Source’s frac sand is currently produced from the Sumner Facility (and the Blair Facility in the event the
Blair Facility Acquisition is completed), and the delivery of that frac sand to Source’s customers is primarily served
by one rail line. Any adverse developments at a facility or on the rail line could have a material adverse effect on
Source’s business, financial condition and results of operations
All of Source’s sand is currently derived from the Sumner Facility, which is served primarily by a single Class I
rail line owned by CN. Further, the Blair Facility is also served primarily by a single Class I rail line owned by CN.
Any adverse development at the Sumner Facility or the Blair Facility (in the event the Blair Facility Acquisition is
completed) or on the rail line due to catastrophic events or weather, or any other event that would cause Source to
curtail, suspend or terminate operations at its facilities, could result in Source being unable to meet its sand deliveries.
Although Source maintains insurance coverage to cover a portion of these types of risks, there are potential risks
associated with Source’s operations not covered by insurance. There also may be certain risks covered by insurance
where the policy does not reimburse Source for all of the costs related to a loss. Downtime or other delays or
interruptions to Source’s operations that are not covered by insurance could have a material adverse effect on Source’s
business, results of operations and financial condition. In addition, since the Sumner Facility and the Blair Facility (in
the event the Blair Facility Acquisition is completed) are each served by a single Class I rail line, any adverse changes
to the existing rail rates, rail car leases, or other logistics costs would adversely affect Source’s business operations and
financial position.
Source is dependent upon key personnel, the loss of whom may adversely impact its business and Source’s results of
operations
Source depends on the expertise, experience and continued services of Source’s senior management employees,
especially Mr. Brad Thomson, Source’s President and CEO, and Mr. Derren Newell, Source’s CFO, as well as senior
management employees of Source’s operating subsidiaries. Mr. Thomson has acquired specialized knowledge and
skills with respect to Source’s and its subsidiaries’ operations and most decisions concerning Source’s business are
made or significantly influenced by him. The loss of any of the foregoing individuals or other senior management
employees, without a proper succession plan, or an inability to attract or retain other key individuals, could materially
adversely affect us. Source seeks to compensate and incentivize Source’s key executives, as well as other employees,
through competitive salaries and bonus plans, but there can be no assurance that these programs will allow Source to
retain key employees or hire new key employees. As a result, if Messrs. Thomson or Newell or other senior executives
of Source’s operating subsidiaries were to leave, Source could face substantial difficulty in hiring qualified successors
and could experience a loss in productivity while any such successors obtain the necessary training and experience.
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Source’s future success depends on its ability to attract and retain qualified employees
Source’s future success and financial performance depends on its ability to attract and retain qualified and
experienced employees, including mine excavation employees, mechanics, safety personnel and field supervisors.
There is demand for such highly skilled personnel in Source’s main markets and Source may be unable to obtain and
retain appropriate levels of skilled labor. In the event of a labor shortage, Source could experience difficulty delivering
Source’s services in a high-quality or timely manner and could be forced to increase wages in order to attract and retain
employees, which would result in higher operating costs and adversely affect Source’s business, financial position,
results of operations and cash flows.
If Source is unable to obtain additional capital as required, Source may be unable to fund the capital outlays
required for the success of Source’s business, including those relating to purchasing and establishing new locations
Source’s ability to compete, sustain Source’s growth and expand Source’s logistics network largely depends on
access to capital. If the cash Source generates from Source’s operations, together with cash on hand and cash that
Source may borrow, is not sufficient to implement Source’s growth strategy and meet Source’s capital needs, Source
will require additional financing. However, Source may not succeed in obtaining additional financing on terms that are
satisfactory to Source or at all. In addition, Source’s ability to obtain additional financing collateralized by Source’s
assets and Source’s ability to obtain additional financing on a secured or unsecured basis will be restricted by the Note
Indenture and the Credit Agreement. If Source is unable to obtain sufficient additional capital in the future, Source may
be unable to fund the capital outlays required for the success of Source’s business, including those relating to
construction of new terminal locations. Furthermore, any additional indebtedness that Source does incur may make
Source more vulnerable to economic downturns and may limit Source’s ability to withstand competitive pressures.
Growing Source’s business by constructing new terminals and facilities subjects Source to construction risks as well
as market risks relating to insufficient demand for the services of such terminals and facilities upon completion
thereof
One of the ways Source may grow Source’s business is through the construction of new terminal locations. The
construction of such terminal locations requires the expenditure of significant amounts of capital, which may exceed
Source’s resources, and involves numerous regulatory, environmental, political, and legal uncertainties. If Source
undertakes these projects, it may not be able to complete them on schedule or at all or at the budgeted cost. Moreover,
Source’s revenues may not increase upon the expenditure of funds on a particular project. For instance, if Source builds
a new terminal location or facility, the construction will occur over an extended period of time, and Source will not
receive any material increases in revenues until at least after completion of the project, if at all. Moreover, Source may
construct new terminal locations or facilities to capture anticipated future demand in a region in which anticipated
market conditions do not materialize or for which Source is unable to acquire new customers. As a result, new terminal
locations or facilities may not be able to attract enough demand to achieve Source’s expected investment return, which
could materially and adversely affect Source’s results of operations and financial condition.
If Source is unable to make acquisitions on economically acceptable terms, or integrate acquired businesses,
Source’s future growth would be limited
A portion of Source’s strategy to grow Source’s business is dependent on its ability to make acquisitions. If
Source is unable to make acquisitions from third parties because Source is unable to identify attractive acquisition
candidates or negotiate acceptable purchase contracts, Source is unable to obtain financing for these acquisitions on
economically acceptable terms or Source is outbid by competitors, Source’s future growth may be limited. Any
acquisition (including the Blair Facility Acquisition) involves potential risks, some of which are beyond Source’s
control, including, among other things:
• inaccurate assumptions about revenues and costs of the businesses Source acquires, including synergies;
• inability to integrate successfully the businesses Source acquires;
• inability to hire, train or retain qualified personnel to manage and operate Source’s business and newly acquired
assets;
• the assumption of unknown liabilities;
• limitations on rights to indemnity from the seller;
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• diversion of Management’s attention from other business concerns;
• unforeseen difficulties operating in new product areas or new geographic areas; and
• customer or key employee losses at the acquired businesses.
If Source completes any future acquisitions, Source’s capitalization and results of operations may change
significantly, and Shareholders will not have the opportunity to evaluate the economic, financial and other relevant
information that Source will consider in determining the application of these funds and other resources.
Source is exposed to the credit risk of its customers, and any material non-payment or non-performance by Source’s
customers could adversely affect its business, results of operations and financial condition
Source is subject to the risk of loss resulting from non-payment or non-performance by Source’s customers.
Source’s credit procedures and policies may not be adequate to fully eliminate customer credit risk. If Source fails to
adequately asses the creditworthiness of existing or future customers or unanticipated deterioration in their
creditworthiness, any resulting increase in non-payment or non-performance by them and Source’s inability to
re-market or otherwise use the production could have a material adverse effect on its business, results of operations and
financial condition. The decline and volatility in natural gas and crude oil prices over the last two years has negatively
impacted the financial condition of Source’s customers and further declines, sustained lower prices, or continued
volatility could impact their ability to meet their financial obligations to us. Further, Source’s counterparties may not
perform or adhere to Source’s existing or future arrangements, contractual or otherwise. To the extent one or more of
Source’s contract counterparties is in financial distress or commences bankruptcy proceedings, agreements with these
counterparties may be subject to renegotiation or rejection under applicable provisions of applicable bankruptcy and/or
creditor protection laws of Canada or the United States. Any material non-payment or non-performance by Source’s
counterparties due to inability or unwillingness to perform or adhere to arrangements, contractual or otherwise, could
adversely affect its business and results of operations.
Source may not be able to complete greenfield development or expansion projects or, if Source does, it may not
realize the expected benefits
Any greenfield development or expansion project may require Source to raise substantial capital and obtain
numerous federal, provincial, state and/or local permits. A decision by any governmental agency not to issue a required
permit or substantial delays in the permitting process could prevent Source from pursuing the development or
expansion project. In addition, if the demand for Source’s products declines during a period in which Source
experience delays in raising capital or completing the permitting process, Source may not realize the expected benefits
from Source’s greenfield facility or expansion project. Furthermore, Source’s new or modified facilities may not
operate at designed capacity or may cost more to operate than Source expects. The inability to complete greenfield
development or expansion projects, or to complete them on a timely basis and in turn grow Source’s business, could
adversely affect its business and results of operations.
Federal, provincial, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the
potential for related litigation could result in increased costs or additional operating restrictions or delays for
Source’s customers, which could cause a decline in the demand for Source’s frac sand and negatively impact its
business, results of operations and financial condition
Although Source does not directly engage in hydraulic fracturing activities, Source’s customers purchase its frac
sand for use in their hydraulic fracturing activities. In Canada, hydraulic fracturing is regulated by provincial oil and
natural gas commissions and similar agencies. Some provinces have adopted, and other provinces are considering
adopting, regulations that could impose new or more stringent permitting, disclosure or well construction requirements
on hydraulic fracturing operations. Aside from provincial laws, state prohibitions or moratoria and local land use
restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local
ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes
within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, United
States federal agencies have started to assert regulatory authority over the process and various studies have been
conducted or are currently underway by the EPA, and other federal agencies concerning the potential environmental
impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that
additional laws may be needed and, in some instances, have pursued voter ballot initiatives to more closely and
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uniformly limit or otherwise regulate the hydraulic fracturing process, and legislation has been proposed by some
members of Congress to provide for such regulation. The adoption of new laws or regulations at the federal, provincial,
state or local levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing
process could make it more difficult to complete natural gas wells, increase Source’s customers’ costs of compliance
and doing business, and otherwise adversely affect the hydraulic fracturing activities they undertake, which could
negatively impact demand for Source’s frac sand. In addition, heightened political, regulatory, and public scrutiny of
hydraulic fracturing practices could expose Source or its customers to increased legal and regulatory proceedings,
which could be time consuming, costly, or result in substantial legal liability or significant reputational harm. Source
could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the
ability of Source’s customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand
for Source’s frac sand, have a material adverse effect on its business, financial condition and results of operations.
Source is subject to numerous occupational health and safety laws and regulations that may result in Source
incurring unanticipated liabilities, which could have an adverse effect on its operating performance
Source’s operations are subject to federal, provincial, state and local laws and regulations pertaining to
occupational health and safety. Source is subject to various regulations that primarily deal with maintaining a safe
workplace environment. Such regulations require Source, among other things, to maintain documentation of workrelated injuries, illnesses and fatalities and files for recordable events, complete workers compensation loss reports and
review the status of outstanding worker compensation claims, and complete certain annual filings and postings. Source
may be involved from time to time in administrative and judicial proceedings and investigations with these
governmental agencies, including inspections and audits by the applicable agencies related to Source’s compliance
with these requirements.
Any failure to comply with these and other applicable requirements could result in fines and penalties and require
Source to undertake certain remedial actions or be subject to a suspension of business, which could materially
adversely affect its business or results of operations. Moreover, involvement in any audits and investigations or other
proceedings could result in substantial financial cost to Source and divert Management’s attention. Additionally, future
events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not
currently known to us, may give rise to additional compliance or remedial costs that could be material. Safety
requirements may become stricter or be interpreted and applied more strictly in the future. These future changes or
interpretations could have a material adverse effect on Source’s business, financial position, results of operations and
cash flows.
Source’s operations are subject to operational hazards and unforeseen interruptions for which Source may not be
adequately insured
Source’s operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other
adverse weather conditions and earthquakes. If any of these events were to occur, Source could incur substantial losses
because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or
other environmental damage resulting in curtailment or suspension of Source’s operations.
Source is not fully insured against all risks incident to its business, including the risk of Source’s operations being
interrupted due to severe weather and natural disasters. Furthermore, Source may be unable to maintain or obtain
insurance of the type and amount Source desires at reasonable rates. As a result of market conditions, premiums and
deductibles for certain of Source’s insurance policies have increased and could escalate further. In some instances,
certain insurance could become unavailable or available only for reduced amounts of coverage. If Source were to incur
a significant liability for which Source is not fully insured, it could have a material adverse effect on its business,
results of operations and financial condition.
A terrorist attack or armed conflict could harm Source’s business
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States and Canada could
adversely affect the U.S., Canadian and global economies and could prevent Source from meeting financial and other
obligations. Source could experience loss of business, delays or defaults in payments from payors or disruptions of fuel
supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are
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direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and
natural gas, which, in turn, could also reduce the demand for Source’s frac sand. Terrorist activities and the threat of
potential terrorist activities and any resulting economic downturn could adversely affect Source’s results of operations,
impair its ability to raise capital or otherwise adversely impact Source’s ability to realize certain business strategies.
Source’s customers in the oil and natural gas industries are subject to complex federal, provincial, state, local and
other laws and regulations that could adversely affect the cost, manner or feasibility of conducting their operations
Source’s customers in the oil and natural gas industry are subject to complex and stringent laws and regulations
governing the acquisition, development, operation, production and marketing of oil and natural gas, taxation, safety
matters and the discharge of materials into the environment. In order to conduct their operations in compliance with
these laws and regulations, Source’s oil and natural gas customers must obtain and maintain numerous permits,
approvals and certificates from various federal, provincial, state and local governmental authorities. Failure or delay in
obtaining and maintaining regulatory approvals or drilling permits could have a material adverse effect on Source’s oil
and natural gas customers’ ability to develop their properties, and receipt of drilling or other environmental permits
with onerous conditions could increase their compliance costs. In addition, regulations regarding resource conservation
practices and the protection of correlative rights affect their operations by limiting the quantity of oil, natural gas and
natural gas liquids they may produce and sell. Source’s oil and natural gas customers are subject to federal, provincial,
state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction
over various aspects of the exploration, production and transportation of oil, natural gas and natural gas liquids. There
are legislative and regulatory uncertainties, including proposed changes to climate change legislation and regulation of
hydraulic fracturing. New laws, regulations or enforcement policies may be more stringent and significantly increase
Source’s oil and natural gas customers’ compliance costs. If Source’s oil and natural gas customers are not able to
recover increased costs resulting from laws, regulations and related permit requirements, they could be adversely
affected and, in turn, Source’s business, financial position, results of operations and cash flows could be adversely
affected due to Source’s dependence on these customers. In addition, any failure to obtain or maintain required permits
may result in project delays which could adversely affect Source’s business.
Source’s oil and natural gas customers rely on third party infrastructure, equipment and technology
Source’s oil and natural gas customers rely on certain infrastructure owned and operated by third parties,
including, without limitation, the following:
• pipelines for the transportation of feedstocks to refineries and certain diluents to purchasers;
• pipelines for the transportation of natural gas;
• railways and trucking for the transportation of refinery products and by-products;
• electricity transmission systems; and
• terminal operation for truck and rail car loading.
A disruption in the provision of any of these services or the supply of these services will negatively affect the
operations of Source’s oil and natural gas customers and, in turn, Source’s business, financial position, results of
operations and cash flows could be adversely affected due to Source’s dependence on these customers.
Public opposition to infrastructure development projects related to the oil and natural gas industries (including
pipelines) could lead to delays in the commencement or completion, or cancellation, of such projects
Public opposition to infrastructure development projects related to the oil and natural gas industries (including
pipelines) could lead to delays in the commencement or completion, or cancellation, of such projects. Such a delay or
cancellation could have a material adverse effect on Source’s customers in the oil and natural gas industries and, in
turn, Source’s business, financial position, results of operations and cash flows could be adversely affected due to
Source’s dependence on these customers.
Source operates on worksites managed and maintained by Source’s customers, and its ability to complete Source’s
work may be adversely affected by actions and events beyond Source’s control
Source operates on worksites managed and maintained by Source’s customers. As such, Source’s ability to
operate its business may be adversely affected by actions and events outside of Source’s control. Work on a given site
may be suspended or halted because of the actions of persons not under Source’s employment. Because Source may
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not control the site on which Source is operating, the decision to suspend or halt work may be made without consulting
Source and without notice. In the event work on a site is suspended or halted, Source may incur costs if Source’s
employees and equipment are forced to sit idle. Source may not be adequately insured to protect against such risk.
Furthermore, Source’s contracts with its customers may not provide for compensation in the event that Source is forced
to suspend operations because of an event outside of Source’s control.
Source’s business is subject to inflationary pressures
Improving economic conditions and competition for available personnel may result in significant increases in
Source’s cost structure, and Source may not be able to pass such cost increases on to its customers. In addition,
inflation in the oil and natural gas industry could lead to higher resource development costs and generally hinder
development. As a result, Source’s gross margins and profitability could be adversely affected.
Disruptions in Source’s information technology systems could adversely affect Source’s operating results by
limiting its capacity to effectively monitor and control Source’s operations
Source’s information technology systems facilitate its ability to monitor and control Source’s operations and
adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as
expected could, depending on the magnitude of the problem, adversely affect Source’s operating results by limiting its
capacity to effectively monitor and control Source’s operations and adjust to changing market conditions. In addition,
because Source’s systems sometimes contain information about individuals and businesses, Source’s failure to
appropriately maintain the security of the data Source holds, whether as a result of Source’s own error or the
malfeasance or errors of others, could harm Source’s reputation or give rise to legal liabilities leading to lower
revenues, increased costs and other adverse effects on Source’s results of operations.
Any future cyber security attacks that affect Source’s facilities, communications systems, Source’s customers or
any of Source’s financial data could have a material adverse effect on Source’s business. In addition, cyber-attacks on
Source’s customer and employee data may result in a financial loss and may negatively impact Source’s reputation.
Source does not maintain specialized insurance for possible liability resulting from a cyber-attack on Source’s assets
that may shut down all or part of Source’s business. Third-party systems on which Source relies could also suffer
operational system failure. Any of these occurrences could disrupt Source’s business, result in potential liability or
reputational damage or otherwise have an adverse effect on Source’s financial results.
Inaccuracies in estimates of volumes and qualities of Source’s sand resources could result in lower than expected
sales and higher than expected production costs
APEX, Source’s independent professional geologists, prepared the Sumner APEX Report and the Blair APEX
Report which are each based on engineering, economic and geological data assembled and analyzed by the facility
owner’s engineers and geologists. However, frac sand resources estimates are by nature imprecise and depend to some
extent on statistical inferences drawn from available data, which may prove to be unreliable. There are numerous
uncertainties inherent in estimating quantities and qualities of resources and costs to mine recoverable resources,
including many factors beyond the facility owner’s control. Estimates of economically recoverable frac sand resources
necessarily depend on a number of factors and assumptions, all of which may vary considerably from actual results,
such as:
• geological and mining conditions and/or effects from prior mining that may not be fully identified by available
data or that may differ from experience;
• assumptions concerning future prices of frac sand, operating costs, mining technology improvements,
development costs and reclamation costs; and
• assumptions concerning future effects of regulation, including the issuance of required permits and the
assessment of taxes by governmental agencies.
Any inaccuracy in the Sumner APEX Report or the Blair Facility Report related to Source’s frac sand resources
(in the event the Blair Facility Acquisition is completed for the Blair Facility Report) could result in lower than
expected sales or higher than expected costs. For example, APEX’s estimates of the Sumner Facility’s and the Blair
Facility’s resources assume that the owner’s revenue and cost structure will remain relatively constant over the life of
the owner’s resources. If these assumptions prove to be inaccurate, some or all of the owner’s resources may not be
economically mineable, which could have a material adverse effect on Source’s results of operations and cash flows. In
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addition, Source’s current customer contracts require Source to deliver frac sand that meets certain API and ISO
specifications. If APEX’s estimates of the quality of the resources, including the volumes of the various specifications
of those resources, prove to be inaccurate, Source may incur significantly higher excavation costs without
corresponding increases in revenues, Source may not be able to meet Source’s contractual obligations, or Source’s
facilities may have a shorter than expected resource life, any of which could have a material adverse effect on Source’s
results of operations and cash flows.
The Sumner Facility and the Blair Facility do not have an interest in any Mineral Reserves
Currently, there are no Mineral Reserves on the Sumner Facility or the Blair Facility. Only those mineral deposits
that Source can economically and legally extract or produce, based on a comprehensive evaluation of cost, grade,
recovery and other factors, are considered Mineral Reserves. The Mineral Resources estimates contained in the Sumner
APEX Report, as the case may be, and the Blair APEX Report are Indicated Mineral Resource and Inferred Mineral
Resource estimates only and no assurance can be given that any particular level of recovery of frac sand minerals from
mineralized material will in fact be realized or that an identified mineralized deposit will ever qualify as a
commercially mineable (or viable) Mineral Reserve. In particular, Inferred Mineral Resources have a great amount of
uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. Substantial additional
work, including mine design and mining schedules, flow sheets and process plant designs, would be required in order
to determine if any economic deposits exist on the Sumner Facility and the Blair Facility. Substantial expenditures
would be required to establish Mineral Reserves through drilling and other testing techniques. The costs, timing and
complexities of upgrading the mineralized material to Proven Mineral Reserves and Probable Mineral Reserves may be
greater than the value of Source’s Mineral Reserves on a mineral property and may require Source to write-off the
costs capitalized for that property in its financial statements. Source cannot provide any assurance that future feasibility
studies will establish Mineral Reserves at the Sumner Facility or the Blair Facility, as the case may be. The failure to
establish Mineral Reserves could restrict the Company’s ability to successfully implement its strategies for long-term
growth.
Source’s production process consumes large amounts of natural gas and electricity. An increase in the price or a
significant interruption in the supply of these or any other energy sources could have a material adverse effect on
Source’s business, results of operations and financial condition
Energy costs, primarily natural gas and electricity, represented approximately 3.1% of Source’s total cost of sales
for the year ended December 31, 2016. Natural gas is currently the primary fuel source used for drying in Source’s frac
sand production process. As a result, Source’s profitability will be impacted by the price and availability of natural gas
Source purchases from third parties. Because Source has not contracted for the provision of natural gas on a fixed price
basis, Source’s costs and profitability will be impacted by fluctuations in prices for natural gas. The price and supply of
natural gas is unpredictable and can fluctuate significantly based on international, political and economic
circumstances, as well as other events outside Source’s control, such as changes in supply and demand due to weather
conditions, actions by OPEC and other oil and natural gas producers, regional production patterns, security threats and
environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in
higher production costs for energy, which may be passed on to Source in whole or in part. The price of natural gas has
been extremely volatile over the last two years, from a high of $4.12 per million BTU in November 2014 to a low of
$1.73 per million BTU in March 2016, and this volatility may continue. In order to manage this risk, Source may hedge
natural gas prices through the use of derivative financial instruments, such as forwards, swaps and futures. However,
these measures carry risk (including non-performance by counterparties) and do not in any event entirely eliminate the
risk of decreased margins as a result of propane or natural gas price increases. Source further attempts to mitigate these
risks by including in Source’s sales contracts fuel surcharges based on natural gas prices exceeding certain
benchmarks. A significant increase in the price of energy that is not recovered through an increase in the price of
Source’s products or covered through Source’s hedging arrangements or an extended interruption in the supply of
natural gas or electricity to Source’s production facilities could have a material adverse effect on its business, results of
operations and financial condition.
Increases in the price of diesel fuel may adversely affect Source’s results of operations
Diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are
subject to political, economic and market factors that are outside of Source’s control. Source’s operations are
dependent on earthmoving equipment, railcars and tractor trailers, and diesel fuel costs are a significant component of
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the operating expense of these vehicles. Source uses earthmoving equipment in Source’s mining operations, and Source
ships the vast majority of its products by either railcar or tractor trailer. To the extent that Source performs these
services with equipment that it owns, it is responsible for buying and supplying the diesel fuel needed to operate these
vehicles. To the extent that these services are provided by independent contractors, Source may be subject to fuel
surcharges that attempt to recoup increased diesel fuel expenses. To the extent Source is unable to pass along increased
diesel fuel costs to its customers, Source’s results of operations could be adversely affected.
Source relies upon trade secrets, contractual restrictions and patents to protect Source’s proprietary rights. Failure
to protect Source’s intellectual property rights may undermine its competitive position, and protecting Source’s
rights or defending against third-party allegations of infringement may be costly
Source’s commercial success depends on its proprietary information and technologies, know-how and other
intellectual property. Because of the technical nature of its business, Source relies on patents, trade secrets, trademarks
and contractual restrictions to protect Source’s intellectual property rights, particularly with respect to Sahara. The
measures Source takes to protect its trade secrets and other intellectual property rights may be insufficient. Failure to
protect, monitor and control the use of Source’s existing intellectual property rights could cause Source to lose its
competitive advantage and result in significant expenses. It is possible that Source’s competitors or others could
independently develop the same or similar technologies or otherwise obtain access to Source’s unpatented
technologies. In such case, Source’s trade secrets would not prevent third parties from competing with it. As a result,
Source’s results of operations may be adversely affected. Furthermore, third parties or Source’s employees may
infringe or misappropriate Source’s proprietary technologies or other intellectual property rights, which could also
harm Source’s business and results of operations. Policing unauthorized use of intellectual property rights can be
difficult and expensive, and adequate remedies may not be available.
In addition, third parties may claim that Source’s products infringe or otherwise violate their patents or other
proprietary rights and seek corresponding damages or injunctive relief. Defending Source against such claims, with or
without merit, could be time-consuming and result in costly litigation. An adverse outcome in any such litigation could
subject Source to significant liability to third parties (potentially including treble damages) or temporary or permanent
injunctions prohibiting the manufacture or sale of Source’s products, the use of Source’s technologies or the conduct of
Source’s business. Any adverse outcome could also require Source to seek licenses from third parties (which may not
be available on acceptable terms, or at all) or to make substantial one-time or ongoing royalty payments. Protracted
litigation could also result in Source’s customers or potential customers deferring or limiting their purchase or use of
Source’s products until resolution of such litigation. In addition, Source may not have insurance coverage in
connection with such litigation and may have to bear all costs arising from any such litigation to the extent Source is
unable to recover them from other parties. Any of these outcomes could have a material adverse effect on Source’s
business, financial condition and results of operations.
Source will incur additional costs as a result of this Offering, and Management will be required to devote additional
time to compliance efforts
As a result of this Offering and other transactions contemplated thereby, including the Blair Facility Acquisition,
Source will incur additional legal, accounting and other expenses that Source did not incur prior to the Offering.
Management and other personnel will need to devote a substantial amount of time and financial resources to comply
with obligations related to the Offering.
Source’s indebtedness could adversely affect its financial flexibility and its competitive position
Source’s indebtedness under the Credit Facilities and the Notes could have significant effects on its business. For
example, it could:
• increase Source’s vulnerability to adverse changes in general economic, industry and competitive conditions;
• require Source to dedicate a substantial portion of its cash flow from operations to make payments on its
indebtedness, thereby reducing the availability of its cash flow to fund working capital, capital expenditures and
other general corporate purposes;
• limit its flexibility in planning for, or reacting to, changes in Source’s business and the industry in which Source
operates;
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• restrict Source from exploiting business opportunities;
• make it more difficult to satisfy its financial obligations, including payments on its indebtedness;
• place Source at a disadvantage compared to its competitors that have less debt; and
• limit Source’s ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt
service requirements, execution of its business strategy or other general corporate purposes.
Restrictions in the Credit Agreement and the Note Indenture may limit Source’s ability to capitalize on potential
acquisition and other business opportunities
The operating and financial restrictions and covenants in the Credit Agreement and the Note Indenture and any
future financing agreements could restrict Source’s ability to finance future operations or capital needs or to expand or
pursue its business activities. For example, the Credit Agreement and the Note Indenture restrict or limit Source’s
ability to:
• grant liens;
• incur additional indebtedness;
• engage in a merger, consolidation or dissolution;
• enter into transactions with affiliates;
• sell or otherwise dispose of assets, businesses and operations;
• materially alter the character of Source’s business; and
• make acquisitions, investments and capital expenditures.
Furthermore, the Credit Agreement and the Note Indenture contain certain operating and financial covenants.
Source’s ability to comply with such covenants and restrictions may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, Source’s
ability to comply with these covenants may be impaired. Further, if Source violates any of the restrictions, covenants,
ratios or tests in the Credit Agreement, a significant portion of Source’s indebtedness may become immediately due
and payable, and any lenders’ commitment to make further loans to Source may terminate. Source might not have, or
be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of the Credit
Agreement or any new indebtedness could have similar or greater restrictions.
Risks Related to Environmental, Mining and Other Regulation
Failure to maintain effective quality control systems at Source’s mining, processing and production facilities could
have a material adverse effect on Source’s business, results of operations and financial condition
The performance and quality of Source’s products are critical to the success of Source’s business. These factors
depend significantly on the effectiveness of Source’s quality control systems, which, in turn, depends on a number of
factors, including the design of Source’s quality control systems, Source’s quality training program and Source’s
ability to ensure that Source’s employees adhere to Source’s quality control policies and guidelines. Any significant
failure or deterioration of Source’s quality control systems could have a material adverse effect on Source’s business,
results of operations and financial condition.
A facility closure entails substantial costs, and if Source closes its facilities sooner than anticipated, Source’s results
of operations may be adversely affected
Source bases its assumptions regarding the life of its facilities on detailed studies that Source performs from time
to time, but Source’s studies and assumptions may not prove to be accurate. If Source closes the Sumner Facility or the
Blair Facility (in the event the Blair Facility Acquisition is completed) sooner than expected, sales will decline unless
Source is able to acquire and develop additional facilities, which may not be possible. The closure of the Sumner
Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed) would involve significant fixed
closure costs, including accelerated employment legacy costs, severance related obligations, reclamation and other
environmental costs and the costs of terminating long term obligations, including energy contracts and equipment
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leases. Source accrues for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other
mining support areas over the estimated mining life of Source’s property. If Source were to reduce the estimated life of
the Sumner Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed), the fixed facility
closure costs would be applied to shorter period of production, which would increase production costs per metric tonne
produced and could materially and adversely affect Source’s business, results of operations and financial condition.
Applicable statutes and regulations require that mining property be reclaimed following a mine closure in
accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of
facilities and equipment, regrading, prevention of erosion and other forms of water pollution, revegetation and postmining land use. Source may be required to post a surety bond or other form of financial assurance equal to the cost of
reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation
liability is based on permit requirements and requires various estimates and assumptions, principally associated with
reclamation costs and production levels. If Source’s accruals for expected reclamation and other costs associated with
facility closures for which Source will be responsible were later determined to be insufficient, Source’s business,
results of operations and financial condition may be adversely affected.
Source’s inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of
mining property could have a material adverse effect on Source’s business, financial condition, and results of
operations
Source is generally obligated to restore property in accordance with regulatory standards and Source’s approved
reclamation plan after it has been mined. Source is required under federal, state and local laws to maintain financial
assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such
assurances, as required by federal, state and local laws, could subject Source to fines and penalties as well as the
revocation of Source’s operating permits. Such inability could result from a variety of factors, including:
• the lack of availability, higher expense, or unreasonable terms of such financial assurances;
• the ability of current and future financial assurance counterparties to increase required collateral; and
• the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance
instruments.
Source’s inability to acquire, maintain or renew necessary financial assurances related to the reclamation and
restoration of mining property could have a material adverse effect on Source’s business, financial condition, and
results of operations.
Climate change legislation and regulatory initiatives could result in increased compliance costs for Source and its
customers
In recent years, the United States Congress has considered legislation to reduce emissions of GHGs, including
methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of natural gas. It
presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the
near future, although energy legislation and other regulatory initiatives are expected to be proposed that may be
relevant to GHG emissions issues. In addition, a number of states are addressing GHG emissions, primarily through the
development of emission inventories or regional GHG cap and trade programs. In Canada, several provinces have
recently adopted legislation to either reduce or cap GHG emissions, or establish regional GHG cap and trade programs.
The Government of Canada has also announced its intention to reduce GHG emissions through a national carbon
pricing scheme. Depending on the particular program, Source could be required to control GHG emissions or to
purchase and surrender allowances for GHG emissions resulting from Source’s operations. Independent of Congress,
the EPA has adopted regulations controlling GHG emissions under its existing authority under the CAA. For example,
following its findings that emissions of GHGs present an endangerment to human health and the environment because
such emissions contributed to warming of the earth’s atmosphere and other climatic changes, the EPA has adopted
regulations under existing provisions of the CAA that, among other things establish construction and operating permit
reviews for GHG emissions from certain large stationary sources that are already potential major sources for
conventional pollutants. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG
emissions from specified production, processing, transmission and storage facilities in the United States on an annual
basis. In Alberta, the Climate Change and Emissions Management Act specifies GHG emissions reduction targets for
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2020. Further, the Specified Gas Emitters Regulation requires facilities that emit greater than 100,000 metric tonnes of
GHGs to conform to emissions intensity limits, either through the reduction of emissions per unit of production, or the
purchase of emissions credits. In Saskatchewan, the legislature has passed, but has not proclaimed in force, the
Management and Reduction of Greenhouse Gases Act, which would establish a program similar to that in place in
Alberta, although precise targets and limits have yet to be identified. British Columbia has adopted a cap and trade
program for GHG emissions and further imposes GHG emissions reduction targets under the Carbon Tax Act and
Greenhouse Gas Industrial Reporting and Control Act. Also, the United States and Canada are among almost 200
nations that, in December 2015, agreed to the Paris Agreement, an international climate change agreement in Paris,
France that calls for countries to set their own GHG emissions targets and be transparent about the measures each
country will use to achieve its GHG emissions targets. The agreement came into force on November 4, 2016. Canada
and the United States are among over 70 nations having ratified or otherwise consented to be bound by the agreement.
Although it is not possible at this time to predict how new laws or regulations in the United States and Canada, or any
legal requirements imposed following the United States and Canada agreeing to the Paris Agreement that may be
adopted or issued to address GHG emissions would impact Source’s business, any such future laws, regulations or
legal requirements imposing reporting or permitting obligations on, or limiting emissions of GHGs from, Source’s
equipment and operations could require Source to incur costs to reduce emissions of GHGs associated with Source’s
operations as well as delays or restrictions in Source’s ability to permit GHG emissions from new or modified sources.
In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas Source
produces. Finally, it should be noted that increasing concentrations of GHGs in the Earth’s atmosphere may produce
climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and
other climatic events; if any such effects were to occur, they could have an adverse effect on Source’s and its customers
exploration and production operations. Although it is not currently possible to predict how any such proposed or future
GHG legislation or regulation by Congress, the states, multistate regions, the Government of Canada, or provinces, or
any legal requirements imposed following the United States and Canada agreeing to the Paris Agreement will impact
Source’s business, any legislation or regulation of GHG emissions that may be imposed in areas in which Source
conducts business could result in increased compliance costs or additional operating restrictions to Source or its
exploration and production customers, and could reduce demand for Source’s frac sand, which could have a significant
adverse effect on Source’s operations.
Source and its customers are subject to other extensive regulations, including licensing, plant and wildlife
protection and reclamation regulation, which impose, and will continue to impose, significant costs and liabilities.
In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs
and liabilities, which could adversely affect Source’s results of operations
In addition to the regulatory matters described above, Source and its customers are subject to extensive
governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection,
wetlands protection, reclamation and restoration activities at mining properties after mining is completed, the discharge
of materials into the environment, and the effects that mining and hydraulic fracturing have on groundwater quality and
availability. Source’s future success depends, among other things, on the quantity and quality of Source’s frac sand
deposits, its ability to extract these deposits profitably, and its customers being able to operate their businesses as they
currently do.
In order to obtain permits and renewals of permits in the future, Source may be required to prepare and present
data to governmental authorities pertaining to the potential adverse impact that any proposed excavation or production
activities, individually or in the aggregate, may have on the environment. Certain approval procedures may require
preparation of archaeological surveys, endangered species studies, and other studies to assess the environmental impact
of new sites or the expansion of existing sites. Compliance with these regulatory requirements is expensive and
significantly lengthens the time needed to develop a site. Finally, obtaining or renewing required permits is sometimes
delayed or prevented due to community opposition and other factors beyond Source’s control. The denial of a permit
essential to Source’s operations or the imposition of conditions with which it is not practicable or feasible to comply
could impair or prevent Source’s ability to develop or expand a site. Significant opposition to a permit by neighboring
property owners, members of the public, or other third parties, or delay in the environmental review and permitting
process also could delay or impair Source’s ability to develop or expand a site. New legal requirements, including
those related to the protection of the environment, could be adopted that could materially adversely affect Source’s
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mining operations (including its ability to extract or the pace of extraction of mineral deposits), Source’s cost structure,
or its customers’ ability to use Source’s frac sand. Such current or future regulations could have a material adverse
effect on Source’s business and it may not be able to obtain or renew permits in the future.
Silica-related legislation, health issues and litigation could have a material adverse effect on Source’s business,
reputation or results of operations
Source is subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state
regulatory authorities, including the MSHA may continue to propose changes in their regulations regarding workplace
exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective
equipment. Source may not be able to comply with any new or amended laws and regulations that are adopted, and any
new or amended laws and regulations could have a material adverse effect on Source’s operating results by requiring
Source to modify or cease its operations.
In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is
evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association
with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may
continue to be, a significant issue confronting the proppant industry. Concerns over silicosis and other potential adverse
health effects, as well as concerns regarding potential liability from the use of frac sand, may have the effect of
discouraging Source’s customers’ use of Source’s frac sand. The actual or perceived health risks of mining, processing
and handling proppants could materially and adversely affect proppant producers, including us, through reduced use of
frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory
authorities of Source and its customers or reduced financing sources available to the frac sand industry.
Source’s operations are dependent on Source’s rights and ability to mine Source’s properties and on Source having
renewed or received the required permits and approvals from governmental authorities and other third parties
Source holds numerous governmental, environmental, mining and other permits, water rights and approvals
authorizing operations at Source’s Sumner Facility and expects to acquire similar permits and authorizations in
connection with the Blair Facility Acquisition if such acquisition is completed. For Source’s extraction and processing
in Wisconsin, the permitting process is subject to federal, state and local authority. For example, on the federal level, a
Mine Identification Request (MSHA Form 700051) must be filed and obtained before mining commences. If wetlands
are impacted, a U.S. Army Corps of Engineers wetland permit is required. At the state level, a series of permits are
required, including but not limited to, matters related to air quality, wetlands, water quality (waste water, storm water),
grading permits, endangered species, archeological assessments and high capacity wells in addition to others depending
upon site specific factors and operational detail. At the local level, matters including but not limited to zoning,
building, storm water, erosion control, wellhead protection, road usage and access are all regulated and require
permitting to some degree. A nonmetallic mining reclamation permit is required. A decision by a governmental agency
or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify
an existing permit or approval, could impair or prevent Source’s ability to develop or expand Source’s operations, and
have a material adverse effect on Source’s business, results of operations and financial condition.
Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes
contain claims or transfer histories that examiners cannot verify. A successful claim that Source lacks appropriate
mineral and water rights on one or more of its properties could cause Source to lose any rights to explore, develop and
extract minerals, without compensation for Source’s prior expenditures relating to such property. Source’s business
may suffer a material adverse effect in the event it has title deficiencies. In some instances, Source has received access
rights or easements from third parties, which allow for a more efficient operation than would exist without the access
or easement. A third party could take action to suspend the access or easement, and any such action could be materially
adverse to Source’s results of operations or financial condition.
Source is subject to the United States Federal Mine Safety and Health Act of 1977, which imposes stringent health
and safety standards on numerous aspects of Source’s operations
Source’s operations are subject to the United States Federal Mine Safety and Health Act of 1977, as amended by
the United States Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and
safety standards on numerous aspects of mineral extraction and processing operations, including the training of
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personnel, operating procedures, operating equipment, and other matters. Source’s failure to comply with such
standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse
effect on Source’s business and financial condition or otherwise impose significant restrictions on its ability to conduct
mineral extraction and processing operations.
Diminished access to water may adversely affect Source’s operations or the operations of its customers
The mining and processing activities at the Sumner Facility and the Blair Facility (in the event the Blair Facility
Acquisition is completed) require significant amounts of water. Additionally, the development of oil and natural gas
properties through fracture stimulation likewise requires significant water use. Source has obtained water rights that it
currently uses to service the activities at the Sumner Facility, and Source plans to obtain all required water rights to
service the Blair Facility (in the event the Blair Facility Acquisition is completed) and any other properties it may
develop or acquire in the future. However, the amount of water that Source and its customers are entitled to use
pursuant to Source’s water rights must be determined by the appropriate regulatory authorities in the jurisdictions in
which Source and its customers operate. Such regulatory authorities may amend the regulations regarding such water
rights, increase the cost of maintaining such water rights or eliminate Source’s current water rights, and Source and its
customers may be unable to retain all or a portion of such water rights. These new regulations, which could also affect
local municipalities and other industrial operations, could have a material adverse effect on Source’s operating costs
and effectiveness if implemented. Such changes in laws, regulations or government policy and related interpretations
pertaining to water rights may alter the environment in which Source and its customers do business, which may
negatively affect Source’s financial condition and results of operations.
Source’s inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of
mining property could have a material adverse effect on Source’s business, financial condition, and results of
operations
Source is generally obligated to restore property in accordance with regulatory standards and Source’s approved
reclamation plan after it has been mined. Source is required under federal, state and local laws to maintain financial
assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such
assurances, as required by federal, state and local laws, could subject Source to fines and penalties as well as the
revocation of Source’s operating permits. Such inability could result from a variety of factors, including:
• the lack of availability, higher expense, or unreasonable terms of such financial assurances;
• the ability of current and future financial assurance counterparties to increase required collateral; and
• the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance
instruments.
Source’s inability to acquire, maintain or renew necessary financial assurances related to the reclamation and
restoration of mining property could have a material adverse effect on Source’s business, financial condition, and
results of operations.
Risks Related to Source’s Structure and Organization
Source’s directors who are nominees of TriWest IV may have conflicts of interest with respect to matters involving
Source
Certain of Source’s directors are affiliated with TriWest Capital. These persons have fiduciary duties to Source
and, in addition, will have duties to TriWest Capital. As a result, such circumstances may entail real or apparent
conflicts of interest with respect to matters affecting both Source and TriWest Capital, whose interests, in some
circumstances, may be averse to those of Source. In addition, as a result of TriWest Capital’s indirect ownership
interest, conflicts of interest could arise with respect to transactions involving business dealings between Source and
TriWest Capital (or TriWest IV) or their respective affiliates, including potential business transactions, potential
acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by Source and
other matters.
TriWest Capital is in the business of making investments in companies and may in the future acquire interests in
businesses that directly or indirectly compete with certain portions of the Company’s business or are suppliers or
clients of the Company.
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The Major Shareholders will retain a significant portion of the voting power of the Company after the Offering
After the Offering, it is anticipated that the Major Shareholders will beneficially own or control Š Common Shares
and Š Class B Shares, which in the aggregate will represent approximately Š% of the aggregate issued and outstanding
Common Shares and Class B Shares following Closing (Š% if the Over-Allotment Option is exercised in full). As a
result, the Major Shareholders will collectively have significant influence over certain matters submitted to the
Shareholders for approval, including without limitation the election and removal of directors, amendments to the
Company’s articles and by-laws and the approval of any business combination. This may negatively affect the
attractiveness of the Company to third parties considering an acquisition of the Company or cause the market price of
the Common Shares to decline. In addition, TriWest IV and Jim McMahon will be entitled to nominate directors for
election pursuant to the TriWest Nomination Agreement and the McMahon Nomination Agreement.
Upon the completion of the Reorganization the Company will be a holding company and a substantial portion of its
assets will be the shares or partnership units of its subsidiaries
Following completion of the Reorganization, the Company will be a holding company and a substantial portion of
its assets will be the shares or partnership units of its subsidiaries. As a result, prospective purchasers of Common
Shares are subject to the risks attributable to the Company’s subsidiaries. As a holding company, the Company will
conduct substantially all of its business through its subsidiaries, which will generate substantially all of its revenues.
Consequently, the Company’s cash flows and ability to execute on current or desirable future business
opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company.
The ability of these entities to pay dividends and other distributions will depend on their operating results and will be
subject to applicable laws and regulations which require that solvency and minimum capital standards requirements be
maintained by such companies and, to the extent applicable, contractual restrictions contained in the instruments
governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s subsidiaries,
holders of indebtedness and other creditors will generally be entitled to payment of their claims from the assets of such
subsidiaries before any assets are made available for distribution to the Company.
Risks Related to the Blair Facility Acquisition
Possible Failure to Realize Anticipated Benefits of the Blair Facility Acquisition
Source is pursuing the Blair Facility Acquisition to strengthen Source’s position in the frac sand industry and to
create the opportunity to realize certain benefits, as described under the heading “Blair Facility Acquisition”.
Achieving the benefits of the Blair Facility Acquisition depends in part on successfully consolidating functions,
integrating operations, procedures and personnel in a timely and efficient manner, as well as Source’s ability to realize
the anticipated growth opportunities and synergies from integrating the Blair Facility into its existing facilities. The
integration of the Blair Facility requires the dedication of substantial Management effort, time and resources, which
may divert Management’s focus and resources from other strategic opportunities and from operational matters during
this process. The integration process may result in the disruption of ongoing business, customer and employee
relationships that may adversely affect its ability to achieve the anticipated benefits of the Blair Facility Acquisition.
See “Blair Facility Acquisition”.
Possible Failure to Complete the Blair Facility Acquisition
The Blair Facility Acquisition is subject to completion of the conditions described herein and normal commercial
risk that the Blair Facility Acquisition may not be completed on the terms negotiated or at all.
Potential Undisclosed Liabilities Associated with the Blair Facility Acquisition
In connection with the Blair Facility Acquisition, Source may not be able to discover or quantify all historical
liabilities of the companies being purchased in its due diligence which was conducted prior to the execution of the Blair
Purchase Agreement. Further, Source may not be indemnified for some or all of these liabilities. If these liabilities are
material and are not adequately addressed by indemnification from the Seller Indemnification Parties, Source would
have to pay or satisfy those liabilities or risk having them adversely affect Source’s rights to the Blair Facility. There
can be no assurances that Source would be able to pay or satisfy those liabilities.
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Operational, Environmental and Reserves Risks Relating to the Blair Facility Acquisition
The risk factors set forth in this prospectus relating to the frac sand business, the oil and gas business, regulatory
environmental and Source’s operations and reserves apply equally in respect of the Blair Facility.
Nature of Acquisitions
Acquisitions of frac sand properties or companies are based in large part on engineering, environmental and
economic assessments made by the acquiror, independent engineers and consultants. These assessments include a
series of assumptions regarding such factors as recoverability and marketability of frac sand, environmental restrictions
and prohibitions regarding releases and emissions of various substances, future prices of frac sand, the oil and gas
industry and related techniques and operating costs, future capital expenditures and royalties and other government
levies which will be imposed over the producing life of the properties. Many of these factors are subject to change and
are beyond Source’s control. All such assessments involve a measure of geologic, engineering, environmental and
regulatory uncertainty that could result in lower production and resources or higher operating or capital expenditures
than anticipated. Although select title and environmental reviews are conducted prior to any purchase of resource
assets, such reviews cannot guarantee that any unforeseen defects in the chain of title will not arise to defeat Source’s
title to certain assets or that environmental defects, liabilities or deficiencies do not exist or are greater than anticipated.
Such deficiencies or defects could adversely affect the value of assets and Source’s securities.
Significant Transaction and Related Costs
Source expects to incur a number of costs associated with completing the Blair Facility Acquisition and
integrating the Blair Facility. The substantial majority of such costs will consist of transaction costs related to the Blair
Facility Acquisition, facilities and systems consolidation costs and employment-related costs. Additional unanticipated
costs may be incurred in the integration of the Assets into Source’s business.
Risks Related to the Offering
There can be no assurances that a liquid public market will develop for the Common Shares.
Before the completion of the Offering, there has been no public market for the Common Shares and there can be
no assurance that a liquid, public market will develop for the Common Shares. The Offering Price will be determined
by negotiation among the Company, the Selling Shareholders and the Underwriters. Among the factors to be
considered in determining the Offering Price are Source’s future prospects and the prospects of the industry in general,
Source’s financial and operating information in recent periods, and the market prices of securities and certain financial
and other operating information of companies engaged in activities similar to those of Source. The Offering Price may
not be indicative of the market price for the Common Shares after the Offering, which price may decline below the
Offering Price. See “Plan of Distribution”.
The price of the Common Shares could be volatile.
A number of factors could influence the volatility in the trading price of the Common Shares, including changes in
the economy or in the financial markets, industry related developments and the impact of changes in Source’s daily
operations. Each of these factors could lead to increased volatility in the market price of the Common Shares. In
addition, variations in Source’s earnings estimates or other financial or operating metrics by securities analysts and the
market prices of the securities of Source’s competitors may also lead to fluctuations in the trading price of the
Common Shares.
Management will have discretion in the use of proceeds.
Management will have broad discretion concerning the use of the proceeds of the Offering, as well as the timing
of their expenditure. As a result, purchasers will be relying on the judgment of Management for the application of the
proceeds of the Offering. Management may use the net proceeds of the Treasury Offering in ways that purchasers may
not consider desirable. The results and the effectiveness of the application of the net proceeds are uncertain. If the
proceeds are not applied effectively, the results of Source’s operations may suffer.
There may be no return on investment in the Common Shares.
There is no assurance that the business of Source will be operated successfully, or that the business will generate
sufficient income to allow investors to recoup all or any portion of their investment. There is no assurance that an
investment in the Common Shares will earn a specified rate of return or any return over the life of the investment.
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The Common Shares will be subject to further dilution.
The Company may make future acquisitions or enter into financings or other transactions involving the issuance
of securities of the Company which may be dilutive.
The Company and the Locked-Up Shareholders have agreed to refrain from issuing or selling further Common
Shares for a period of 180 days following the Closing Date without the consent of the Underwriters, subject to certain
exceptions. However, at the end of that period (or earlier if a release is granted by the Underwriters), there will be no
restrictions on the Company issuing or selling, or on the Locked-Up Shareholders selling, Common Shares other than
those pursuant to Applicable Securities Laws and stock exchange policies. In addition, pursuant to the Distribution
Rights Agreement, the Company has granted the Distribution Rights Shareholder demand rights and piggyback rights
which permit the Distribution Rights Shareholders to sell all or a portion of their Common Shares through one or more
prospectus offerings. See “Principal Shareholders — Distribution and Nomination Rights — Distribution Rights
Agreement”.
The Locked-Up Shareholders have entered into Lock-Up Agreements as described in “Plan of Distribution —
Lock-Up Arrangements” and other than as set out therein, there are no restrictions on sales of Common Shares by any
of the Locked-up Shareholders of the Company following the Closing Date, some of whom may wish to reduce their
share position in the Company and sell some or all of their shares. No prediction can be made as to the effect, if any,
such future sales of Common Shares will have on the market price of the Common Shares prevailing from time to time.
The sale of a substantial number of the Common Shares in the public market after the Offering, or the perception that
such sales may occur, could adversely affect the prevailing market price of the Common Shares and negatively impact
the Company’s ability to raise equity capital in the future.
Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common
Shares RTR Payment will be deemed to have agreed to the terms of a lock-up agreement the terms of which are
substantially similar to those of the Lock-Up Agreements.
The Lead Underwriters may waive or release parties to the Lock-Up Agreements entered into in connection with this
Offering, which could adversely affect the price of the Common Shares.
The Lead Underwriters, in their discretion, may, at any time and without notice, release all or any portion of the
Common Shares subject to the Lock-Up Agreements to be entered into in connection with the Offering. If the
restrictions under the Lock-Up Agreements are waived, then Common Shares will be available for sale into the public
markets, which could cause the market price of our Common Shares to decline and impair Source’s ability to raise
capital.
Residents of the United States may have limited ability to enforce civil remedies.
Source is organized under the laws of Alberta, Canada and its head office is located in Canada. Source’s directors
and officers and the experts named herein are residents of Canada. As a result, it may be difficult for investors in the
United States to effect service of process within the United States upon those directors, officers and experts who are
not residents of the United States or to enforce against them judgments of U.S. courts based upon civil liability under
the U.S. federal securities laws or the securities laws of any state within the United States. There is doubt as to the
enforceability in Canada against Source or against any of Source’s directors, officers or experts who are not residents
of the United States, in original actions or in actions for enforcement of judgments of U.S. courts of liabilities based
solely upon the U.S. federal securities laws or the securities laws of any state within the United States.
The Company has no plans to pay dividends.
The Company currently intends to use its future earnings, if any, and other cash resources for the operation and
development of its business and does not currently anticipate paying any dividends on the Common Shares. Any future
determinations to pay dividends on the Common Shares will be at the sole discretion of the Board of Directors after
considering a variety of factors and conditions existing from time to time, including current and future commodity prices,
production levels, capital expenditure requirements, debt service requirements, operating costs, royalty burdens, foreign
exchange rates and the satisfaction of the liquidity and solvency tests imposed by the ABCA for the declaration and
payment of dividends. In addition, the Company’s ability to pay dividends may be restricted by restrictions and/or
limitations imposed by the Credit Agreement or any other future outstanding indebtedness of the Company. As a result, a
holder of Common Shares may not receive any return on an investment in the Common Shares.
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The forward-looking statements contained in this prospectus may prove to be inaccurate.
This prospectus contains forward-looking statements, including, without limitation, the forward-looking
statements listed in “Forward-Looking Statements”. By their nature, forward-looking statements involve numerous
assumptions, known and unknown risk and uncertainties, of both a general and specific nature, that could cause actual
results to differ materially from those suggested by the forward-looking statements or contribute to the possibility that
predictions, forecasts or projections will prove to be materially inaccurate. The factors discussed in this section and the
section entitled “Forward-Looking Statements” should therefore be weighed carefully and prospective investors should
not place undue reliance on the forward-looking statements provided in this prospectus.
A Purchaser of the Common Shares under the Offering will do so at a substantial premium to book value per
Common Share.
The Offering Price is substantially higher than the book value per share of the Common Shares issued prior to the
Closing. As a result, purchasers of Common Shares pursuant to the Offering will experience immediate dilution.
Additional information on the risks, assumptions and uncertainties are found in this prospectus under the
heading “Forward-Looking Statements”.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as described below, there are no legal proceedings Source is or was a party to, or that any of its
property is or was the subject of, during Source’s most recent financial year, nor are any such legal proceedings known
to Source to be contemplated, that involves a claim for damages, exclusive of interest and costs, exceeding 10% of the
current assets of Source.
In 2015, a dispute arose between SES Proppants and a customer (the “CMSA Customer”) under a master supply
agreement providing for the supply of proppant pursuant to purchase orders (the “CMSA”). Pursuant to the CMSA,
SES Proppants received US$20,000,000 as a prepayment for future purchases of processed frac sand which was paid
upon three installments by the completion of certain phases of Source’s frac wet plant at the Sumner Facility. To
evidence the underlying obligations for prepayment, SES Proppants executed and delivered to the CMSA Customer a
promissory note (the “Prepayment Note”) in the principal amount of US$20,000,000. The CMSA Customer claimed
that the entire outstanding balance of the principal and accrued interest on the Prepayment Note became due and
payable in cash on November 16, 2015 and that SES Proppants failed to pay as required. The CMSA Customer
threatened to commence foreclosure under certain mortgages over the Sumner Facility which secured the Prepayment
Note. SES Proppants sought a declaratory judgment that (a) absent an event of default or prepayment as set forth in the
Prepayment Note, the Prepayment Note is payable only through credits against invoices for proppant supplied by SES
Proppants to the CMSA Customer, all as specified under the terms of the CMSA; and (b) the Customer had no existing
right, under the CMSA, the Prepayment Note, or the applicable mortgages, to foreclose on the Sumner Facility. SES
Proppants also asserted a claim against the CMSA Customer for breach of its obligations under the CMSA by failing to
purchase the quantities required to amortize the Prepayment Note. SES Proppants obtained a preliminary injunction
against the CMSA Customer from taking any action to enforce the mortgages. In November 2016, the parties entered
into a confidential settlement agreement and have settled the dispute amicably for payment by SES Proppants to the
CMSA Customer of US$16.5 million. On November 30, 2016, the applicable court issued an order granting the motion
to dismiss the lawsuit.
There are no: (a) penalties or sanctions imposed against Source by a court relating to securities legislation or by a
securities regulatory authority since Source’s inception; (b) other penalties or sanctions imposed by a court or
regulatory body against Source that would likely be considered important to a reasonable investor in making an
investment decision; or (c) settlement agreements Source entered into before a court relating to securities legislation or
with a securities regulatory authority since Source’s inception.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Except as otherwise set out herein, there is no material interest, direct or indirect, of any: (a) director or executive
officer of Source; (b) person or company that beneficially owns, or controls or directs, directly or indirectly, more than
10% of any class or series of Source’s voting securities; or (c) associate or affiliate of any of the persons or companies
referred to in (a) or (b) above in any transaction within three years before the date of this prospectus that has materially
affected or is reasonably expected to materially affect Source.
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AUDITORS, TRANSFER AGENT AND REGISTRAR
The external auditors of the Company are PricewaterhouseCoopers LLP, Chartered Professional Accountants,
Suncor Energy Centre East Tower, 3100 – 111 5th Avenue S.W., Calgary, Alberta T2P 5L3. PricewaterhouseCoopers
LLP has been the Company’s auditors since February 7, 2017 and the auditors of Source since July 2014.
The transfer agent and registrar for the Common Shares is Computershare Trust Company of Canada at its
principal offices in Calgary, Alberta and Toronto, Ontario.
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the only material contracts that the Company
has entered into prior to the date of this prospectus or that are expected to be entered into in connection with the
Reorganization, which can reasonably be regarded as presently material, are the following:
1.
the Credit Agreement (see “Description of Indebtedness — Indebtedness outstanding following the
Offering — Credit Facilities”);
2.
the Note Indenture (see “Description of Indebtedness — Indebtedness outstanding following the Offering —
Notes”);
3.
the Distribution Rights Agreement (see “Principal Shareholders — Distribution and Nomination Rights”);
4.
the TriWest Nomination Agreement (see “Principal Shareholders — Distribution and Nomination Rights”);
5.
the McMahon Nomination Agreement (see “Principal Shareholders — Distribution and Nomination
Rights”);
6.
the Underwriting Agreement (see “Plan of Distribution”);
7.
the Blair Purchase Agreement (see “Business — Blair Facility Acquisition — Blair Purchase Agreement”);
and
8.
the Source Canada Exchange Agreement (see “Corporate Structure — Reorganization”).
Copies of the foregoing and the articles and by-laws of the Company may be inspected during ordinary office
business hours at the Company’s principal offices located at 100, 438 – 11th Avenue S.E., Calgary, Alberta T2G 0Y4
during the period of the distribution of the Common Shares or may be viewed under the Company’s profile at
www.sedar.com.
EXPERTS
Names of Experts
The only persons or companies who are named as having prepared or certified a report, valuation, statement or
opinion in this prospectus and whose profession or business gives authority to such report, valuation, statement or
opinion, are: (a) APEX, the Company’s independent professional geologists; (b) Stikeman Elliott LLP, the Company’s
counsel and Blake, Cassels & Graydon LLP, the Underwriters’ counsel; and (c) PricewaterhouseCoopers LLP, the
Company’s independent auditors.
Interests of Experts
As at the date hereof, the designated professionals of APEX, the Company’s independent professional geologists,
the designated professionals of Stikeman Elliott LLP, the Company’s counsel, and the designated professionals of
Blake, Cassels & Graydon LLP, the Underwriters’ counsel, as respective groups, beneficially own, directly or
indirectly, less than one percent of the outstanding Common Shares.
PricewaterhouseCoopers LLP are the external auditors of the Company and have confirmed that they are
independent with respect to the Company within the meaning of the Rules of Professional Conduct of the Institute of
Chartered Professional Accountants of Alberta.
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PURCHASERS’ STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to
withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt
or deemed receipt of a prospectus and any amendment. In several of the provinces and territories, the securities
legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or
damages where the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser,
provided that such remedies for rescission or damages are exercised by the purchaser within the time limit prescribed
by the securities legislation of the purchaser’s province. The purchaser should refer to any applicable provisions of the
securities legislation of the province or territory in which the purchaser resides for the particulars of these rights or
consult with a legal advisor.
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APPENDIX “FS”
FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND ANALYSIS
Page
Audited Balance Sheet of the Company as at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-2
Audited Combined Financial Statements of Source as at and for the years ended December 31, 2016 and
2015 and for each of the three years in the three-year period ended December 31, 2016, including the
notes thereto and the auditor’s report thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-7
Management’s Discussion and Analysis of Source’s Operations, Financial Position and Outlook for each
of the Three Years ended December 31, 2016, December 31, 2015 and December 31, 2014 . . . . . . . . . . .
FS-36
SOURCE ENERGY SERVICES LTD.
Balance Sheet
AS AT FEBRUARY 7, 2017
FS-2
February 10, 2017
Independent Auditor’s Report
To the Board of Directors of Source Energy Services Ltd.
We have audited the accompanying financial statement of Source Energy Services Ltd., which comprises the
balance sheet as at February 7, 2017 and the related notes, which comprise a summary of significant accounting
policies and other explanatory information.
Management’s responsibility for the financial statement
Management is responsible for the preparation and fair presentation of this financial statement in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial
statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statement in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statement.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the financial statement presents fairly, in all material respects, the financial position of Source
Energy Services Ltd. as at February 7, 2017 in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
PricewaterhouseCoopers LLP
111 5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
FS-3
SOURCE ENERGY SERVICES LTD.
Contents
FEBRUARY 7, 2017
Financial Statements
Page
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-5
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-6
FS-4
Source Energy Services Ltd.
Balance Sheet
As at February 7, 2017
Assets
Cash
$10
Shareholder’s Equity
Share Capital
$10
Approved on behalf of the Board of Directors of Source Energy Services Ltd.
(signed) “Cody Church”
Cody Church
Director
(signed) “Brad Thomson)
Brad Thomson
President and Chief Executive Officer
FS-5
Source Energy Services Ltd.
Notes to the Balance Sheet as at February 7, 2017
1.
Company Information
Source Energy Services Ltd. (the “Company”) was formed as an Alberta corporation established under the laws of
Business Corporation Act (Alberta), pursuant to articles of incorporation dated February 7, 2017. The Company was
established to serve as the public company for Source Energy Services Canada LP and Source Energy Services US LP
after the completion of the closing of the public issuance by the Company. The sole shareholder of the Company is
Brad Thomson, CEO of Source Energy Services Canada LP and Source Energy Services US LP, each a related entity.
The Company’s registered office is at 100, 438 — 11th Avenue S.W., Calgary Alberta, Canada, T2G 0Y4.
The financial statement was approved by the Board of Directors and authorized for issue on February 10, 2017.
2.
Significant accounting policies
The Balance Sheet has been prepared in accordance with International Financial Reporting Standards. Separate
statements of Operations and Comprehensive Income, Changes in shareholder’s equity, and cash flows have not been
presented as there has been no activity since its inception.
Common Control Transactions
Business combinations involving entities under common control are excluded from IFRS 3, Business Combinations.
As there is no specific guidance in IFRS, management has selected an accounting policy that is consistent with IAS 8,
Accounting policies. Management has chosen to apply the predecessor value method since inception for common
control transactions. The predecessor value method involves accounting for the acquired assets and liabilities at
existing carrying values rather than at fair value, which results in no goodwill being recorded.
3.
Share Capital
The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of preference
shares issuable in series and an unlimited number of voting class B shares. As at February 7, 2017, the Company issued
one common share.
FS-6
SOURCE ENERGY SERVICES
COMBINED FINANCIAL STATEMENTS
AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
FS-7
February 10, 2017
Independent Auditor’s Report
To the Board of Directors of Source Energy Services
We have audited the accompanying combined financial statements of Source Energy Services and its subsidiaries,
which comprise the balance sheets as at December 31, 2016, December 31, 2015 and December 31, 2014 and the
combined statements of operations and comprehensive income (loss), changes in partners’ equity and cash flows for
each of the years in the three year period ended December 31, 2016, and the related notes, which comprise a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the combined financial statements
Management is responsible for the preparation and fair presentation of these combined financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines
is necessary to enable the preparation of combined financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks
of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the combined financial statements present fairly, in all material respects, the financial position of
Source Energy Services and its subsidiaries as at December 31, 2016, December 31, 2015 and December 31, 2014 and
its financial performance and its cash flows for each of the years in the three year period ended December 31, 2016 in
accordance with International Financial Reporting Standards.
PricewaterhouseCoopers LLP
111 5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
FS-8
Emphasis of matter
Without modifying our opinion, we draw attention the fact that, as described in note 2 to the combined financial
statements, the businesses included in the combined financial statements have not operated as a single entity. These
combined financial statements are, therefore, not necessarily indicative of results that would have occurred if the
businesses had operated as a single business during the year presented or of future results of the combined businesses.
Chartered Professional Accountants
FS-9
SOURCE ENERGY SERVICES
Contents
December 31, 2016
Financial Statements
Page
Combined Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-11
Combined Statement of Operations and Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-12
Combined Statement of Partners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-13
Combined Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-14
Notes to the Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FS-15 - FS-35
FS-10
Source Energy Services
Combined Balance Sheet
As at
(Stated in thousands of Canadian dollars)
Note
Assets
Current assets
Cash
Accounts receivable
Prepaid expenses
Inventories
Property, plant and equipment available for sale
December 31
2016
$
–
14,634
2,943
27,710
–
4(c)
6
7
Total current assets
$
276
21,756
2,973
24,415
–
45,287
Deferred income tax
Due from related parties
Property, plant and equipment
8
16
7
Total Assets
Liabilities and Partners’ Equity
Current liabilities
Overdraft
Accounts payable and accruals
Deferred revenue
Shareholder loan
Due to related parties
Derivative Liability
Current portion of long-term debt
$
597
32
173,490
Total long-term liabilities
Total liabilities
Equity
Partners’ equity
Cumulative translation adjustment
13
13
Total equity
Total Liabilities and Equity
49,420
$
81
145
181,466
70,539
$
479
109
123,661
$
$
$
–
21,358
1,792
–
–
14,817
1,109
475
25,393
5,245
–
–
–
8,164
2,598
22,498
7,552
–
–
–
11,624
39,076
39,277
44,272
–
4,599
123,242
125
36,770
4,300
70,513
$ 22,852
4,363
74,950
–
26,841
1,639
66,032
$ 17,053
3,356
52,173
–
13,486
422
65,187
$
239,549
196,677
151,677
$278,625
$235,954
$195,949
(64,820)
5,601
(11,349)
6,507
222
(1,383)
(59,219)
(4,842)
(1,161)
$219,406
Approved on behalf of the Board of Directors of Source Energy Services
(signed) “BRAD THOMSON”
Brad Thomson
President and Chief Executive Officer
FS-11
3,202
37,562
3,398
13,527
12,850
$194,788
10
9
16
10
10
16
11
12
$
$231,112
4(d)
9
16
16
Deferred revenue
Due to related parties
Long-term debt
Derivative Liability
Shareholder Loan
Decommissioning provision
Preferred shares obligation
December 31
2014
$219,406
Total current liabilities
(signed) “CODY CHURCH”
Cody Church
Director
December 31
2015
$231,112
$194,788
Source Energy Services
Combined Statements of Operations and Comprehensive Income (Loss)
For the years ended December 31,
(Stated in thousands of Canadian dollars)
Note
2016
2015
2014
Sales
Sand revenue
Wellsite Solutions
Terminal Services
$112,962
21,261
4,976
$139,574
6,208
7,353
$118,755
11,782
15,969
Sales
$139,199
$153,135
$146,506
$123,257
8,039
$116,364
7,133
$ 95,504
4,611
$
7,903
$ 29,638
$ 46,391
$ 23,866
6,373
$ 18,183
5,674
$ 18,913
3,146
Cost of sales
Cost of sales – depreciation
14
Gross margin
Operating and general & administration expense
Depreciation
14
Income (loss) from operations
$ (22,336) $
Other expense (income):
Loss (gain) on asset disposal
Loss (gain) on impairment
Finance expense
Loss (gain) on derivative liability
Fair value adjustment on shareholder loan
Other income
Management Fees
Foreign exchange loss/(gain)
5,781
$ 24,332
$
$
17
13
16
1,082 $
94 $ (3,110)
1,852 $
– $
–
19,491
12,346
8,998
910
–
–
–
3,906
–
$ (4,859) $ (1,796) $ (420)
1,043
1,683
1,456
2,059
(1,255)
(64)
Total other expense (income)
$ 21,578
Income (loss) before income taxes
Income taxes
Current tax
Deferred tax
$ (43,914) $ (9,197) $ 17,472
$
8
$ 14,978
4 $
(516)
171
398
$
$
6,860
58
379
Net income (loss)
$ (43,402) $ (9,766) $ 17,035
Other comprehensive (income) loss
Foreign currency translation adjustment (not subject to recycling)
$
Consolidated comprehensive income (loss)
$ (44,308) $ (1,876) $ 19,337
FS-12
906
$ (7,890) $ (2,302)
Source Energy Services
Combined Statement of Partners’ Equity
Partners Units
For the years ended December 31, 2016, 2015 and 2014
(Stated in thousands of Canadian dollars)
Number
of Units
Balance at January 1, 2014
Unrealized foreign exchange gain
Stock based compensation expense
Net income
96,880
Balance at December 31, 2014
96,880
$ (58,663)
17,035
$41,850
$ (41,628)
Accumulated Other
Comprehensive Income
(Loss)
$(1,383) $ (1,161)
7,890
7,890
67
(1,872)
(9,766)
$ 6,507
$ (4,842)
(1,872)
(9,766)
96,880
$41,917
$ (53,266)
$
500
(5,500)
(906)
24
(5,093)
(43,402)
96,880
FS-13
$41,941
$(106,761)
Total
Equity
$(3,685) $(20,683)
2,302
2,302
185
17,035
67
Fair Value of Warrants Issuance
Promissory Note Issuance
Unrealized foreign exchange loss
Stock based compensation expense
Distribution to Unitholders
Net loss
Balance at December 31, 2016
$41,665
185
Unrealized foreign exchange gain
Stock based compensation expense
Payment to unitholders
Net loss
Balance at December 31, 2015
$
Partners’
Equity
$ 5,601
500
(5,500)
(906)
24
(5,093)
(43,402)
$(59,219)
Source Energy Services
Combined Statements of Cash Flows
For the years ended December 31,
(Stated in thousands of Canadian dollars)
Note
Cash Flows Provided by (Used in) Operating Activities
Net income (loss)
Adjusted for the following:
provided by (used in) operating activities:
Depreciation
Stock based compensation
Loss (Gain) on sale of assets
Loss (Gain) on impairment
Finance expense
Fair value adjustment on shareholder loan
Gain on settlement of deferred revenue
Deferred income taxes
Onerous lease costs
Loss (Gain) on derivative liability
Payments Deferred Revenue
Payments made to decommissioning liability
Net changes in non-cash working capital
2016
2015
2014
$ (43,402) $ (9,766) $ 17,035
14,412
24
1,082
1,852
19,491
–
(3,328)
(516)
227
910
–
(3,220)
3,015
12,807
67
94
–
12,346
3,906
(2,860)
–
6,632
(2,686)
–
(36,195)
Cash flows provided by operating activities
(9,453)
23,624
(7,882)
Investing Activities
Purchase of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Net changes in non-cash working capital
(6,405)
841
(4,906)
(38,901)
224
3,216
(45,390)
5,692
2,077
(10,470)
(35,461)
(37,621)
Financing Activities
Proceeds on long-term debt
Payments on long-term debt
Proceeds on note
Payments on Deferred Revenue
Financing expense paid
Proceeds on shareholder loan
Payments made to preferred shareholders
Payments made to unitholders
38,346
(106,607)
130,000
(23,571)
(14,953)
2,000
–
(5,093)
73,770
(59,759)
–
45,526
(12,161)
–
(5,481)
7,500
(3,188)
(1,872)
(2,787)
15,589
–
–
Cash flows provided by financing activities
20,122
10,970
46,167
–
64
(139)
(803)
604
525
79
(199) $
604
17
5
Cash flows used in investing activities
Effect of exchange rate changes on cash
Increase (Decrease) in cash
Cash and cash equivalents, beginning of year
398
199
(199)
Cash and cash equivalents, end of year
$
–
$
7,672
185
(3,110)
–
8,838
–
379
Cash consists of the following:
Cash
Overdraft
–
–
FS-14
276
(475)
3,202
(2,598)
SOURCE ENERGY SERVICES
Notes to the Combined Financial Statements
For the Years Ended December 31, 2016, 2015 and 2014
(All amounts are in thousands of Canadian dollars, unless otherwise noted)
1.
GENERAL DESCRIPTION OF BUSINESS
Source Energy Services (“Source” or the “Partnership”) is headquartered in Calgary, Alberta. The registered office is at
100, 438 — 11th Avenue S.W., Calgary Alberta, Canada, T2G 0Y4. Source is primarily engaged in mining,
processing, storing and transporting frac sand in Western Canada and the United States, and coordinating trucking
services for sand, hydrochloric acid and other chemicals for use in the oilfield industry.
The Partnership consists of Source Energy Services Canada LP (“SES Canada”) and Source Energy Services US LP
(“SES US”). SES Canada is privately owned and registered under the Alberta Partnership Act. SES US is privately
owned and register under the Alberta Partnership Act and the Delaware Partnership Act. Triwest Capital holds majority
of the ownership of the Partnership.
2.
BASIS OF PRESENTATION
Statement of compliance
The combined financial statements were prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International
Financial Reporting Interpretations Committee (“IFRIC”).
The policies applied in these combined financial statements are based on IFRS issued and outstanding as at February
10, 2017, the date of the final approval of the financial statements by the Board of Directors.
Basis of measurement
The financial statements have been combined on the basis of common control, as the users of the financial statements
view the Partnership as a whole business, and viewing the business as less than the whole does not portray its results
properly.
The combined financial statements of the Partnership include the accounts of all entities over which the Partnership has
the ability to exercise control through ownership (“Subsidiaries”). The Partnership controls an entity when the
Partnership is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity.
The combined financial statements include the activities of Source Energy Services Canada LP, Source Energy
Services Canada Holdings Ltd., Source Energy Services Canadian Logistics LP, Source Energy Services Canadian
Chemical LP, Source Energy Services US LP, Source Energy Services Logistics US LP, Source Energy Services
Proppants LP, Source Energy Services Chemical US LP, CSP Property Holdings LLC, and Berthold Transload Inc.
Intercompany balances and transactions are eliminated on combination.
The combined financial statements have been prepared under the historical cost convention, except for the revaluation
of certain financial assets and liabilities to estimated fair value. The combined financial statements have also been
prepared on the basis that the Partnership will continue to operate as a going concern, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business.
Use of estimates and judgments
The preparation of the combined financial statements in conformity with IFRS requires management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and judgments are
continually evaluated and are based on historical experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future years affected.
The following discussion sets forth management’s most critical estimates and assumptions in determining the value of
assets, liabilities and equity.
FS-15
Allowance for Doubtful Accounts
The Partnership performs ongoing credit evaluations of its customers and grants credit based on a review of historical
collection experience, current aging status, the customer’s financial condition and anticipated industry conditions.
Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific
situations and overall industry conditions.
Inventories
The Partnership evaluates its inventory to ensure it is carried at the lower of average cost and net realizable value.
Allowances are made against obsolete or damaged inventories and charged to the cost of sales. The reversal of any
write-down of inventory arising from an increase in net realizable value would be recognized as a reduction in cost of
sales in the period in which the reversal occurred.
Depreciation
The amounts recorded for depreciation of property and equipment are based on estimates of the useful lives of the
assets and residual values. This estimated residual value and useful lives of property and equipment are reviewed at the
end of each reporting period and adjusted if required.
Decommissioning liabilities
The amounts recorded for decommissioning liabilities are based on the Company’s mining activities and the estimated
costs to abandon and reclaim the land and facilities, the estimated time period in which these costs will be incurred in
the future and the discount and inflation rates. Any changes to these estimates could change the amount of
decommissioning liability and may materially impact the combined financial statements in future periods.
Income Taxes
The amounts recorded for deferred income taxes are based on estimates as to the timing of the reversal of temporary
differences and tax rates currently substantively enacted. Legislation and Regulations in the various jurisdictions that
the company operates in are subject to change and differing interpretations require management judgement. Income tax
filings are subject to audits, re-assessments and changes in facts, circumstances and interpretations of the standards
could result in a material change in the Partnerships provision for income taxes. As such, income taxes are subject to
measurement uncertainty.
Stock-Based Compensation
The fair value of the restricted share units is estimated at the grant date using the Black-Scholes option pricing model,
which includes underlying assumptions related to the risk-free interest rate, average expected unit life, estimated
forfeitures, and estimated volatility of the Partnership.
Cash-Generating Units (CGUs)
The determination of CGUs is based on management’s judgment regarding geographical proximity, shared equipment,
and mobility of equipment. Management has determined that the Partnership’s operations represent one CGU.
Impairment of non-financial assets
Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which
the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest
levels for which there are largely independent cash inflows (CGUs). Prior impairments of non-financial assets are
reviewed for possible reversal at each reporting date.
FS-16
Embedded Derivatives
An embedded derivative is a component of a contract that modifies the cash flows of the contract. The relevant
transaction rights and the prepayment option included in the $130M senior secured notes represents a hybrid contract.
The embedded derivatives are separated from the note payable and accounted for as derivative liabilities. The
embedded derivatives are measured at Fair value through profit or loss (FVTPL). The fair value of the derivatives is
based on prices or valuation techniques that require inputs that are not based on observable market data.
Shareholder Loans
Shareholder loans have been recorded at fair value, which represents the amount of the loan plus applicable interest.
One of the promissory note bears interest at 25% per annum which is paid in a combination of cash and in kind interest.
According to the agreement, the Partnership is obligated to pay the 25% interest for a minimum of 3 months after
December 31, 2016. For the year ended December 31, 2016, the Partnership has recorded the interest obligation up to
March 31, 2017.
3.
SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories represent unprocessed but mined sand, work in process and sand available for shipment, as well as spare
parts and supplies. The Partnership values inventory at the lower of cost or net realizable value.
Cost is determined using the weighted average cost method. Cost includes the cost of mining of the sand as well as the
direct labor costs, utility costs, transportation costs, and other processing costs to wash and dry the sand, as well as
depreciation directly attributable to production equipment and depreciation of capitalized stripping activities.
Net realizable value is the estimated selling price less applicable selling expenses. When the weighted average cost of
inventories exceeds the net realizable value, inventory is written down to the net realizable value. All write downs are
charged to cost of goods sold. The amount of the write down may be reversed (up to original amount of the write
down) where there is a change in the economic circumstances.
Foreign currency translation
The combined financial statements are presented in Canadian dollars, which is the Partnership’s presentation currency.
Each entity of the combined statements is measured using the currency of the primary economic environment in which
the entity operates (the “functional currency”). The financial statements of the entities that have a different functional
currency are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the
balance sheet date, revenue and expenses are translated at average exchange rate for the period (as this is considered a
reasonable approximation of actual rates), and gains and losses in translation are recognized in partners’ equity as
accumulated other comprehensive income (loss).
Foreign currency transactions in entities that have Canadian dollars as the functional currency are translated into the
functional currency using the exchange rate prevailing on the transaction date. Foreign exchange gains and losses
resulting from the settlement of foreign currency translation and from the translation at period-end exchange rates of
monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in
the Combined Statements of Operations and Comprehensive Income (Loss).
Property, plant and equipment
All costs directly associated with the purchase and development of property, plant and equipment are capitalized and
reflected at cost less accumulated depreciation and net impairment losses. Costs of replacing parts of property, plant
and equipment are capitalized only when they increase the future economic benefits embodied in the specific assets to
which they relate. All other expenditures are recognized in income as incurred. The carrying amount of any replaced or
sold component is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in the
Combined Statements of Operations and Comprehensive Income as incurred.
Exchanges or swaps of property, plant and equipment are measured at fair value unless the transaction lacks
commercial substance or neither the fair value of the asset received nor the asset given up can be reliably estimated.
FS-17
When fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset given up.
Any gains or losses from the divestiture of property and equipment are recognized in the Combined Statements of
Operations and Comprehensive Income.
Depreciation of property, plant and equipment is provided using the declining balance method at the following annual
rates approximating their estimated useful lives in years:
Buildings
Equipment
Vehicles
Computer hardware and software
20
7 — 15
5—7
3—5
Depreciation of an asset or an asset under construction begins when it is available for use. Depreciation of an asset
ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized.
Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully
depreciated.
The Partnership allocates the amount initially recognized in respect of an item of property and equipment to its
significant components and depreciates separately each such component where applicable.
In 2015, the Partnership adopted IFRIC 20 “stripping costs in the production phase of a surface mine”. During the
production phase of the mine, stripping costs incurred that provide access to a component of reserves that will be
produced in future periods and that would not have otherwise been accessible are capitalized. The costs qualifying for
capitalization are those costs directly incurred to perform the stripping activity that improves access to the resource
body. The stripping activity asset is included as part of the carrying amount of the mining property. Capitalized
stripping costs are amortized on a straight-line basis over the production period it relates to. Refer to note 7 for more
details.
Property, plant and equipment available for sale
Property, plant and equipment assets are classified as held for sale if their carrying amounts will be recovered through a
sale transaction rather than through continuing use. Property, plant and equipment held for sale are measured at the
lower of carrying amount and fair value less costs to dispose and presented as a current asset on the Combined Balance
Sheet. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate
sale in its present condition. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.
Property, plant and equipment available for sale is reviewed periodically by management and if the fair value less cost
to dispose is less than the cost, an impairment loss is recognized in the Combined Statements of Operations and
Comprehensive Income (Loss). A previously recognized impairment loss may be reversed to the extent of the
improvement and the amount of the reversal is recognized in the Combined Statements of Operations and
Comprehensive Income. The reversal may be recorded provided it is no greater than the amount that had been
previously reported as a reduction in the asset and it does not exceed original cost.
Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying
amount of the asset and are included in the Combined Statements of Operations and Comprehensive Income (Loss).
Impairment of non-financial assets
The carrying amounts of the Partnership’s non-financial assets, other than deferred tax assets, are reviewed for
indicators of impairment at least annually. If indicators of impairment exist, the recoverable amount of the assets is
estimated. For purposes of assessing impairment, property, plant and equipment and intangibles are grouped into
cash-generating units (“CGUs”), defined as the lowest levels for which there are separately identifiable independent
cash inflows.
The recoverable amount of a CGU is the greater of its fair value less costs to dispose and its value in use. Fair value is
determined to be the amount for which the asset would be sold in an arm’s length transaction between knowledgeable
and willing parties. Value in use is determined by estimating the present value of the future net cash flows to be
derived from the continued use of the cash-generating unit in its present form. These cash flows are discounted at a rate
based on the time value of money and risks specific to the CGU.
FS-18
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. An
impairment loss recognized in respect of a CGU is allocated to reduce the carrying amounts of the assets in the CGU
on a pro rata basis. Impairment losses are recognized in Combined Statements of Operations and Comprehensive
Income (Loss).
Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment
loss had been recognized.
Deferred revenue
The Partnership has entered into agreements with some of its customers where deposits are paid by the customers in
exchange for goods and services at a discounted rate. These deposits received have been recorded as deferred revenue
on the Partnership’s Combined Balance Sheet, and are recognized as revenue as goods and services are provided to the
customers, consistent with the Partnership’s revenue recognition policy.
Provision and contingent liabilities
Provisions are recognized by the Partnership when it has a legal or constructive obligation as a result of past events, it
is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate can be
made of the amount of that obligation. The obligation is not recorded and is disclosed as a contingent liability if it is
not probable that an outflow will be required, if the amount cannot be estimated reliably or if the existence of the
outflow can only be confirmed by the occurrence of a future event.
Decommissioning provision
Decommissioning provision is recognized for decommissioning and restoration obligations associated with the
Partnership’s mining reserves. The best estimate of the expenditure required to settle the present obligations at the
balance sheet date is recorded on a discounted basis using the pre-tax risk-free interest rate at each reporting date. The
future cash flow estimates are adjusted to reflect the risks specific to the liability. The value of the provision is added to
the carrying amount of the associated property, plant and equipment asset and is depreciated over the useful life of the
asset. The provision is accreted over time through charges to finance expenses. Changes in the future cash flow
estimates resulting from revisions to the estimated timing or amount of undiscounted cash flows or the discount rate are
recognized as changes in the decommissioning provision and related assets. Actual decommissioning expenditures up
to the recorded liability at the time are charged against the provision as the costs are incurred. Any differences between
the recorded liability and the actual costs incurred are recorded as a gain/loss in the Combined Statements of
Operations and Comprehensive Income (Loss).
Income taxes
Current and deferred income tax expenses are recognized in the Combined Statements of Operations and
Comprehensive Income (Loss) except to the extent that it relates to items recognized directly in equity or other
comprehensive income.
Current income taxes for current and prior periods are measured at the amount expected to be payable or recoverable
from the taxation authorities based on the income tax rates enacted at the end of the period
Deferred income tax is recognized using the liability method, providing for temporary differences between the carrying
amounts of assets and liabilities and the carrying amounts used for taxation purposes. Deferred income tax liabilities
are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all temporary
differences deductible to the extent future recovery is probable. The carrying amount of deferred income tax assets is
reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient
taxable income will be generated to allow for all or part of the asset to be recovered. Deferred income tax balances are
calculated using enacted or substantively enacted tax rates. Deferred income tax balances are adjusted to reflect
changes in income tax rates that are enacted or substantively enacted with the adjustment being recognized in the
period the change occurs, except items recognized in equity.
FS-19
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income
taxes levied by the same taxation authority on the same taxable entity, or on different tax entities, but they intend to
settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
Leases
Leases that transfer substantially all of the benefits and risks of ownership to the Partnership are accounted for at the
commencement of the lease term as finance leases and are recorded as property, plant and equipment at the fair value
of the leased asset, or, if lower, at the present value of the minimum lease payments, together with an offsetting
liability. Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining
balance of the liability and are charged directly against income. Capitalized leased assets are amortized over the shorter
of the estimated useful life of the asset or the lease term. All other leases are accounted for as operating leases and the
lease costs are expensed as incurred.
Preferred shares obligation
Partnership units that have no voting rights and bear a fixed mandatory return have been classified as liability on the
Partnership’s Combined Balance Sheet.
Restricted share units
Restricted share units (“RSU”) are granted to specific employees, which entitle the participant, at the Partnership’s
option, to receive either a partnership unit or cash equivalent in exchange for a vested unit. The vesting period for
RSUs is one third per year over the three-year period from the grant date. Compensation expense related to the units
granted is recognized over the vesting period based on fair value of the units, calculating using the Black Scholes
option pricing model.
Revenue recognition
The Partnership’s revenue, which is comprised principally of sand sales and other services, is generally subject to
contractual arrangements, which specify price and general terms and conditions. The Partnership recognizes sand sales
when the risks and rewards of ownership of goods have been transferred to the customer and it is probable that the
economic benefits associated with the transaction will flow to the Partnership. The Partnership also considers if it has
retained any material involvement in the sand being sold and if the revenue and costs related to the sale can be
measured reliably.
Revenue for third party sand and chemical distribution is recognized based on contractual arrangements or when
services have been completed Revenue for trucking is recognized when services are provided. Revenue for rental of
tanks is recognized on a monthly basis.
Finance income and expenses
Finance income, consisting of interest income, is recognized as it accrues in the Combined Statements of Operations
and Comprehensive Income (Loss), using the effective interest method.
Finance expense comprises interest expense on borrowings and impairment losses recognized on financial assets.
Amounts paid to financial institutions for the purpose of borrowing funds are capitalized upon recognition and are
offset against the outstanding obligation to the financial institution. These costs are amortized over the remaining term
of the facility placed.
Borrowing costs are recognized in the Combined Statements of Operations and Comprehensive Income (Loss) in the
period in which they are incurred using the effective interest method.
Segment Reporting
An operating segment is a component of the Partnership that engages in business activities from which it may earn
revenues and incur expenses. All operating results are reviewed regularly on a segmented basis by Partnership
management to make decisions about resources to be allocated to the segment and to assess its performance, and for
which discrete financial information is available. Segment results that are reported to management include items
directly attributable to a segment as well as those that can be allocated on a reasonable basis.
FS-20
Financial Instruments
(i)
Classification and measurement Recognition
Recognition
Financial assets and liabilities are generally initially recognized at fair value when the Partnership becomes a party to
the contractual provisions of the instrument. However, where the fair value differs on initial recognition from the
transaction price and the fair value is not measured using entirely observable inputs the instrument is recognized at the
transaction price. In the case of instruments not measured at fair value through profit and loss, incremental, directly
attributable transaction costs are accounted for as an adjustment to the carrying amount and in all other cases such
transaction costs are expensed as incurred.
The Partnership evaluates contracts to purchase non-financial items which are subject to net settlement (whether
explicitly or in substance) to determine if such contracts should be considered derivatives or if they were entered into
and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements (“Own Use”). If such contracts qualify as “Own Use” they are
considered executory contracts outside the scope of financial instrument accounting.
The Partnership evaluates financial and non-financial contracts not measured at fair value through profit and loss to
determine whether they contain embedded derivatives. An embedded derivative is a component of a hybrid (combined)
instrument that also includes a non-derivative host contract — with the effect that some of the cash flows of the
combined instrument vary in a way similar to a stand-alone derivative. For such instruments, an embedded derivative is
separated where the economic characteristics and risks of the embedded derivative are not closely related to the
economic characteristics and risks of the host contract and a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative.
Financial assets and liabilities are not offset unless they are with a counterparty for which the Partnership has a legally
enforceable right to settle the financial instruments on a net basis and the Partnership intends to settle on a net basis.
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The Partnership discloses more details
about fair value of financial instruments in Note 4.
Derecognition
Financial assets are derecognized when the rights to receive cash flows from the assets have expired or it transfers the
financial instrument in a manner that qualifies for derecognition through transfer of substantially all risks and rewards
or transfer of control.
Financial liabilities are derecognized upon extinguishment. A modification of a financial liability with an existing
lender is evaluated to determine whether the amendment results in substantially different terms in which case it is
accounted for as an extinguishment.
Classification
The financial instruments of the Partnership are classified in the following categories: fair value through profit or loss
(which includes financial assets and financial liabilities), loans and receivables, available-for-sale and other financial
liabilities. The classification depends on the nature and purpose of the financial instrument and is determined at the
time of initial recognition.
Financial assets and financial liabilities acquired principally for the purpose of selling or repurchasing in the short term
are classified as “fair value through profit or loss” and are recognized initially at fair value with changes in fair value
recognized in the Combined Statements of Operations and Comprehensive Income (Loss). The shareholder loan
payable is classified as fair value through the Combined Statements of Operations and Comprehensive Income (Loss).
Financial assets classified as “loans and receivables” are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They are initially measured at fair value and subsequently carried at
amortized cost using the effective interest method of amortization. The Partnership’s loans and receivables are
comprised of cash, accounts receivable, and due from (to) related parties.
FS-21
Financial assets and liabilities classified as “available-for-sale” are measured at fair value, with changes in fair value
recognized in other comprehensive income. Available-for-sale financial assets are non-derivatives that are either
designated in this category or not classified in any of the other categories. The Partnership has no available-for-sale
financial assets.
Other financial liabilities include overdraft, accounts payable and accruals and long-term debt. Financial instruments in
this category are initially recorded at fair value, net of any transaction costs incurred, and subsequently carried at
amortized cost using the effective interest method.
(ii) Equity instruments
The Partnership’s common units are classified as equity. Incremental costs directly attributable to the issue of common
units are recognized as a reduction from equity. Partnership units which have redemption rights and include fixed
annual returns have been classified as long term liabilities.
(iii) Impairment
At each balance sheet date, the Partnership assesses whether there is objective evidence that financial assets, other than
those designated as “fair value through the statement of income” are impaired. When impairment has occurred, the
cumulative loss is recognized in the Combined Statements of Operations and Comprehensive Income (Loss). For
financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the
asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original
effective interest rate. When an available-for-sale financial asset is considered to be impaired, cumulative gains or
losses previously recognized in other comprehensive income are reclassified to the Combined Statements of Operations
and Comprehensive Income (Loss) in the period. Impairment losses may be reversed in subsequent periods.
Recently Issued Accounting Standards Not Yet Applied
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on
or after January 1, 2017 with earlier application permitted.
(i)
IFRS 9 Financial Instruments
On January 1, 2018, the Corporation will be required to adopt IFRS 9 Financial Instruments, which is the result of the
first phase of the International Accounting Standards Board (“IASB”) project to replace IAS 39 “Financial Instruments:
Recognition and Measurement”. The new standard replaces the current multiple classification and measurement
models for financial assets and liabilities with a single model that has only two classification categories: amortized cost
and fair value. The Partnership is in the process of assessing the impact of IFRS 9 on its financial statements.
(ii) IFRS 15 Revenue from Contracts with Customers
On January 1, 2018, the Partnership will be required to adopt IFRS 15 Revenue from Contracts with Customers. IFRS
15 was issued in May 2014 and will replace IAS 11 Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13
Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of
Assets from Customers, and SIC-31 Revenue — Barter Transactions Involving Advertising Services. IFRS 15 provides
a single, principle-based five-step model that will apply to all contracts with customers with limited exceptions,
including, but not limited to, leases within the scope of IAS 17 and financial instruments and other contractual rights or
obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements and IFRS
11 Joint Arrangements. In addition to the five-step model, the standard specifies how to account for the incremental
costs of obtaining a contract and the costs directly related to fulfilling a contract. The standard’s requirements will also
apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an
output of the entity’s ordinary activities. The Partnership is in the process of assessing the impact of IFRS 15 on its
financial statements.
(iii) IFRS 16 Leases
On January 1, 2019, the Partnership will be required to adopt IFRS 16 Leases. The new standard requires lessees to
recognize a lease liability reflecting future lease payments and a ‘right-of-use-asset’ for most lease contracts. The
FS-22
standard permits a ‘simplified approach’ that includes certain reliefs related to the measurement of the
right-of-use-asset and the lease liability, rather than full retrospective application. IFRS 16 must be applied for
financial years commencing on or after January 1, 2019. Early adoption is permitted, but only in conjunction with IFRS
15. The Partnership is in the process of assessing the impact of IFRS 16 on its financial statements.
4.
FINANCIAL INSTRUMENT AND RISK MANAGEMENT
(a) Risk management overview
The Partnership’s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk.
Further quantitative disclosures are included throughout these combined financial statements. The Partnership employs
risk management strategies and polices to ensure that any exposures to risk are in compliance with the Partnership’s
business objectives and risk tolerance levels. While the Board of Directors has the overall responsibility for the
Partnership’s risk management framework, Source’s management has the responsibility to administer and monitor
these risks.
(b) Fair value of financial instruments
The fair values of cash, accounts receivable, overdraft, accounts payable and accrued liabilities approximate their
carrying values due to the short-term maturity of those instruments. The fair value of the ABL facility approximates the
carrying values as they bear interest at market floating rates consistent with market rates for similar debt. Based on the
closing market price at December 31, 2016, the fair value of the $130,000 notes is $137,800.
The Partnership analyzes financial instruments carried at fair value, by valuation method. The different levels have
been defined as follows:
Level 1: Values based on unadjusted quoted prices in active markets for identical assets or liabilities, accessible at the
measurement date.
Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly
or indirectly for substantially the full term of the asset or liability.
Level 3: Values based on prices or valuation techniques that require inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
FS-23
A financial instrument is classified as Level 3 if one or more of its unobservable inputs may significantly affect the
measurement of its fair value. Appropriate inputs are chosen so that they are consistent with market evidence or
management judgment. Due to the unobservable nature of the inputs, there may be uncertainty about the value of Level
3 financial instruments.
Fair Value
December 31, 2016
Financial liabilities at Fair value through profit and loss:
$12,500 and $7,500 promissory note
Derivative Liability
Financial liabilities at amortized cost:
$130.0M of Senior Secured First Lien Notes
$5,500 and $2,000 promissory notes
Finance lease obligations — current
Finance lease obligations — long term
Carrying
amount
Level 1
$ 29,270
$ 14,941
$110,171
$ 7,500
$ 1,109
$
524
Level 2
Level 3
–
–
–
125
$29,270
$14,816
$137,800
–
–
–
$1,109
$ 524
–
$ 7,500
–
–
Fair Value
Carrying
amount
December 31, 2015
Financial liabilities at Fair value through profit and loss:
Shareholder loan
Financial liabilities at amortized cost:
Finance lease obligations — current
Finance lease obligations — long term
Level 1
Level 2
$ 26,841
$
$
1,153
530
Level 3
$26,841
–
–
$1,153
$ 530
–
–
Fair Value
December 31, 2014
Financial liabilities at Fair value through profit and loss:
Shareholder loan
Financial liabilities at amortized cost:
Finance lease obligations — current
Finance lease obligations — long term
Carrying
amount
Level 1
$ 13,486
–
–
$13,486
$
994
$ 1,197
–
$ 994
$1,197
–
–
Level 2
Level 3
(c) Credit risk
Credit risk is the risk of financial loss to the Partnership if a customer or counterparty to a financial instrument fails to
meet its contractual obligations. Substantially all of the Partnership’s accounts receivable are due from purchasers of
proppants and logistics service and are subject to normal industry credit risk.
The Partnership’s revenues are generally derived from a group of large and reputable oilfield services and oilfield
production customers. Orders for proppants are subject to the Partnership’s credit and collection programs. The five
largest customers account for 87% of total revenue in 2016 (78% in 2015, 63% in 2014), and two of those customers
(four in 2015, four in 2014) account for more than 10% of total revenue individually.
The Partnership performs ongoing credit evaluations of its customers and establishes an allowance for doubtful
accounts based on credit risk applicable to certain accounts, historical trends and other relevant information. The
Partnership’s maximum exposure to credit risk is the fair value of cash and accounts receivable on the balance sheet
shown net of an appropriate allowance for doubtful accounts.
Significant changes in industry conditions will increase the risk of not collecting receivables. Management believes the
risk is often mitigated by the size and reputation of the companies to which they extend credit. As at December 31,
2016, 2015 and 2014, the Partnership’s accounts receivable comprised the following:
As at
December 31, 2016
December 31, 2015
December 31, 2014
0 - 30 days
31 - 60 days
61 - 90 days
91+ days
$11,179
3,055
96
304
$21,004
265
1,234
(747)
$32,646
5,333
(420)
3
Total Trade Receivables
$14,634
$21,756
$37,562
FS-24
The Partnership manages the credit exposure related to cash by using major Canadian chartered banks and monitors all
short-term deposits to ensure an adequate rate of return. Given these institutions, management does not expect any
counterparty to fail to meet its obligations.
For the year ended December 31, 2016, $2,929 of bad debt expense was recorded (2015 –$150, 2014 -$176)
(d) Liquidity risk
Liquidity risk is the risk that the Partnership will not be able to meet its financial obligations as they are due. The
Partnership’s approach to managing liquidity is to ensure it will have sufficient liquidity to meet its liabilities when
due. The Partnership’s ongoing liquidity is impacted by various external events and conditions, including commodity
price fluctuations, foreign currency fluctuations, and the global economic conditions.
The financial liabilities on the combined balance sheet consist of overdraft, accounts payable and accrued liabilities,
long-term debt and shareholder loans. The Partnership manages this risk through detailed monitoring of budgeted and
projected operating results and cash requirements. Formal monthly senior management meetings address levels of firm
sales and monitor obligations and customer credit facilities.
The Partnership expects to repay its financial liabilities in the normal course of operations and to fund future
operational and capital requirements through the use of its asset backed loan facility and operating cash flows, as well
as future debt and equity financings. If available liquidity is not sufficient to meet the Partnership’s obligations as they
come due, expenditures will be reduced as necessary, and additional financing arrangements will be pursued. See Note
10 for ABL facility disclosure.
The Partnership’s planned cash outflows relating to financial liabilities is outlined in the table below:
Year ended December 31, 2016
Accounts payable and accruals
Capital loan and finance lease
Bank debt(a)(b)
Notes Payable(a)(b)
Shareholder loan(a)(b)
Due to related parties(b)
Preferred shares obligation(b)
Total
2017
2018
2019
2020 and
thereafter
$ 21,358
$ 1,633
$ 13,410
$178,497
$ 57,325
$ 4,599
$ 70,513
21,358
1,109
578
13,650
–
–
–
–
524
12,832
13,650
–
–
–
–
–
–
13,650
–
–
–
–
–
–
137,547
57,325
4,599
70,513
(a)
Includes interest for future periods.
(b)
Although these items are long term, the Partnership may settle them within a year, either by cash or common stock.
Year ended December 31, 2015
Total
2016
2017
2018
2019 and
thereafter
Accounts payable and accruals
Capital loan and finance lease(a)
Bank debt(a)
Shareholder loan
Due to related parties
Preferred shares obligation
$25,395
$ 2,253
$90,813
$26,841
$ 4,363
$66,032
25,395
1,329
11,453
–
–
–
–
359
79,360
7,537
–
–
–
553
–
–
–
–
–
12
–
19,304
4,363
66,032
(a)
Includes interest for future periods.
(e) Market risk
Market risk is the risk that changes in market prices, foreign exchange rates and interest rates will affect the
Partnership’s net earnings or the value of financial instruments and are largely outside the control of the Partnership.
The objective of the Partnership is to manage and mitigate market risk exposures within acceptable limits, while
maximizing returns. Primary market risks are as follows:
Foreign currency risk
The Partnership is exposed to currency price risk on sales denominated in U.S. dollars to the extent that the receipt of
payment of the U.S. denominated accounts receivable are subject to fluctuations in the related foreign exchange rate. In
FS-25
addition, foreign currency risk exists on U.S. costs of manufacturing and transporting inventory for sale to the extent
that the payment of those costs are U.S. dollar denominated accounts payable are subject to fluctuations in the foreign
exchange rate. Included in accounts receivable and accounts payable and accrued liabilities at December 31, 2016 are
$1,693 (2015 — $17,611, 2014 — $32,270) and $8,380 (2015 — $14,499, 2014 — $16,351) denominated in foreign
currency respectively. The net effect of each 1% change in foreign exchange would have an impact of $179 for 2016
net income (2015 — $189, 2014 — $161). As at December 31, 2016, December 31, 2015 and December 31, 2014, the
Partnership had no forward exchange rate contracts in place.
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The
Partnership is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings
under the floating rate credit facility. The Partnership is exposed to interest rate price risk its asset backed loan facility
that bear interest at floating rates. The Partnership had no interest rate swaps or financial contracts in place as at or
during the periods ended December 31, 2016, December 31, 2015 or December 31, 2014.
For the year ended December 31, 2016, a 1% change to the effective interest rate would have an impact of
approximately $175 (2015 — $669, 2014 — $403) on net income and cash flow.
(f) Capital management
The Partnership’s capital management policy is to maintain a strong capital base that optimizes the Partnership’s ability
to grow, maintain partner and creditor confidence and to provide a platform to create value for its common Partnership
unitholders. The Partnership’s officers are responsible for managing the Partnership’s capital and do so through
monthly management meetings and quarterly board meetings including regular reviews of financial information
including budgets and forecasts. The Partnership’s Directors are responsible for overseeing this process. The
Partnership considers its capital structure to include partners’ equity, bank debt and due to related parties.
The Partnership monitors capital based on its current working capital, available bank line, projected cash flow from
operations and anticipated capital expenditures. In order to manage its capital structure, the Partnership prepares annual
capital expenditure and operating budgets, which are updated as necessary. The annual and updated budgets are
prepared by the Partnership’s management and approved by the Partnership’s Board of Directors. The budget results
are regularly reviewed and updated as required.
In order to maintain or adjust the capital structure, the Partnership may issue units, seek debt financing and adjust its
capital spending to manage its current and projected capital structure. The Partnership’s ability to raise additional debt
or equity financing is impacted by external conditions, including the global economic conditions. The Partnership
continually monitors economic and general business conditions.
The Partnership’s share capital is not subject to external restrictions but the amount of the bank operating facility is
determined with reference to inventory and accounts receivable levels maintained.
The Partnership is subject to externally imposed capital requirements for the asset backed loan facility, requiring the
Partnership to maintain. a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b)
1.25:1 at all times thereafter to be measured when Source’s excess availability is less than 20% of the lesser of the
borrowing base and the operating facility. As of December 31, 2016, the excess availability was greater than 20%. The
Partnership is compliant with all covenants as of December 31, 2016.
The Partnerships capital management policy has not changed during the years ended December 31, 2016 2015, or
2014.
5.
SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash operating assets and liabilities for the years ended December 31, 2016 and 2015 are as follows:
2016
2015
2014
Accounts receivable
Prepaid expenses and deposits
Inventory
Accounts payable and accrued liabilities
$ 7,100 $16,207 $(32,166)
(308)
(169)
(1,949)
(5,551)
(9,149) (10,241)
1,774
(257)
(8,161)
Changes in non-cash working capital
$ 3,015
FS-26
$ 6,632
$(36,195)
Included in change in inventory is $1,297 for 2016 (2015 — $1,544, 2014 — $384) related to depreciation for sand
producing equipment.
Changes in non-cash investing assets and liabilities for the years ended December 31, 2016, 2015 and are
as follows:
2016
2015
2014
Prepaid expenses and deposits
Accounts payable and accrued liabilities
$
259 $1,646
(5,165) 1,570
$1,059
$1,018
Changes in non-cash working capital
$(4,906) $3,216
$2,077
6.
INVENTORIES
Inventory consists of three main classifications:
December 31,
2016
December 31,
2015
December 31,
2014
Unprocessed sand and work in progress
Sand available for shipment
Spare parts and supplies
$17,807
8,423
1,480
$10,910
11,998
1,507
$ 2,396
10,084
1,047
Total inventories
$27,710
$24,415
$13,527
As at,
Spare parts and supplies include spare parts and supplies for routine facilities maintenance. Included in the inventory
balance is the depreciation expense related to sand producing properties of $4,108 as of December 31, 2016 (2015 —
$1,362, 2014 — $430). The total amount of inventory expensed through cost of sales during the year was $98,143
(2015 — $107,370, 2014 — $80,830). An inventory write-down of $439 was recorded for the year ended
December 31, 2016 (2015 — $0, 2014 — $0).
7.
PROPERTY, PLANT AND EQUIPMENT
Cost
Balance as at January 1, 2014
Assets acquired
Reclassification from held for sale
Disposals
CIP Completed
Exchange Differences
Balance as at December 31, 2014
Assets acquired
Reclassification from held for sale
Disposals
CIP Completed
Exchange Differences
Balance as at December 31, 2015
Assets acquired
Disposals
CIP Completed
Exchange Differences
Balance as at December 31, 2016
Land &
Building
Equipment &
vehicles
Other
Construction
in Progress
$ 31,503
18,542
1,600
(2,461)
17,460
2,941
69,585
4,588
15,231
(3,787)
12,163
10,473
$108,253
9,473
(2,235)
661
(2,282)
$113,870
$ 48,611
3,754
–
(3,305)
7,460
2,971
59,491
7,997
–
(354)
7,910
8,240
$ 83,284
180
(1,641)
464
(1,703)
$ 80,584
$ 1,352
1,666
–
–
–
164
3,182
497
–
–
887
483
$ 5,049
223
(17)
1
(90)
$ 5,166
$ 8,812
24,162
–
–
(24,920)
386
8,440
26,182
–
–
(20,960)
2,062
$ 15,724
2,340
(9)
(1,126)
(137)
$ 16,792
$ (2,902)
(3,666)
1,182
(101)
(5,487)
(1,069)
(8,398)
3,787
(724)
$ (11,891)
$ (7,837)
(3,663)
1,652
(244)
(10,092)
–
(5,201)
89
(1,043)
$(16,247)
$ (566)
(812)
–
(80)
(1,458)
–
(940)
–
(308)
$(2,706)
Total
$ 90,278
48,124
1,600
(5,766)
–
6,462
140,698
39,264
15,231
(4,141)
–
21,258
$212,310
12,216
(3,902)
–
(4,212)
$216,412
Accumulated Depreciation
Balance as at January 1, 2014
Depreciation
Disposals
Exchange Differences
Balance as at December 31, 2014
Moved from Held for Sale
Depreciation
Disposals
Exchange Differences
Balance as at December 31, 2015
FS-27
–
–
–
–
–
–
–
–
–
–
$ (11,305)
(8,141)
2,834
(425)
$ (17,037)
(1,069)
(14,539)
3,876
(2,075)
$ (30,844)
Land &
Building
Moved from Held for Sale
Depreciation
Disposals
Exchange Differences
Balance as at December 31, 2016
Equipment &
vehicles
Construction
in Progress
Other
Total
(6,037)
183
147
(6,095)
377
201
(927)
10
63
–
–
–
(13,059)
570
411
$(17,598)
$(21,764)
$(3,560)
–
$ (42,922)
64,098
96,362
96,272
49,399
67,037
58,820
1,724
2,343
1,606
Carrying Amounts
At December 31, 2014
At December 31, 2015
At December 31, 2016
8,440
15,724
16,792
123,661
181,466
173,490
The Partnership incurred stripping costs of $3,541 in 2016 (December 31, 2015 — $3,230, December 31, 2014 —
$1,755). $445 of it remains unamortized in Property, plant and equipment as of December 31, 2016 (December 31,
2015 — $160, December 31, 2014 — $640). Previously these amounts would have been included in Prepaids. The
amount of $3,110 has been included in Cost of sales — depreciation for 2016 (December 31, 2015 — $2,867,
December 31, 2014 — $896). Previously these expenses would have been included in Cost of sales. Unamortized
stripping costs of $1,624 in 2016 (December 21, 2015 — $1,540, December 31, 2014 — $262) remain in inventory.
Assets under construction represent the transloading facilities that are being built at year end. Assets under construction
are not amortized until the asset is deemed to be ready for use. Once deemed ready for use, the assets under
construction will be allocated to their corresponding capital asset group and commence depreciating.
For the year ended December 31, 2016 the partnership recorded impairment of property plant and equipment of $1,414
(December 31, 2015 — $0, December 31, 2015 $0. Current year impairment of assets was based on specific
identifiable assets.
Property, plant and equipment are tested annually for impairment in accordance with the accounting policy stated in
Note 2. The Partnership recognized that there were indicators for impairment in the industry and performed impairment
assessment using a value in use method. The partnership is considered to be one CGU for impairment purposes. Under
valuation model, five years of cash flows were utilized using management’s best estimates and a discount rate of 12%.
No terminal value was factored into the calculation. Based on this assessment, the Partnership has determined that no
impairment has occurred as of December 31, 2016.
8.
DEFERRED INCOME TAXES
The only taxable entity of the Partnership is Source Energy Services Canada Holdings Ltd. The provision of deferred
income taxes for Source Energy Services Canada Holdings Ltd has been calculated and recorded as at December 31,
2016, December 31, 2015 and December 31, 2014.
December 31,
2016
Earnings Before Income Taxes
Statutory Income Tax Rate
$
Expected Income Taxes
Increase (Decrease) in taxes from:
Finance Fees
Non-Deductible Expense
Rate Changes
Unrealized F/X
Other
332
27.00%
December 31,
2015
($1,175)
26.00%
December 31,
2014
$3,078
25.00%
90
(306)
770
(799)
16
–
176
1
–
1
(21)
695
30
–
14
–
(368)
(36)
Total Income Tax Expense (Recovery)
($ 516)
$
399
$ 380
Deferred income tax expense
Current income tax expense
($ 516)
–
$
399
–
$ 380
–
Total Income Tax Expense
($ 516)
$
399
$ 380
(a)
Significant components of the deferred income tax assets at December 31, 2016, December 31, 2015 and December 31, 2014 are as follows.
FS-28
December 31,
2016
December 31,
2015
December 31,
2014
Difference between tax and reported
amounts for depreciable assets
Tax loss carryforwards recognized
Finance Fees
Other
($ 75)
($ 98)
($264)
7
663
2
124
52
3
667
74
2
Deferred Income Taxes
$ 597
$ 81
$ 479
(b)
The Partnership has available the following non-capital loss carry forwards as of December 31, 2016 (December 31, 2015 –$460, December
31, 2014 –$2,667:
Year of Expiry
Amount
2032
$24
At December 31, 2016 the Company had tax pools of approximately $3,307 (December 31, 2015 –$1,081,
December 31, 2014 $1,128)
9.
DEFERRED REVENUE
The Partnership has entered into storage subscription agreements with select customers to provide them with
guaranteed proppant storage at the Partnership’s facilities. The agreements all expire by August 2017. Under the terms
of the agreements customers pay a non-refundable subscription fee entitling them to a discount of $2 per metric tonne
from the Partnership’s normal sand distribution fees. The subscription fees have been deferred and are recognized as
revenue as proppant is transloaded by the subscribers.
In September 2011, the Partnership entered into a sale agreement with one of its major customers where the Partnership
received $20,000US as a prepayment for future purchases of processed frac sand. The prepayment clause was such that
the customer made three installments upon completion of certain phases of the Partnership’s frac sand plant located in
Wisconsin. These pre-payments accrued interest at 5%. In consideration of the prepayment amounts, the cash price per
ton to the customer was reduced for each ton of sand sold in the US or Canada. The prepayment amount was also
reduced by 50% of the customer’s billings for storage and transloading services provided in North America. The
agreement was secured by a first charge mortgage on land the Partnership uses to mine and process frac sand. The
Partnership commenced sales under the contract in 2014. These amounts were recognized as deferred revenue on the
Combined Balance Sheets. On December 8, 2016, the Partnership settled the above sales agreement for $16,500US.
The total of this customer’s advances and interest accrued at the time of settlement was $18,985US (December 31,
2015 — $18,208US, December 31, 2014 –$19,687US). The Partnership recorded a gain of $2,485US on the settlement
of this contract.
In 2015, one customer failed to meet their minimum sand purchase requirement outlined in their sale agreement. As a
result, the Partnership deferred $922 of revenue relating to this penalty in 2015, and this amount was deemed
collectible at that time. Subsequently, this amount was deemed uncollectible in 2016 due to bankruptcy of that
customer and was written off.
Due to the 2017 expiry dates of the remaining contracts, the Partnership has estimated the recognition of these deferred
revenues with the assumption of equal usage of storage facilities, and minimum frac sand supply over the term of the
agreements as follows
As at
Current
Long-term:
2016
2017
2018
2019
2020
2021 and
later
Total
FS-29
December 31,
2016
December 31,
2015
December 31,
2014
$1,792
$ 5,245
$ 7,552
–
–
–
–
–
–
3,512
2,930
2,930
2,930
7,524
7,524
2,005
–
–
–
–
10,550
22,852
17,053
$1,792
$28,097
$24,605
10.
LONG TERM DEBT
As at
December 31, 2016
December 31, 2015
December 31, 2014
Senior Secured First Lien Notes, due on December 15, 2021, bearing interest at
10.5% per annum
$110,171
–
–
Asset backed loan facility (the “ABL”) due December 2018. Interest is based on
floating rates dependent upon the amount of the facility used.
$ 12,291
–
–
–
81,407
61,114
Bank facility that was drawn in 2015 and 2014. Consists of three facilities with
varying repayment terms. Interest is based on a floating rate is paid monthly
on outstanding balances.
Finance Lease obligations related to equipment, bearing interest at rates ranging
from 4.25% to 12% per annum, with final payments due between January
2017 and August 2018
$
1,633
1,683
2,192
Other long term debt
$
256
–
–
Capital loans payable in monthly instalments of $43 including interest at 6.5% to
6.9%, final instalments due between June 2015 and December 2015.
Collateral provided by equipment with a net book value of $0 as of December
31, 2016
$
–
Less: current portion term portion
$124,351
(1,109)
$83,114
(8,164)
$ 63,797
(11,624)
$123,242
$74,950
$ 52,173
$
24
$
491
On December 8, 2016, the Partnership issued a $130.0M Senior Secured First Lien Notes (the “Notes”) which bear
interest at 10.5% per annum, and mature December 15, 2021. The Notes are secured by a fixed and floating charge
over all of the assets of the business except Accounts Receivable and Inventory, which the Notes have a second charge
on. Each debt holder is entitled to a relevant right of 4% of the equity value of the Partnership upon various liquidation
or change of control events. There are prepayment options, where the Partnership may redeem 35% of the aggregate
principal amounts of the Notes with the net proceeds of an equity offering by Source at a redemption price of 110.5%
of the principal amount. The Partnership may also redeem all or part of the Notes at any time prior to December 15,
2018 for 100% of the principal, accrued and unpaid interest, and the applicable premium as defined in the agreement.
After December 15, 2018 the Notes may be redeemed in whole or in part at the applicable percentage (2018 —
107.875%, 2019 — 103.9375%, 2020 — 100%), plus accrued and unpaid interest. Both the relevant rights and
prepayment option have been classified as a derivative liability and are measured at fair value through profit or loss, for
a total of $14,817 for the rights and $125 for the prepayment option as at December 31, 2016. Changes in fair value of
the derivative liabilities are recorded through the Combined Statements of Operations and Comprehensive Income
(Loss). The partnership has recorded a fair value loss on the relevant rights of $862 and $48 on the prepayment option
as of December 31, 2016 (2015 –$0, 2014 –$0).
The $35,000 ABL facility is secured by floating first lien charge on the Accounts Receivable and Inventory of the
Partnership under a general business security agreement and a second lien charge on all other assets of the business.
The facilities bear interest based on the bank’s prime lending rate, banker’s acceptances or LIBOR rates, plus an
applicable margin depending on the amount of excess availability. The ABL facility matures on December 8, 2018.
The amount available under the general operating facility is subject to a borrowing base formula applied to accounts
receivable and inventories, at December 31, 2016 $12,995 was drawn under this facility, and $26,032 was available.
The borrowing base is updated by the bank monthly. Letters of credits were issued for the amount of $5,923US. To
date no amounts have been drawn against these letters of credit.
The ABL facility includes a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b)
1.25:1 at all times thereafter to be measured when Source’s excess availability is less than 20% of the lesser of the
borrowing base and the operating facility. As of December 31, 2016, the excess availability was greater than 20%.
At December 31, 2015, the Partnership had a syndicated bank facility composed of three facilities: a $35 million
operating facility, a $45 million term facility, and a $15 million capital facility. The syndicated facility was secured by
fixed and floating charges on all the assets of the Partnership under a general business security agreement. The
facilities bore interest based on the bank’s prime lending rate plus an applicable margin, ranging from Prime plus
0.75% to Prime plus 2.75% per annum. The amount available under the general operating facility was subject to a
FS-30
borrowing base formula applied to accounts receivable and inventories. At December 31, 2015, $24,210 ($17,008 at
December 31, 2014) was drawn under this facility. The borrowing base was updated by the bank monthly. This facility
was extinguished on December 8, 2016.
Source has deferred $727 in financing costs for the ABL facility and $5,915 for the Notes, with $23 and $117 of these
costs amortized as at December 31, 2016. Financing costs of $1,234 relating to the old facility have been expensed for
the year ended December 31, 2016.
Interest on the above debt amounted to $6,833 for 2016 (2015 — $4,005, 2014 — $1,960) for the year. Effective
interest rate for 2016 is 7.05% (2015 — 5.5%, 2014 — 4.3%).
11.
DECOMMISSIONING PROVISION
December 31,
2016
December 31,
2015
December 31,
2014
Balance, Beginning of year
Liabilities incurred
Liabilities settled
Accretion
Changes in estimate
Changes in discount and inflation rates
Changes in F/X Rate
$ 1,639
1,144
(3,220)
56
4,756
(26)
(49)
$ 422
1,148
$316
56
15
7
(27)
81
14
29
Balance, end of year
$ 4,300
$1,639
$422
The Partnerships decommission provision relates to reclamation of land and facilities where the mine operates.
Management estimates the costs to abandon and re-claim its properties based on current reclamation technology, acres
disturbed and the estimated time period in which these costs will be incurred in the future. The total future estimate of
undiscounted cash flows required to settle the provisions is $4,765 at December 31, 2016 (December 31,
2015 — $1,814, December 31, 2014 — $488), which has been discounted using risk-free rate of 1.50% at
December 31, 2016 (December 31, 2015 — 1.39%, December 31, 2014 — 1.79%). These obligations are to be settled
based on the economic lives of the underlying assets, which is currently estimated to be between 8 and 20 years.
12.
PREFERRED SHARES OBLIGATION
December 31,
2016
As at
Preferred shares obligation
Payments
Accrued preferred distribution
$66,032
–
4,481
$70,513
December 31,
2015
$60,807
(3,159)
8,384
$66,032
December 31,
2014
(Restated)
$60,807
–
4,380
$65,187
The Partnership issued class B preferred shares as a result of the reorganization on October 16, 2013. Class B units are
non-voting, and are entitled to a preferred distribution as follows:
• 5.92% per annum up to June 30, 2016;
• 6.82% per annum from July 1, 2016 to June 30, 2017;
• 7.7% per annum from July 1, 2017 to June 30, 2018;
• 8.59% per annum from July 1, 2018 and thereafter.
Based on the nature of the Class B preferred shares, the Partnership has an obligation to pay the preferred distribution.
The preferred shares are callable by the Partnership, but not by the holder. The Class B preferred shares have the same
features of debt, bear a fixed return and obligation. They have been classified as a liability and the corresponding
preferred distribution has been treated like interest. There are no specific terms of repayment.
FS-31
13.
PARTNER’S EQUITY
a) Partners’ Capital in 000’s
The Partnership has six classes of units. The table below shows the combined units of Canada and US LP, as the
Partnership agreements mirror each other.
Voting units:
• Class A units are redeemable at option of the Partnership, participating and voting units which earn a return of
up to 225% on their originally issued value;
• Class D units: 12,946 US units are non-participating and voting units.
Non-voting units:
• Class C units are non-participating, non-voting units. The units are redeemable after the Class A units earn a
225% return on their original issued value;
• Class E units are non-participating, non-voting units and are redeemable after the Class A units earn a 225%
return on their original issued value.
Preferred Units:
• Class B units are non-voting, classified as liability.
December 31, 2016
# of Units
$
Class A
Class D US
Total voting units
Class C
Class E
Total non–voting units
Total voting and non-voting units
Class B
preferred units
Total units
Cumulative
Stock Based
Compensation
December 31, 2015
# of Units
$
December 31, 2014
# of Units
$
70,968
12,946
83,914
12,956
10
12,966
96,880
41,535
–
41,535
130
–
130
41,665
70,968
12,946
83,914
12,956
10
12,966
96,880
41,535
–
41,535
130
–
130
41,665
70,968
12,946
83,914
12,956
10
12,966
96,880
41,535
–
41,535
130
–
130
41,665
60,807
157,687
–
41,665
60,807
157,687
–
41,665
60,807
157,687
–
41,665
400
158,087
276
41,941
400
158,087
252
41,917
400
158,087
185
41,850
b) Warrants in $ and units
December 31,
2016
# of Units
$
As at (in 000’s)
Warrants
December 31,
2015 & 2014
# of Units $
20
500
–
–
20
500
–
–
During 2016 the Partnership in conjunction with the issuance of a $2,000 promissory note and the receipt of $2,000, issued
warrants exercisable into 20 units for an aggregate price of $20. Given the nature of the warrants related to the $2,000
promissory note they have been recorded at a fair value of $500, as part of finance expense and with a corresponding charge
to equity. Each warrant allows the holder to acquire Class D units of the Canadian Partnership and Class F units of the U.S.
Partnership. The Warrants are exercisable into an aggregate of 20 Class D units of the Canadian Partnership and 20 Class F
units of the US Partnership. As of December 31, 2016 none of the warrants had been exercised. The shares issued under these
warrants are non-participating voting warrants which earn a return of up to 225% of their originally issued value.
FS-32
c) Restricted Share Units in $ and units
The Partnership issued 400 restricted share units to its employees as of September 30, 2014, these units have an
exercise price of $0.001, vest over a three-year period, and expire five years from the date of grant. Stock based
compensation of $24 was expensed as for the year ended December 31, 2016 (December 31, 2015 — $67,
December 31, 2014 — $185) and was included in the operating and general & administration expense on the
Partnership’s Combined Statement of Operations and Comprehensive Income. There have been no new restricted share
units issued during 2016.
14.
OPERATING AND GENERAL & ADMINISTRATIVE COSTS
The Partnership presents its expenses on the Combined Statements of Operations and Comprehensive Income (Loss)
using the function of expense method whereby expenses are classified according to function within the Partnership.
This method was selected as it is more closely aligned with the Partnership’s business structure. The Partnership’s
functions under IFRS are as follows:
• Cost of sales; and
• Operating, general and administrative
Cost of sales includes direct operating costs (including product costs, direct labour and overhead costs) and
depreciation on assets relating to operations. Additional information on the nature of expenses is as follows:
Year ended December 31, 2016
Cost of Sales
Direct Materials
People costs
Equipment costs
Transportation costs
Facility costs
Selling costs
Administration costs
$ 74,138
12,451
6,720
24,695
5,253
–
–
Total
$123,257
Year ended December 31, 2015
Cost of Sales
Operating and
General &
Administrative Costs
$
–
8,446
5,229
–
3,064
3,521
3,606
$ 74,138
20,897
11,949
24,695
8,317
3,521
3,606
23,866
147,123
Operating and
General &
Administrative Costs
Total
Direct Material
People costs
Equipment costs
Transportation costs
Facility costs
Selling costs
Administration costs
$ 78,157
13,094
10,912
9,633
4,568
–
–
$
Total
$116,364
$18,183
Year ended December 31, 2014
Cost of Sales
– $ 78,157
9,389
22,483
3,278
14,190
–
9,633
2,703
7,271
(20)
(20)
2,833
2,833
Operating and
General &
Administrative Costs
Direct Material
People costs
Equipment costs
Transportation costs
Facility costs
Selling costs
Administration costs
61,496
11,232
5,054
13,833
3,889
–
–
–
10,869
3,186
–
2,531
(1,011)
3,338
Total
95,504
18,913
FS-33
Total
$134,547
Total
61,496
22,101
8,240
13,833
6,420
(1,011)
3,338
114,417
15.
COMMITMENTS AND CONTINGENCIES
The Partnership has various lease commitments regarding equipment, railcars, physical natural gas contract and office
space. The leases expire between January 2017 and December 2025. Estimated annual lease commitment is as follows:
2017
2018
2019
2020
2021
Subsequent Years
10,225
7,348
5,631
5,011
4,994
9,124
$42,333
In the ordinary course of conducting business, the Partnership occasionally becomes involved in legal proceedings
relating to contracts, environmental issues, or other matters. While any proceeding or litigation has an element of
uncertainty, management of the Partnership believes that the outcome of any pending or threatened actions will not
have a material adverse effect on the business or financial condition of the Partnership.
In 2016, the Partnership was named as a defendant in a lawsuit regarding underpayment of a contract. The lawsuit
alleges that the Plaintiff fulfilled all terms of the agreement with the Partnership and that there are amounts owing to
the Plaintiff under the contract. The maximum aggregate settlement under the claim is estimated to be approximately
$617 US as at December 31, 2016. A provision of $617 US has been recorded in these combined financial statements.
16.
RELATED PARTY TRANSACTIONS
As at
Amounts due from
Shareholder receivable
Due from GP
December 31,
2016
December 31,
2015
December 31,
2014
$
$
$
$
Amounts due to related
Due to Sand Royalty LP
–
32
32
$ 4,599
$ 4,599
$36,770
Shareholder loan
$
98
47
145
$ 4,363
$ 4,363
$26,841
$
82
27
109
3,356
$ 3,356
$13,486
Shareholder loan payable consist of four promissory notes. A $12,500 promissory note from common unitholders issued on
March 27, 2014. This promissory note bears interest at 25% per annum which is paid with in kind interest. According to the
agreement, the Partnership is obligated to pay the 25% interest for a minimum of 3 months after December 31, 2016.
Therefore, for the year ended December 31, 2015, a fair value adjustment of $3,906 was recorded to record the interest
obligation until March 31, 2017. The second promissory note from the common unitholders was advanced on December 21,
2015 in the amount of $7,500. This promissory note bears interest at 18% per annum which is also paid in a combination of
cash and in kind interest, the interest increases to 25% per annum after eighteen months. The promissory note and any
accrued interest is convertible to equity eighteen months after the date of issue at the option of the shareholder. The
conversion and the prepayment represent derivatives, however, the Partnership has elected to designate the shareholder loan
as fair value through the Combined Statements of Operations and Comprehensive Income (Loss). The maturity date of these
promissory notes is on December 31, 2023. The third promissory note has a face value of $2,000 and was recorded at a fair
value of $2,000. It does not bear interest and is due September 7, 2026.
During 2016, certain unitholders provided guarantees to the syndicated bank group totaling $5,500. In exchange for
these guarantees, these unitholders were provided with 5,500 warrants at an aggregate price of $55 dollars or a 0%,
10-year promissory note depending on whether the guarantees were drawn or not. The promissory note would be issued
for an amount equal to the amount that the guarantee was less than $5,500 prior to February 28, 2017, for reasons other
than the call of the guarantee by the syndicated banking group. The agreements governing such guarantees stipulated
that if the syndicated bank facility was repaid, promissory notes for the full amount of the guarantee would be issued
and the related warrants would be cancelled. The promissory notes come due if there was a change of control. The
syndicated bank facility was repaid and the related warrants were cancelled. The $5,500 promissory note was issued.
The amount due to Sand Royalty LP bears interest at 8% per annum with no maturity date. The partnership has accrued
all interest due as of December 1, 2022. No payments have been made.
FS-34
Interest expense includes $2,428 (2015 — $2,753, 2014 — $1,736) relating to long term debt held by common
unitholders of the Partnership. Of the 2016 interest expense, $2,428 (2015 — $2,367, 2014 $986) is unpaid and is
subject to the Partnership’s standard payment policies.
Key management personnel are comprised of the Company’s directors and executive officers. Key management
personnel compensation comprised:
2016
2015
2014
Short term employment benefits
Management Fees owing to common unitholders that are not executive officers
$1,099
1,043
$1,081
1,683
$ 991
1,456
Total
$2,142
$2,764
$2,447
2015
2014(1)
17.
FINANCE EXPENSE
2016
Finance expense
Interest expense
Reorganization expense
Accretion
$ 3,094
16,202
–
195
$
252
12,079
–
15
$ 128
8,838
26
6
Total
$19,491
$12,346
$8,998
(1)
18.
Certain prior year amounts have been reclassified to conform to current year presentation.
OPERATING SEGMENTS
The Partnership considers operations to be one operating segment. The performance of this segment is measured based
on revenue and gross margin as included in internal management reports. These reports are reviewed monthly by the
executive team. The Partnership has operations in both the United States and Canada; the two geographic segments are
summarized in the table below. For major customer information, refer to Note 4(c).
The Corporate Segment does not represent an operating segment and is included for informational purposes only.
Corporate segment administrative expenses consist of salary and office expenses and other general costs related to
corporate employees.
Canadian
Operations
Year ended December 31, 2016
Sales
Gross Margin
136,909
12,773
Total Assets
71,688
Canadian
Operations
Year ended December 31, 2015
United States
Operations
2,290
(4,870)
146,329
United States
Operations
Corporate
Total
–
–
139,199
7,903
1,389
219,406
Corporate
Total
–
–
153,135
29,638
146,442
951
231,112
Canadian
Operations
United States
Operations
Corporate
Total
Sales
Gross Margin
113,096
35,755
33,410
10,636
–
–
146,506
46,391
Total Assets
84,402
109,733
653
194,788
Sales
Gross Margin
144,447
32,382
Total Assets
83,719
Year ended December 31, 2014
19.
8,688
(2,744)
SUBSEQUENT EVENTS
On February 9, 2017, the Partnership entered into a purchase and sale agreement with Sand Products Wisconsin, LLC.
The transaction involves the purchase of the mineral rights to sand reserves at multiple sites, a sand mine and
associated rail facilities, property, plant and equipment, and prepaid royalties. The purchase price is $45,000 US.
Closing of the transaction is subject to Source Energy Services Ltd. completing an initial public offering for stock to be
traded on the Toronto Stock Exchange, and various other conditions. The transaction is expected to close within 5
business days of the initial public offering.
FS-35
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis should be read in conjunction with Source’s audited combined
annual financial statements and related notes as at and for the years ended December 31, 2016, December 31, 2015,
and December 31, 2014, each of which are provided in Appendix “FS” — Financial Statements and Management’s
Discussion and Analysis. This Management’s Discussion and Analysis contains forward-looking statements and
involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of
the prospectus. Actual results may differ materially from those expressed or implied by such forward-looking
statements. See “Forward-Looking Statements”. Capitalized terms used in this Management’s Discussion and Analysis
which are not defined herein have the meanings given to those terms in the prospectus.
Overview
Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a
preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells.
Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal
network, which Source believes is the largest of its kind in the WCSB. Source’s fully integrated logistics platform
enables it to transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that
during 2016 Source sold substantially all of its product “in-basin” and over 50% of its product directly at its customers’
wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver
sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably
deliver high volumes of frac sand to its customers in a cost effective manner.
Non-IFRS Measures
Source utilizes EBITDA and Adjusted EBITDA, and Adjusted Gross Margin in its financial analysis of its
performance. These measures are not financial measures determined in accordance with IFRS. See “Non-IFRS
Financial Measures” and “Selected Historical Information” in the prospectus for a reconciliation of EBITDA,
Adjusted EBITDA and Adjusted Gross Margin to the most comparable financial measures for the years ended
December 31, 2016, December 31, 2015, and December 31, 2014. See “Summary of Quarterly Results” herein for a
reconciliation of EBITDA and Adjusted EBITDA for the noted quarterly periods.
History of Business
Source began operations in 1998, as a proppant transloading business. From 1998 to 2007, Source further developed its
geographic footprint by adding terminals in key oil and gas basins in Canada and the United States. In 2007, Source
commenced developing mine and sand processing facilities at Chippewa Falls, Wisconsin, which it subsequently sold
to EOG Resources, Inc. before completion. In 2010, Source began developing the Sumner Facility and Weyerhaeuser
Facility. In October 2013, TriWest IV invested in the Source business and collectively became its majority unitholder.
TriWest IV’s investment facilitated the completion of the Sumner Facility, the Weyerhaeuser Facility and the
Wembley Terminal. See “Corporate Structure” and “Three-Year History” in the prospectus.
FS-36
Review of Operations for 2016, 2015 and 2014
For the Year Ended or As at
December 31
2016
2015
2014
($000’s CDN, except MT and per unit amounts)
Sand Volumes (MT)
Sand Revenue
Well Site Solutions
Terminal Services
832,435
112,962
21,261
4,976
821,482
139,574
6,208
7,353
727,213
118,755
11,782
15,969
Sales
Cost of Sales
Cost of Sales Depreciation
139,199
123,257
8,039
153,135
116,364
7,133
146,506
95,504
4,611
Cost of Sales
131,296
123,497
100,115
7,903
23,866
6,373
29,638
18,183
5,674
46,391
18,913
3,146
(22,336)
5,781
24,332
1,082
1,852
19,491
910
–
(4,859)
1,043
2,059
94
–
12,346
–
3,906
(1,796)
1,683
(1,255)
(3,110)
–
8,998
–
–
(420)
1,456
(64)
Gross Margin
Operating and General and Administrative Expenses
Depreciation
Income (loss) from operations
Other expense(income):
Loss/(gain) on asset disposal
Loss/(gain) on impairment
Finance expense
Loss/(gain) on derivative liability
Fair Value adjustment on shareholder loan
Other income
Management Fees
Foreign exchange loss/(gain)
Total other expense (income)
21,578
14,978
6,860
Income (loss) before income taxes
Income taxes
(43,914)
(512)
(9,197)
569
17,472
437
Net Income(loss)
(43,402)
(9,766)
17,035
Income (loss) from operations
Cost of Sales Depreciation
Depreciation
Other income
Foreign exchange loss/(gain)
Transaction and professional fees
(22,336)
8,039
6,373
(4,859)
2,059
926
5,781
7,133
5,674
(1,796)
(1,255)
746
24,332
4,611
3,146
(420)
(64)
229
(4,198)
22,385
32,802
186.41
231,112
196,677
201.46
194,788
151,677
Adjusted EBITDA
Sales/MT
Total Assets
Total non-current financial liabilities
167.22
219,406
239,549
See “Selected Historical Financial Information” for a reconciliation of EBITDA and Adjusted EBITDA to Net Income
(loss) and of Adjusted Gross Margin to Gross Margin.
Sales
The majority of Source’s sales are derived from mining, processing and providing a full frac sand delivery solution to
customers in basin or at the wellsite. Frac sand sales occur at Source’s terminals or at the customer’s wellsite. These
sales primarily occur under a combination of contracts with terms between one and three years. Sales also occur on a
spot basis. The contracts commit customers to a percentage of their Northern White frac sand requirements, that range
from 25% to 100% of their sand needs. The pricing under the contracts ranges from current market pricing to fixed
prices with adjustment mechanisms based on various factors. Transloading, wellsite storage and logistics coordination
service sales are earned on a fee-for-service basis.
Sustained freezing temperatures during the winter months in Wisconsin, where Source’s processing facilities are
located, create a general industry practice to halt excavation activities and sand washing operations during these
months. Source’s sand washing facility at the Sumner Facility is fully enclosed and heated making it capable of
operating year round, including through the winter months. Winter operations at the Sumner Facility are an important
facet of Source’s business, as the WCSB is seasonally busiest in the winter months.
FS-37
Regardless of its ability to wash sand in the winter, Source excavates and washes sand in excess of current delivery
requirements during the warmer months when Source’s processing facilities are more efficient. The excess sand is
placed in stockpiles that feed the drying operations throughout the year.
Sales in 2016 were $139.2 million, which was a decrease of $13.9 million from sales of $153.1 million in 2015. The
continued soft oil and gas commodity price environment in 2016 was particularly impactful for the first three quarters
of 2016, and led most exploration and development companies to significantly reduce their drilling and completion
programs for 2016. This low activity environment, combined with a very wet and prolonged spring breakup, led to a
very price competitive environment for frac sand throughout the WCSB and most of North America. In this low
activity environment all the frac sand competitors were able to service the jobs and they were all actively bidding to do
so which lead to significant price compression particularly in the second and third quarters of 2016. Source’s sand sales
decreased by $26.6 million in 2016, reflecting a 19% price decrease compared to 2015, causing a price variance in sand
sales of $28.5 million. Partially offsetting the price decrease was a 1% increase in sales volumes that increased sand
sales by $1.9 million. In the fourth quarter of 2016, when oil and gas commodity prices stabilized and rose, the larger,
better financed exploration and development companies returned to work, and Source saw a 79% sequential increase in
sales volumes compared to the third quarter of 2016 and a 64% increase in sales volumes compared to the fourth
quarter of 2015. As North American sand sales volumes have ramped up in the fourth quarter of 2016 and into the first
quarter of 2017, sand pricing has also begun to rise. Compared to 2015, Source saw an increase in its sales to
customers at the wellsite in 2016 as it worked closely with its customers to find ways to help them reduce their
completion costs. As part of this transition to wellsite sales, Source saw 37% of its customer sand sales convert from
US dollar denominated sales to Canadian dollar denominated sales. In 2015, sand prices were mainly U.S. dollar
denominated. In 2016, 41% of Source’s sand sales were U.S. dollar denominated and benefitted from a 4% decrease in
the strength of the Canadian dollar. In 2015, 85% of our sales were U.S. dollar denominated and were impacted by a
16% decrease in the strength of the Canadian dollar.
With the push for additional sand sales at the wellsite in 2016, Source saw a $15.1 million, or a 242%, increase in Well
site solutions sales as compared to 2015. In 2016, as the exploration and production companies worked to manage their
well completion costs, they used Source to help manage their last mile logistics costs from the terminal to the wellsite
and to provide them with wellsite sand storage solutions. By placing Source’s personnel and its Sahara unit on
customers’ well sites, it was able to better manage overall trucking costs and sand supply reliability for its customers,
which in turn helped them succeed with their completion programs.
Terminal services sales declined by $2.4 million or 32%, in 2016 from 2015 levels, as the overall slowdown in
completion activity in the WCSB reduced the Source’s trans loading activities for non-sand proppants (mainly resins)
and chemicals. Terminal services sales generally follow completion trends in the WCSB.
In 2015, sales increased by $6.6 million to $153.1 million as compared to $146.5 million in 2014, as sand sales
increased by $20.8 million in 2015 which offset an $8.6 million decline in terminal services sales and a $5.6 million
decline in well site solutions sales in 2015 as compared to 2014. The increase in sand revenue compared with 2014 was
the result of both a 13% increase in volumes and a 4% increase in average realized sand prices in 2015. Volumes
increased in 2015, despite the downturn in the oil and natural gas industry as natural gas and crude oil prices fell
dramatically during 2015, as a result of limited 2014 sand sales due to the delay in completion of Source’s sand
processing facilities, growing Source’s rail car fleet and building the Wembley Terminal in 2014. Sand prices which
were mainly U.S. dollar denominated in 2015 were improved in Canadian dollar terms by the weakening of the
Canadian dollar by 16% during 2015. With the significant slowdown in the energy industry during 2015, Source
extended certain price concessions to customers in order to maintain its market share. Terminal services and well site
solutions sales fell in 2015 as Source changed its focus to selling its own sand and these parts of the business were
more noticeably impacted by the down turn in the oil and gas industry.
Expenses
The principal expenses involved in the production of frac sand are excavation, labour, utilities, transportation and
maintenance costs. Source contracts a third party to remove the Sumner Facility’s overburden, to excavate the
unprocessed frac sand and to deliver that material to its washing facility at the Sumner Facility. Source pays a fixed
price per metric tonne of material excavated and delivered to the washing facility. Until this material is washed and
dried it will not necessarily meet API specifications and not be a saleable product. Therefore, Source incurs excavation
costs for materials which are handled but from which it does not ultimately generate sales (rejected materials). Source
FS-38
also incurs costs related to sand that is washed and stockpiled awaiting completion of the drying process. The ratio of
rejected materials to the total amounts excavated has been and is expected to continue to be in line with Source’s
expectations, based on the core sampling Source has undertaken at the Sumner Facility.
Labour costs associated with employees at Source’s processing facilities represent the most significant cost of
converting frac sand to finished product. Source incurs utility costs in connection with the operation of its processing
facilities, primarily natural gas and electricity. Source has entered into a physical fixed price natural gas contract for a
portion of its natural gas needs. The balance of Source’s utility purchases is based on local market prices. Source has
contracted a third party to transport the washed sand from the Sumner Facility to the Weyerhaeuser Facility, and to
transport waste material back to the Sumner Facility. Source’s processing facilities require periodic scheduled
maintenance to ensure their efficient operation. Direct and indirect labour costs, utilities, transportation and
maintenance costs associated with sand processing are capitalized as a component of inventory and are included in cost
of sales when that inventory is ultimately sold.
To distribute sand from its processing facilities to its terminals or the customer’s wellsite, Source purchases freight
from CN and then, if applicable, incurs third party trucking costs to move the sand to the customer’s wellsite. Source is
charged fuel surcharges by the various transportation companies, leasing costs related to its railcars, labour and other
terminal operating costs. Rail related costs are capitalized as a component of inventory and are then included in the cost
of sales when that inventory is sold. Costs related to directly moving sand or other transloaded products at Source’s
terminals are directly charged to cost of goods sold, while overhead costs of operating the terminals are recorded as
operating costs of the business.
Occasionally, Source will purchase sand from third party producers. This may occur when there are third party
transportation disruptions, when Source has other production constraints or when it identifies the opportunity to make
purchases of sand in the market place from third parties. When Source purchases sand these costs are included in
inventory until the sand is sold and then such costs are recognized in cost of goods sold.
Source incurs general and administrative expenses related to its corporate operations, including operating its corporate
offices and maintaining its limited partnership statuses and operations. Significant costs include salaries for the
corporate staff, facility costs for the corporate offices, professional and advisory fees and information systems related
costs for Source.
Cost of Sales
($000’s CDN, except MT and per unit amounts)
Direct Materials
People Costs
Equipment Costs
Transportation Costs
Facility Costs
Cost of Sales
2016
2015
2014
74,138
12,451
6,720
24,695
5,253
78,157
13,094
10,912
9,633
4,568
61,496
11,232
5,054
13,833
3,889
123,257
116,364
95,504
Cost of sales, which is composed of sand processing costs, rail freight, rail car lease, terminal operation costs, third
party trucking costs, and wellsite operations costs, increased by $6.9 million to $123.3 million in 2016 as compared to
2015. The increase is primarily due to the increased use of third party trucking firms to support the “last mile” solution
for Source’s customers. Offsetting this increase was a reduction in Source’s cost to produce and land sand at its
terminals despite a 1% increase in the volumes sold in 2016. Significant components of cost of sales are mainly U.S.
dollar denominated costs including sand processing, rail freight, and rail car leases and therefore subject to fluctuations
of the Canadian dollar compared to the U.S. dollar. In 2016, the average U.S./Canadian dollar exchange rate weakened
by 4% as compared to 2015, which led to increases in the Canadian dollar equivalent cost of sales.
Cost of sales — depreciation is comprised of costs incurred in Source’s mining operations. These costs consist of
depreciation on sand processing equipment and stripping costs to remove overburden. Costs associated with sand
processing equipment, and overburden stripping costs are capitalized as the cost is incurred and depreciated on a unit of
production basis. Cost of sales — depreciation increased by $0.9 million year over year, primarily due to taking a full
year of depreciation on 2015 capital additions as compared to a partial year in 2015 as construction of part of the sand
processing facilities were not completed until part way through the year.
FS-39
Cost of sales increased by $20.9 million to $116.4 million in 2015 as compared to 2014. The increase is partially due to
the 13% increase in sales volumes, as described above. In 2015, the average U.S./Canadian dollar exchange rate
weakened by 16% as compared to 2014, which lead to increases in the Canadian dollar equivalent cost of sales.
Depreciation on the sand processing equipment, increased by $2.5 million year over year, as there was a full year of
depreciation in this equipment in 2015 as compared to a partial year in 2014 as construction of part of the sand
processing facilities were not completed until part way through the year.
Gross Margin
($000’s CDN, except MT and per unit amounts)
2016
2015
2014
Gross Margin
Cost of Sales — depreciation
7,903
8,039
29,638
7,133
46,391
4,611
15,942
36,771
51,002
Adjusted Gross Margin
Gross Margin %
5.7%
Gross Margin/MT
$
Adjusted Gross Margin %
9.49
11.5%
Adjusted Gross Margin/MT
19.15
19.4%
$ 36.08
24.0%
44.76
31.7%
$ 63.79
34.8%
70.13
Adjusted Gross Margin was $15.9 million or 11.5% in 2016 vs $36.8 million or 24% in 2015. The Adjusted Gross
Margin declined year over year due to the compression of sand prices that occurred. The Adjusted Gross Margin was
also impacted by the increase in lower margin wellsite solutions services year over year. Gross margin of $7.9 million
or 5.7% in 2016 declined by $21.7 million year over year due to the same reasons the adjusted gross margin declined.
Gross margins were also impacted by an increase in cost of sales depreciation due to a full year of depreciation on
production capital expenditures made in 2015.
Gross margin of $29.6 million or 19.4% in 2015 declined by $16.8 million year over year, as the increase in cost of
sales was not offset by the increase in sales.
Operating and General and Administrative Expenses
($000’s CDN, except MT and per unit amounts)
2016
2015
2014
Operating and General and Administrative Expenses
People
Equipment
Facility
Selling and Administrative
8,446
5,229
3,064
7,127
9,389
3,278
2,703
2,813
10,869
3,186
2,531
2,327
23,866
18,183
18,913
Operating and general and administrative expenses for the year ended December 31, 2016 were $23.9 million in 2016,
an increase of $5.7 million from the prior year. Costs associated with Source’s people declined year over year due to:
not replacing non-operational staff that left Source during the year; not having any bonus program in 2016 and some
salary roll backs that were undertaken in response to the downturn in the oil and natural gas industry. Equipment costs
of $5.2 million in 2016 were $2.0 million higher than 2015, as Source stored older less desirable rail cars for a total of
119,260 car storage days in 2016. The majority of these leases expired by the end of 2016 and have been removed from
the rail fleet. These rail cars are being replaced with newer, more functional cars at lower lease rates. Facility costs
were $0.4 million higher than 2015 levels due to increased property taxes and other general increases. Selling and
administrative costs were $4.3 million higher than the prior year due to a $2.9 million bad debt expense when a
pressure pumper customer went bankrupt in 2016 compared to a $0.2 million recovery of a bad debt in the prior year.
Professional fees were also $1.0 million higher in 2016 due to the settlement of the CMSA (see note 9 of the audited
financial statements of Source for the year ended December 31, 2016 and “Legal Proceedings and Regulatory
Actions” in the prospectus) and the settlement of several smaller lawsuits during the year.
Operating and general and administrative expenses for the year ended December 31, 2015 were $18.2 million, a
decline of $0.7 million from the prior year. Costs associated with Source’s employees declined year over year due to
staffing reductions that were undertaken in response to the downturn in the oil and natural gas industry and lower
bonus payouts as only safety targets were achieved. Facility and equipment costs were higher due to a full year of
FS-40
operation of the Wembley Terminal and the opening of the Eckville, Alberta terminal to better service Source’s central
Alberta customers. Selling and administrative costs were $0.5 million higher than the prior year due to higher
professional fees, related to establishing sand sales contracts with customers and ancillary costs related to upgrading
Source’s enterprise resource system.
Depreciation
Depreciation primarily consists of depreciation on property plant and equipment and depreciation of capitalized
stripping costs. Depreciation of the processing equipment used in the processing of frac sand to a final saleable product
and depreciation of capitalized stripping costs are included in cost of goods sold. Depreciation of other equipment used
in the business is recorded in a separate line item in the statements of operations and comprehensive income.
Depreciation in 2016 increased by $0.7 million year over year due to a full year of depreciation being taken on 2015
capital additions as compared to a partial year in 2015.
Depreciation in 2015 increased year over year by $2.5 million due to having a full year of depreciation on the
Wembley Terminal assets as well as the depreciation associated with a terminal located in Eckville, Alberta that was
completed in 2015.
Finance Expense
Finance expense is primarily composed of interest expense on the Notes, the Credit Facility, the Previous Credit
Facility, the preferred shares obligation, the Sand Royalty Loan, the Shareholder Loans and interest on the Prepayment
Note. These items are all further described in the prospectus and notes to the audited financial statements of Source for
the year ended December 31, 2016. See Appendix “FS” — Financial Statements and Management’s Discussion and
Analysis.
Finance expenses increased by $7.2 million to $19.5 million in 2016 as compared to 2015. Source’s financial
performance during the first three quarters of 2016 led to an increase in the interest rate on its Previous Credit Facility
as well as some additional advisory fees. The Previous Credit Facility was ultimately repaid from the proceeds of the
Note Offering. At the same time the Credit Facilities were put in place and the prior deferred financing costs of
$1.2 million were expensed. Financing costs also increased by $1.4 million in 2016 due to having a full year of interest
on the SES II Shareholder Loan. The distribution rate on the preferred share obligation owed to the Class B Founder
also increased on July 1, 2016 to 6.82%, resulting in an increase to finance expense of $0.3 million in 2016.
Finance expense increased by $3.3 million to $12.3 million in 2015 as compared to 2014. Increases in the Previous
Credit Facility and the Shareholder Loans were put in place to finance further growth in Source’s terminal network as it
started work on a unit train facility in Edson, Alberta. Construction activities on this facility were subsequently
suspended as a result of the continued downturn in the energy industry. Additional financing was also put in place to
support the growth in working capital that arose from the additional sales volumes. The interest on the SES
Shareholder Loan was converted to more permanent capital in 2015 and its interest rate was increased by 7% to 25%
per annum.
Other Expense and Income
In 2016, the loss on asset disposals was $1.1 million as compared to $0.1 million for 2015 as surplus miscellaneous
equipment was sold throughout the year. In 2014, there was a gain on asset sales as Source disposed of a number of
surplus assets as part of the transition to selling its own sand, resulting in a higher amount of other income.
A loss on impairment of $1.9 million was recognized in 2016 as Source closed and moved out of its Eckville terminal
due to a lack of oil and gas activity in the area. There was no loss on impairments in 2015 or 2014.
In December 2016, the Note Offering was completed. Embedded in these Notes were two derivative instruments. The
first instrument includes relevant rights which entitles debt holders to 4% of the equity value of Source on a combined
basis upon an initial public offering or various liquidation or change of control events. There are also prepayment
options entitling Source to redeem the Notes in part or in whole prior to their maturity. Such rights and the prepayment
options have been classified as derivative liabilities and are measured at fair value through profit and loss. As of
December 31, 2016, Source recorded a combined fair value loss on both derivatives of $0.9 million. There were no
such losses recorded in 2015 or 2014.
FS-41
In 2015, when the SES Shareholder Loan was converted to more permanent capital, Source became obligated to pay
25% per annum interest for a minimum of 15 months, which expires in March 2017. Therefore, a fair value adjustment
of $3.9 million was recorded as of December 31, 2015. No fair value adjustments related to the SES Shareholder Loan
were recognized in 2016 or 2014.
Other income of $4.9 million was recorded in 2016, compared to other income of $1.8 million in 2015 and $0.4 million
in 2014. In December 2016, Source settled a deferred revenue contract with the CMSA Customer and recognized a
gain on the settlement of $3.3 million.
Source realized a foreign exchange loss of $2.1 million in 2016, which was a $3.3 million change from the $1.3 million
gain recognized in 2015. The 2016 loss was generated from a weakening Canadian dollar and lower average U.S.
dollar denominated net working capital balances in 2016 than 2015, as some of Source’s customers changed from
buying sand in U.S. dollars to Canadian dollars. The weakening of the Canadian dollar against the U.S. dollar in 2015
resulted in a realized foreign exchange gain on stronger U.S. dollar denominated working capital balances.
Adjusted EBITDA for 2016 declined by $26.6 million to a loss of $4.2 million, as the decline in oil and gas commodity
prices put downward pressure on sand prices, which lowered revenues despite an increase in sand sales volumes.
Operating and general and administrative costs were higher year over year due to storing older less desirable rail cars
until their leases expired late in 2016.
FS-42
Summary of Quarterly Results
The following quarterly results have been calculated by aggregating management’s internal monthly financial data and other
than the results for the third quarter of 2016 and 2015 have not been reviewed or audited by Source’s auditors. Although
Source believes such aggregations are accurate undue reliance should not be placed thereon.
$000’s, except MT and per
unit amounts
Sand Sales MT
Sand Revenue
Well Site Solutions
Terminal Services
Sales
Cost of Sales
Cost of Sales Depreciation
Cost of Sales
Gross Margin
Operating and General and Admin
Expenses
Depreciation
Income (loss) from operations
Other expense(income):
Loss(gain) on asset disposal
Loss(gain) on impairment
Finance expense
Loss(gain) on derivative liability
Fair Value adjustment on
shareholder loan
Other income
Management Fees
Foreign exchange loss/(gain)
Total other expense (income)
Income (loss) before income
taxes
Income taxes
Net Income (loss)
Net Income (loss)
Interest
Income taxes
Depreciation
Cost of Sales Depreciation
EBITDA
Add:
Loss(gain) on asset disposal
Loss(gain) on impairment
Finance expense
Loss(gain) on derivative liability
Fair Value adjustment on
shareholder loan
Management Fees
Infrequent transaction and
professional fees
Adjusted EBITDA
Sand Revenue Sales/MT
Gross Margin
Cost of Sales Depreciation
Adjusted Gross Margin
Gross Margin/MT
Adjusted Gross Margin/MT
2016
2015
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
260,117 133,636 157,210 281,472 242,081 156,037 251,740 171,624 37,910 175,959 231,079 282,265
$ 40,947 $ 17,066 $ 19,109 $ 35,840 $ 44,770 $ 26,222 $ 45,299 $ 23,283 $ 5,613 $ 27,377 $ 37,875 $ 47,890
858
6,982
4,499
8,922
1,276
1,112
2,038
1,782 3,654
1,839
3,872
2,417
1,530
1,049
1,112
1,285
2,562
1,052
2,088
1,651 6,301
2,680
3,672
3,316
43,335 25,097
24,720
46,047 48,608 28,386 49,425 26,716 15,568 31,896 45,419 53,623
34,249 25,755
24,048
39,205 32,116 22,494 37,027 24,728 10,229 23,424 30,311 31,540
2,360
1,989
2,078
1,612
1,620
1,782
1,551
2,181 1,200
1,146
1,097
1,167
36,609 27,744
26,126
40,817 33,735 24,275 38,578 26,909 11,429 24,570 31,408 32,707
6,726 (2,647) (1,406)
5,230 14,873
4,111 10,847
(193) 4,139
7,326 14,011 20,916
4,766
7,906
1,299
1,523
661 (12,076)
4,444
1,200
(7,050)
6,750
2,351
(3,871)
4,183
1,397
9,293
4,055
1,305
(1,249)
4,040
1,816
4,991
5,905
1,156
(7,254)
4,249
724
(834)
4,616
778
1,932
3,908
827
9,276
6,140
818
13,958
–
–
3,500
–
1,460
–
4,902
–
1,410
–
3,984
–
(1,788)
1,852
7,105
910
75
–
2,513
–
27
–
2,272
–
(1)
–
3,676
–
(7) (8,915)
–
–
3,885
743
–
–
(917)
–
1,312
–
(509)
–
4,495
–
7,231
–
2,448
–
–
(1,028)
178
309
2,959
–
(55)
636
569
7,512
–
(310)
76
118
5,278
–
(3,466)
153
1,063
5,829
–
(146)
348
(1,460)
1,330
–
(217)
592
11
2,685
3,906
(53)
164
(106)
7,586
–
–
(1,380) (127)
579
364
300
47
3,377 (7,888)
–
(105)
364
(1)
653
–
(122)
364
(39)
4,189
–
(66)
364
(71)
9,906
(2,298) (19,588) (12,328)
–
4
81
$ (2,298)$(19,592) $ (12,409) $
$ (2,298)$(19,592) $ (12,409) $
3,193
4,325
3,840
–
4
81
1,299
1,523
1,200
2,360
1,989
2,078
$ 4,554 $ (11,751) $ (5,210) $
–
–
307
–
1,460
–
577
–
1,410
–
144
–
–
178
–
636
–
76
264
$ 5,303 $
$
157 $
$ 6,726 $
2,360
$ 9,086 $
$ 25.86 $
$ 34.93 $
–
662
(9,078) $ (2,918) $
128 $
122 $
(2,647) $ (1,406) $
1,989
2,078
(658) $
672 $
(19.81) $ (8.94) $
(4.92) $
4.27 $
(9,700)
7,963 (3,934)
(597)
(6)
23
(9,103)$ 7,969 $ (3,957)$
(9,103)$ 7,969 $ (3,957)$
4,844
2,487
2,256
(597)
(6)
23
2,351
1,397
1,305
1,612
1,620
1,782
(893)$ 13,467 $ 1,409 $
(1,788)
1,852
2,261
910
–
153
–
2,495
177
5,230
1,612
6,842
18.58
24.31
75
–
26
–
27
–
16
–
–
348
–
592
–
$ 13,916 $
$
185 $
$ 14,873 $
1,620
$ 16,493 $
$ 61.44 $
$ 68.13 $
FS-43
(2,595) (10,631)
(1)
553
(2,594)$ (11,184)$
(2,594)$ (11,184)$
3,676
3,660
(1)
553
1,816
1,156
1,551
2,181
4,448 $ (3,634)$
(1)
–
–
–
3,906
164
7,054
1,279
5,087
4,052
33
22
3
379
7,021 $ 1,257 $ 5,084 $ 3,673
7,021 $ 1,257 $ 5,084 $ 3,673
720
1,316
4,295
2,507
33
22
3
379
724
778
827
818
1,200
1,146
1,097
1,167
9,698 $ 4,519 $ 11,306 $ 8,544
(7) (8,915)
–
–
225
23
–
–
–
579
–
364
–
–
746
–
2,044 $ 8,517 $ (2,091)$ 1,170 $
168 $
188 $
136 $ 148 $
4,111 $ 10,847 $ (193)$ 4,139 $
1,782
1,551
2,181 1,200
5,893 $ 12,398 $ 1,988 $ 5,339 $
26.35 $ 43.09 $ (1.12)$109.71 $
37.76 $ 49.25 $ 11.58 $140.83 $
(917)
–
(4)
–
(509)
–
200
–
7,231
–
(59)
–
–
364
–
364
–
364
–
3,962
156
7,326
1,146
8,472
41.63
48.15
–
229
$ 11,361 $ 16,309
$
164 $
170
$ 14,011 $ 20,916
1,097
1,167
$ 15,108 $ 22,083
$ 60.63 $ 74.10
$ 65.38 $ 78.23
Quarters Ended December 31, 2016, 2015 and 2014
In the fourth quarter of 2016, when oil and gas commodity prices stabilized and began to rise, the larger, better
financed exploration and development companies returned to work, and Source saw a 79% sequential increase in sales
volumes from the third quarter of 2016 and an 64% increase in sales volumes from the fourth quarter of 2015. Fourth
quarter 2016 sales volumes were consistent with fourth quarter 2014 sales volumes. As North American sand sales
volumes have ramped up in the fourth quarter of 2016 and into the first quarter of 2017, sand pricing which was stable
in the fourth quarter has begun to rise as the industry wide supply and demand have begun to better align. Sales in the
fourth quarter of 2016 were $35.8 million an increase of $12.6 million from 2015’s sales of $23.3 million. In the fourth
quarter of 2016, Source sold 78 % of its sand sales volumes at the wellsite, compared to 0% in 2015, which resulted in
a dramatic increase in well site solution sales. The higher sales volumes in the fourth quarter of 2016 help drive down
the cost of the delivered product, which resulted in improved adjusted gross margins for the quarter.
In the fourth quarter of 2016, the Note Offering was completed. The proceeds from the Note Offering were used to
repay the Previous Credit Facility and to settle the Prepayment Note. As explained in the section above entitled
“Finance Expense” this increased finance expense in the fourth quarter of 2016 as the Previous Credit Facility’s
deferred financing costs were expensed. Source also recognized a gain of $3.3 million on the settlement of the
Prepayment Note.
The fourth quarter of 2015 saw sand sales volumes at 171,624 MT, representing a 39% decrease from the fourth
quarter of 2014. The continued softening of oil and gas commodity prices has caused the exploration and production
companies to curtail their capital spending programs which has led to a significant decline in the amount of completion
activity in the WCSB.
Source’s sales levels are affected by weather conditions. As warm weather returns in the spring each year, the winter’s
frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment
or trucks hauling sand until they have dried out. In addition, many exploration and production areas in northern Canada
are accessible only in the winter months when the ground is frozen.
In 2014, Source began the transition from being a third party transloader of frac sand in the WCSB to being a sand
producer selling sand in the WCSB. Throughout 2014, Source was completing its Wisconsin production facilities, its
Wembley Terminal and assembling its rail car fleet. It was not until the latter part of the fourth quarter of 2014 that
Source was actually able to achieve its full run rate, in a robust pricing environment. In 2015, while the first part of the
first quarter was very strong, the impact of the continuing softening of the oil and natural gas commodity prices
eventually led to pricing reductions, which was partially offset by increased sales volumes as Source continued to grow
its market share. The soft oil and gas commodity price environment continued into the first three quarters of 2016.
Sales volumes were also impacted by a very wet second and third quarter in the WCSB in 2016, which impacted the
timing of customer’s completion programs, as many were delayed until the access roads were usable again in the fourth
quarter. As described above, the fourth quarter of 2016 represented a significant turnaround in sales volumes.
Liquidity and Capital Resources
Source operates in a working capital and capital expenditure intensive industry where capital is required to fund
working capital growth and the continued development of the transload terminal network and processing facilities. To
date free cash flow from operations, amounts available under the Notes, the Credit Facilities and the Shareholder Loans
have been the primary sources of liquidity that allowed Source to meet its financial requirements to both grow and
operate the business operations in the short and long term.
Source’s capital management policy is to maintain a strong capital base that optimizes Source’s ability to grow,
maintain investor and creditor confidence and to provide a platform to create value for its stakeholders. Source’s
officers are responsible for managing its capital and do so through monthly management meetings and quarterly board
meetings including regular reviews of financial information including budgets and forecasts. Source’s Board is
responsible for overseeing this process. Source considers its capital structure to include Source’s equity, bank debt and
due to related parties.
Source monitors its capital, based on its current working capital, available bank line, projected cash flow from
operations and anticipated capital expenditures. In order to manage its capital structure, Source prepares annual capital
FS-44
expenditure and operating budgets, which are updated as necessary. The annual and updated budgets are prepared by
Management and approved by each of the boards of directors of Source Canada LP GP and Source US LP GP. The
budget results are regularly reviewed and updated as required.
In order to maintain or adjust the capital structure, Source may issue equity securities, seek debt financing and adjust
its capital spending to manage its current and projected capital structure. Source’s ability to raise additional debt or
equity financing is impacted by external conditions, including the global economic conditions. Source continually
monitors economic and general business conditions.
Source’s share capital is not subject to external restrictions but the amount of the Credit Facilities is determined with
reference to inventory and accounts receivable levels maintained.
Source’s capital management policy has not changed during the years ended December 31, 2016, 2015, or 2014.
Source intends to meet its future capital requirements primarily through cash flow from operations, the Credit Facilities
and raising equity in the public markets in Canada. Source expects these sources will be sufficient to meet its capital
needs. However, Source’s ability to fund future operating expenses and capital expenditures and its ability to make
scheduled payments of interest on the Notes and the Credit Facilities and to satisfy any of Source’s other present or
future debt obligations will depend on our future operating performance which will be affected by general economic,
financial and other factors including the risks described in the following paragraphs, and those described under “Risk
Factors” in the body of the prospectus and factors beyond Source’s control.
On December 8, 2016, the Note Issuers issued the Notes which bear interest at 10.5% per annum, and mature
December 15, 2021. The Notes are secured by a fixed and floating charge over all of the assets of the business except
accounts receivable and inventory, on which the Notes carry a second charge. Each holder of Notes is entitled to a
relevant right of 4% of the equity value of the Note Issuers upon an initial public offering and various liquidation or
change of control events. There are prepayment options, where the Note Issuers may redeem 35% of the aggregate
principal amounts of the Notes with the net proceeds of an equity offering by Source at a redemption price of 110.5%
of the principal amount. The Note Issuers may also redeem all or part of the Notes at any time prior to December 15,
2018 for 100% of the principal, accrued and unpaid interest, and the applicable premium as defined in the agreement.
After December 15, 2018 the Notes may be redeemed in whole or in part at the applicable percentage (2018 —
107.875%, 2019 — 103.9375%, 2020 — 100%), plus accrued and unpaid interest. Such rights and prepayment option
have been classified as a derivative liability and are measured at fair value through profit or loss, for a total of
$14.8 million for the rights and $0.1 million for the prepayment option as of December 31, 2016. Changes in fair value
of the derivative liabilities are recorded through the Combined Statements of Operations and Comprehensive Income
(Loss). Source has recorded a fair value loss on the relevant rights of $0.8 million and $0.1 million on the prepayment
option as of December 31, 2016 (2015 — $0, 2014 — $0).
The Credit Facilities are secured by floating first lien charge on the accounts receivable and inventory of Source under
a general business security agreement and a second lien charge on all other assets of the business. The amount
available under the general operating facility is subject to a borrowing base formula applied to accounts receivable and
inventories. As of December 31, 2016, $13.0 million was drawn under the Credit Facilities, and
$26.0 million was available. The borrowing base is updated by the bank monthly. Letters of credits were issued for the
amount of US$5.9 million. To date no amounts have been drawn against these letters of credit.
Source is subject to externally imposed capital requirements for the Credit Facility, requiring Source Canada LP to
maintain a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b) 1.25:1 at all times
thereafter to be measured when Source’s excess availability is less than 20% of the lesser of the borrowing base and the
operating facility. As of December 31, 2016, the excess availability was greater than 20%. Source Canada LP is in
compliance with all covenants of the Credit Facilities as of December 31, 2016.
As of December 31, 2015, the Previous Credit Facility composed of three facilities: a $35 million operating facility, a
$45 million term facility, and a $15 million capital facility. The Previous Credit Facility was secured by fixed and
floating charges on all the assets of Source under a general business security agreement. The facilities bore interest
based on the bank’s prime lending rate plus an applicable margin, ranging from prime plus 0.75% to prime plus 2.75%
per annum. The amount available under the general operating facility was subject to a borrowing base formula applied
to accounts receivable and inventories. As of December 31, 2015, $24.2 million ($17.0 million as of December 31,
2014) was drawn under this facility. The borrowing base was updated by the bank monthly. This facility was
extinguished in connection with the Note Offering
FS-45
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Source is
exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the Credit
Facilities and loans payable. Source is exposed to interest rate price risk on the long-term debt that bears interest at
floating rates. Source had no interest rate swaps or financial contracts in place as at or during the periods ended
December 31, 2016, or December 31, 2015 or December 31, 2014.
For the year ended December 31, 2016, a 1% change to the effective interest rate would have an impact of
approximately $0.2 million (year ended December 31, 2015 — $0.7 million and 2014 — $0.4 million) on net income
and cash flow.
Foreign Currency Risk
Source is exposed to currency price risk on sales denominated in U.S. dollars to the extent that the receipt of payment
of the U.S. dollar denominated accounts receivable are subject to fluctuations in the related foreign exchange rate. In
addition, foreign currency risk exists on U.S. costs of manufacturing and transporting inventory for sale to the extent
that the payment of those costs are U.S. dollar denominated accounts payable are subject to fluctuations in the foreign
exchange rate. Included in accounts receivable and accounts payable and accrued liabilities as of December 31, 2016
are $1.7 million (2015 — $17.6 million, 2014 — $32.3 million) and $8.4 million (2015 — $14.5 million, 2014 —
$16.4 million) denominated in foreign currency respectively. The net effect of each 1% change in foreign exchange
would have an impact of $0.2 million for 2016 net income (2015 - $0.2 million, 2014 — $0.2 million). As of
December 31, 2016, December 31, 2015 and December 31, 2014, Source had no forward exchange rate contracts in
place.
Cash and Net Working Capital
As of December 31, 2016, Source had no cash on hand and had senior long term debt outstanding of $124.4 million, as
compared to $83.1 million as of December 31, 2015. Cash flow deficit from operations was $9.5 million in 2016, and
this shortfall was funded by additional senior debt borrowings and additional Shareholder Loans. Net capital
expenditures for 2016 were $5.6 million which was also funded through proceeds from the increase in senior debt
borrowings and additional Shareholder Loans. The balance of the proceeds was used to pay financing charges and tax
distributions to limited partners for prior years’ taxes owed by those partners.
As of December 31, 2015, Source had no cash on hand and had senior long term debt outstanding of $83.1 million, as
compared to $63.8 million as of December 31, 2014. Cash flows from operations were $23.6 million in 2015, which
were used to partially fund the net capital expenditures in the year of $38.7 million. The balance of the capital
expenditure program was funded through proceeds from the increase in the Credit Facilities and additional Shareholder
Loans. The balance of the proceeds was used to pay financing charges and distributions to limited partners.
Net working capital as of December 31, 2016 was $6.2 million, as compared to $10.1 million as of December 31, 2015.
The decrease was primarily driven by lower accounts receivable balances as Source had better collections of its
accounts receivable in the fourth quarter of 2016 compared to the fourth quarter of 2015. This decrease was partially
offset from higher inventory levels at December 2016 as Source prepared for a busy first quarter in 2017.
Net working capital as of December 31, 2015 was $10.1 million, as compared to $26.3 million as of December 31,
2014. The decrease was mainly driven from lower accounts receivable balances and no assets held for sale in 2015,
partially offset by higher inventory levels. Source was in a better position to build inventory in the fall of 2015 than
2014 to prepare for the busy drilling and completion season that occurs in the WCSB. Sales were slower in the fourth
quarter of 2015 than 2014 as the oil and gas industry was dealing with softer commodity prices.
Capital expenditures in 2016 were $6.4 million, as compared to $38.9 million in 2015. The 2016 capital expenditure
program predominately related to overburden removal expenditures at the mine site and additional payments related to
land acquisitions at the mine site. The 2015 capital expenditure program was focused on completing the sand
processing facilities, and the terminal network to begin to sell Source’s own sand as well as land acquisitions at the
mine site.
Capital expenditures in 2015 were $38.9 million, as compared to $45.4 million in 2014. The capital expenditure
programs for both years were focused on completing the sand processing facilities and the terminal network to begin to
sell Source’s own sand.
FS-46
Deferred Revenue
Source has entered into storage subscription agreements with some customers to provide them with guaranteed
proppant storage at our facilities, which will all expire by August 2017. Under the terms of such agreements, customers
pay a non-refundable subscription fee entitling them to a discount of $2 per tonne from our normal sand distribution
fees. The subscription fees have been deferred and are recognized as revenue as proppant is transloaded by the
subscribers.
In September 2011, Source entered into the Prepayment Note. The prepayment clause was such that the CMSA
Customer made three installments upon completion of certain phases of Source’s frac sand plant located in Wisconsin.
These pre-payments accrued interest at 5%. In consideration of the prepayment amounts, the cash price per ton to the
customer was reduced for each metric tonne of frac sand sold in the United States or Canada. The prepayment amount
was also reduced by 50% of the customer’s billings for storage and transloading services provided in North America.
The agreement was secured by a first charge mortgage on land Source uses to mine and process frac sand. Source
commenced sales under the contract in 2014. These amounts were recognized as deferred revenue on the combined
balance sheets. On December 8, 2016, Source settled the above sales agreement for US$16.5 million. The total of this
customer’s advances and interest accrued at the time of settlement was US$19.0 million (December 31, 2015 —
US$18.2 million December 31, 2014 — US$19.7 million). Source recorded a gain of US$2.5 million on the settlement
of this contract.
One customer failed to meet the minimum sand purchase requirement outlined in their sale agreement during 2015. As
a result, Source deferred $0.9 million of revenue relating to this penalty, which was recognized in 2016, but
subsequently written off as the customer went bankrupt.
Contractual Obligations
Source has various lease commitments regarding equipment, railcars, physical natural gas contract and office space.
The leases expire between January 2017 and December 2025. Estimated annual lease commitment is as follows:
$000’s, except MT and per unit amounts
2017
2018
2019
2020
2021
Subsequent Years
10,225
7,348
5,631
5,011
4,994
9,124
42,333
Source is a party to contracts with numerous customers. Source’s customers are primarily exploration and development
companies and pressure pumping companies operating in the WCSB. Source’s goal is to create long-term relationships
with its customers. Source has structured contracts with customers outlining volume commitments and in some cases
fixed pricing, the terms of which vary from one to three years. This mitigates the impact of any nonpayment or
non-performance by, or significant reduction in purchases by, any of these contracted customers. A significant number
of our customers are serviced on a spot basis where volume thresholds are not set and orders are serviced on an
as-available basis at prevailing market prices.
In the ordinary course of conducting business, Source occasionally becomes involved in legal proceedings relating to
contracts, environmental issues, or other matters. While any proceeding or litigation has an element of uncertainty,
management of Source believes that the outcome of any pending or threatened actions will not have a material adverse
effect on the business or financial condition of Source.
Outstanding Security Data
Source’s partners’ equity is described in note 13 of the audited financial statements of Source for the year ended
December 31, 2016.
FS-47
Transactions between Related Parties
Shareholder Loans payable consist of four promissory notes. The first promissory note from common unitholders was
issued on March 27, 2014 in the amount of $12.5 million. This promissory note bears interest at 25% per annum which
is paid with in kind interest. According to the agreement, Source is obligated to pay the 25% interest for a minimum of
three months after December 31, 2016. Therefore, for the year ended December 31, 2015, a fair value adjustment of
$3.9 million was recorded to record the interest obligation until March 31, 2017. The second promissory note from the
common unitholders was advanced on December 21, 2015 in the amount of $7.5 million. This promissory note bears
interest at 18% per annum which is also paid in a combination of cash and in kind interest, and the interest increases to
25% per annum after eighteen months. The promissory note and any accrued interest is convertible to equity eighteen
months after the date of issue at the option of the unitholder. The conversion and the prepayment represent derivatives,
however, Source has elected to designate the Shareholder Loans as fair value through the combined statements of
operations and comprehensive income (loss). The maturity date of these promissory notes is on December 31, 2023.
The third promissory note has a face value of $2 million and was recorded at a fair value of $2 million. It does not bear
interest and is due September 7, 2026. See “Description of Indebtedness — Indebtedness being repaid in connection
with the Offering — Shareholder Loans” in the prospectus.
During 2016, certain unitholders provided guarantees to the syndicated bank group of the Previous Credit Facility
totaling $5.5 million. In exchange for these guarantees, these unitholders were provided with 5,500 warrants at an
aggregate price of $55 dollars or a 0% 10-year promissory note depending on whether the guarantees were drawn or
not. The promissory note would be issued for an amount equal to the amount that the guarantee was less than
$5.5 million prior to February 28, 2017, for reasons other than the call of the guarantee by the syndicated banking
group of the Previous Credit Facility. The agreements governing such guarantees stipulated that if the syndicated bank
facility was repaid, promissory notes for the full amount of the guarantee would be issued and the related warrants
would be cancelled. The promissory notes will become due and payable if there is a change of control. The Previous
Credit Facility was repaid and the related warrants were cancelled. The $5,500 promissory note was issued in 2016.
The amount due to Sand Royalty LP bears interest at 8% per annum with no maturity date. Source has accrued all
interest due as of December 1, 2022. No payments have been made.
Proposed Transactions
There are no proposed transactions other than described in the prospectus.
Critical Accounting Estimates
The following discussion sets forth Management’s most critical estimates and assumptions in determining the value of
assets, liabilities and equity.
Allowance for Doubtful Accounts
Source perform ongoing credit evaluations of its customers and grants credit based on a review of historical collection
experience, current aging status, the customer’s financial condition and anticipated industry conditions. Customer
payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and
overall industry conditions.
Inventories
Source evaluates its inventory to ensure it is carried at the lower of average cost and net realizable value. Allowances
are made against obsolete or damaged inventories and charged to the cost of sales. The reversal of any write-down of
inventory arising from an increase in net realizable value would be recognized as a reduction in cost of sales in the
period in which the reversal occurred.
Depreciation
The amounts recorded for depreciation of property and equipment are based on estimates of the useful lives of the
assets and residual values. This estimated residual value and useful lives of property and equipment are reviewed at the
end of each reporting period and adjusted if required.
FS-48
Decommissioning Liabilities
The amount recorded for decommissioning liabilities and accretion expense depends on estimates of current risk-free
interest rates, future restoration and reclamation expenditures, and the timing of those expenditures.
Income Taxes
The amounts recorded for deferred income taxes are based on estimates as to the timing of the reversal of temporary
differences and tax rates currently substantively enacted. They are also based on estimates of the probability of Source
utilizing certain tax losses in future periods and tax rates applicable to those periods.
Stock-Based Compensation
The fair value of the restricted share units is estimated at the grant date using the Black-Scholes option pricing model,
which includes underlying assumptions related to the risk-free interest rate, average expected unit life, estimated
forfeitures, and estimated volatility of Source.
Cash-Generating Units
The determination of cash-generating units is based on Management’s judgment regarding geographical proximity,
shared equipment, and mobility of equipment.
Impairment of Non-Financial Assets
Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which
the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest
levels for which there are largely independent cash inflows, prior to impairments of non-financial assets and are
reviewed for possible reversal at each reporting date.
Embedded Derivatives
An embedded derivative is a component of a contract that modifies the cash flows of the contract. The relevant
transaction rights and the prepayment option included in the $130M senior secured notes represents a hybrid contract.
The embedded derivatives are separated from the note payable and accounted for as derivative liabilities. The
embedded derivatives are measured at Fair value through profit or loss (FVTPL). The fair value of the derivatives is
based on prices or valuation techniques that require inputs that are not based on observable market data.
Shareholder Loans
Shareholder loans have been recorded at fair value, which represents the amount of the loan plus applicable interest.
One of the promissory note bears interest at 25% per annum which is paid in a combination of cash and in kind interest.
According to the agreement, the Partnership is obligated to pay
Changes in Accounting Policies including Initial Adoption and Recently Issued Accounting Standards Not Yet
Applied
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on
or after January 1, 2017 with earlier application permitted.
IFRS 9 Financial Instruments
On January 1, 2018, Source will be required to adopt IFRS 9 Financial Instruments, which is the result of the first
phase of the International Accounting Standards Board (“IASB”) project to replace IAS 39 “Financial Instruments:
Recognition and Measurement”. The new standard replaces the current multiple classification and measurement
models for financial assets and liabilities with a single model that has only two classification categories: amortized cost
and fair value. Source is in the process of assessing the impact of IFRS 9 on its financial statements.
FS-49
IFRS 15 Revenue from Contracts with Customers
On January 1, 2018, Source will be required to adopt IFRS 15 Revenue from Contracts with Customers. IFRS 15 was
issued in May 2014 and will replace IAS 11 Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13
Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of
Assets from Customers, and SIC-31 Revenue — Barter Transactions Involving Advertising Services. IFRS 15 provides
a single, principle-based five-step model that will apply to all contracts with customers with limited exceptions,
including, but not limited to, leases within the scope of IAS 17 and financial instruments and other contractual rights or
obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements and IFRS 11
Joint Arrangements. In addition to the five-step model, the standard specifies how to account for the incremental costs
of obtaining a contract and the costs directly related to fulfilling a contract. The standard’s requirements will also apply
to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output
of the entity’s ordinary activities. Source is in the process of assessing the impact of IFRS 15 on its financial
statements.
IFRS 16 Leases
On January 1, 2019, Source will be required to adopt IFRS 16 Leases. The new standard requires lessees to recognize a
lease liability reflecting future lease payments and a ‘right-of-use-asset’ for most lease contracts. The standard permits
a ‘simplified approach’ that includes certain reliefs related to the measurement of the right-of-use-asset and the lease
liability, rather than full retrospective application. IFRS 16 must be applied for financial years commencing on or after
January 1, 2019. Early adoption is permitted, but only in conjunction with IFRS 15. Source is in the process of
assessing the impact of IFRS 16 on its financial statements.
Financial Instruments and Other Instruments
Risk management overview
Source’s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk. Further
quantitative disclosures are included in the December 2016 combined financial statements. Source employs risk
management strategies and polices to ensure that any exposures to risk are in compliance with Source’s business
objectives and risk tolerance levels. While the board of directors has the overall responsibility for Source’s risk
management framework, Source’s management has the responsibility to administer and monitor these risks.
Fair value of financial instruments
The fair values of cash, accounts receivable, overdraft, accounts payable and accrued liabilities approximate their
carrying values due to the short-term maturity of those instruments. The fair value of the asset backed loan facility
approximates the carrying values as they bear interest at market floating rates consistent with market rates for similar
debt. Based on the closing market price as of December 31, 2016, the fair value of the $130 million Notes is
$137.8 million.
FS-50
APPENDIX “A”
DESCRIPTIONS OF THE MINERAL PROPERTIES
A-1
DESCRIPTION OF THE SUMNER FACILITY
Current Technical Report
The information in this section of the prospectus related to the Sumner Facility is based upon the Sumner APEX
Report authored by the QPs. The QPs have verified the data disclosed, including sampling, analytical, and test data
underlying the information contained in the prospectus. Any reference to figures, tables or citations below correspond
to such items in the Sumner APEX Report. For an explanation of certain technical terms used in this prospectus, see
“Scientific and Technical Information”. Portions of the following information are based on assumptions, qualifications
and procedures which are not fully described herein. Reference should be made to the full text of the Sumner APEX
Report, which is available for review under the Company’s profile on the SEDAR website at www.sedar.com.
Project Description, Location, and Access
Property Location
The Sumner Facility is located in Barron County directly east of the village of Cameron and near the town of
Sumner. The approximate center of the Sumner Facility, in Universal Transverse Mercator coordinates is: 608550 m
Easting, 5028430 m Northing, Zone 15, North American Datum 83. The Sumner Facility is located in the Public Land
Survey System at Township 34, Range 10W (Sumner) and encompasses most of Section 28 and parts of sections 27,
29, 32 and 34.
The Sumner Facility is located on the south side of U.S. Hwy 8 at 2595 State Highway 8, Cameron, Wisconsin
USA 54822. The Weyerhaeuser Facility is located eight miles (12.9 km) east of the Sumner Facility on the north side
of U.S. Hwy 8 at W14251 Stiles Road, Weyerhaeuser, Wisconsin USA 54895.
Nature and Extent of Source Land Titles
The majority of the land parcels are either: owned by Source; under contract to be purchased by Source in the near
term; or are leased by Source with established royalties. The current status of the private lands is presented in Figure 3
and Table 3, and is summarized as follows: (a) thirty of the 36 parcels are 100% owned by Source; (b) three parcels are
under contract to be 100% owned by Source with the current land holders land rights terminating between July 31,
2016 and October 31, 2017; and (c) three parcels are presently being leased from the current land owners by Source
with sand tonnage royalties established with the individual owners (Vincent 1, Vincent 2 and Vincent 3).
Figure 2. Sumner Facility land package is comprised of 36 separate parcels.
A-2
Table 3. Permit descriptions and status for Sumner Facility.
Public Land
Survey System
(sectionTownshipRange-quarter
quarter sectionQuarter section)
Parcel #
Sub-permit
name
Area
(acres)
Area
(hectares)
46270007000
Benik
46290005000
Bronstad 1
46290005001
Bronstad A
46290008000
Bronstad 2
27-34N-10WNW-NW
29-34N-10WNW-NE
29-34N-10WNW-NE
29- 34N-10W
40.00
16.19
18.00
7.28
1.28
0.52
20.00
8.09
46290021000
Bronstad 3
29- 34N-10W
40.00
16.19
46290002000
CSP 1
29-34N-10WNE-NE/
29-34N-10WNW-NE
29-34N-10W-SENE
29-34N-10WNE-SE
29-34N-10W-SESE
29-34N-10WSW-SE
28-34N-10WNE-NW
28-34N-10W-SENW
39.40
15.94
46290010000
CSP 2
40.00
16.19
46290020000
CSP 3
40.00
16.19
46290023000
CSP 4
40.00
16.19
46290022000
CSP 5
40.00
16.19
46280008000
D Johnson
19.41
7.85
46280014000
Frank
39.00
15.78
46280020000
Fredrickson
32.31
13.08
46270010000
Givens
40.00
16.19
46280003000
Goss 1
38.00
15.38
46280004000
Goss 2
2.00
0.81
46320002000
J Johnson
40.00
16.19
46270012000
Kirk
27-34N-10WSW-SW
28-34N-10W
40.00
16.19
46280006000
Klump
40.00
16.19
46280022010
Kreier 2
28-34N-10WNW-SE
28-34N-10WSW-SE
28-34N-10WNE-NW
37.26
15.08
46280023000
Kreier 1
40.00
16.19
46280007000
Nelson 3
20.00
8.09
46280011000
Nelson 1
28-34N-10WNW-NW
13.00
5.26
46280012000
Nelson 2
28-34N-10WSW-NW
41.00
16.59
46280009000
Ort Lumber
28-34N-10WNW-NW
14.50
5.87
28-34N-10WNE-SE
27-34N-10WNE-SW
28-34N-10WNW-NE
28-34N-10WNW-NE
32-34N-10WNE-NE
A-3
Private (deeded) land
owner(1)
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
FRANK, ALLAN H
& NORMA J
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
JOHNSON, JOHN R
& SALLY A
CSP PROPERTY
HOLDINGS LLC.
KLUMP, JON W &
MELISSA M
KREIER, JOHN E &
SHARON M
KREIER, JOHN E &
SHARON M
NELSON
TRUSTEES,
GREGORY S &
JUDY K
NELSON
TRUSTEES,
GREGORY S &
JUDY K
NELSON
TRUSTEES,
GREGORY S &
JUDY K
CSP PROPERTY
HOLDINGS LLC.
Ownership status
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Under contract with
Source to own;
closes 12/31/16(2)
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Under contract with
Source to own;
closes 12/31/16(2)
Owned by Source
Under contract with
Source to own;
closes 7/31/16(2)
Leased to Source
(Royalty)(2)
Leased to Source
(Royalty)(2)
Under contract with
Source to own;
closes 10/31/17
Under contract with
Source to own;
closes 10/31/17
Under contract with
Source to own;
closes 10/31/17
Owned by Source
Parcel #
Sub-permit
name
46280024000
Postle
46270008000
Schoenecker
46270013000
Scoville 1
46340006000
Scoville 2
46270011000
Smith
46280005000
St. Louis
46280016000
Vincent 1
46280017000
Vincent 2
46280019000
Vincent 3
46280002000
Waggoner
46280010000
Wiesner
Public Land
Survey System
(sectionTownshipRange-quarter
quarter sectionQuarter section)
28-34N-10W-SESE
27-34N-10WSW-NW
27-34N-10W-SESW
34-34N-10WNE-NW
27-34N-10WNW-SW
28-34N-10WSW-NE
28-34N-10WNW-SW
28-34N-10WSW-SW
28-34N-10W-SESW
28-34N-10WNE-NE
28-34N-10W
Totals
Area
(acres)
Area
(hectares)
Private (deeded) land
owner(1)
20.00
8.09
40.00
16.19
40.00
16.19
40.00
16.19
20.00
8.09
40.00
16.19
40.00
16.19
39.48
15.98
40.00
16.19
40.00
16.19
12.50
5.06
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
VINCENT FAMILY
TRUST
VINCENT FAMILY
TRUST
VINCENT FAMILY
TRUST
CSP PROPERTY
HOLDINGS LLC.
CSP PROPERTY
HOLDINGS LLC.
1,147.1
464.2
Ownership status
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Owned by Source
Leased to Source
(Royalty)(3)
Leased to Source
(Royalty)(3)
Leased to Source
(Royalty)(3)
Owned by Source
Owned by Source
Notes:
(1) In October 2013, CSP Property Holdings LLC and other “Source” ventures were consolidated under the Source Energy Services brand.
(2) Subsequently purchased since the date of the Sumner APEX Report.
(3) Mineral lease and royalty agreements dated September 25, 2014 for a term of 10 years. Source must pay a royalty of $1.50 for each tonne of
washed sand extracted from the respective property.
Figure 3. Summary of land titles (to accompany Table 3 and text).
A-4
The purchase agreements are for 100% of the land title including mineral rights, buildings, etc. The purchase
agreements do not include any additional payouts or percentages. The purchase agreements meet the standard
Wisconsin real estate purchase agreements: (a) WB-11 Residential Offer to Purchase; and (b) WB-13 Vacant Land
Offer to Purchase (Wisconsin Department of Regulation and Licensing, 2015).
With respect to the leased parcels (Vincent 1, Vincent 2 and Vincent 3), the landowners agreed to royalty
agreements allowing Source the right to mine their properties in exchange for a royalty, which is outlined in Table 3
and on Figure 3.
In the purchase and leased/royalty agreements, there is no designation between mineral and surface rights. The
purchase agreements are for 100% of the land title including surface and mineral rights. The royalty agreement does
not define mineral rights and the property owner grants to Source a lease to excavate, remove, and process any and all
marketable nonmetallic minerals including silica (frac) sand. Source must pay a royalty of $1.50 for each tonne of
washed sand extracted from the respective property (See Footnote 3 in Table 3).
Permitting and Environmental Approvals
The 100% owned Source parcels and parcels under contract to be owned by Source were rezoned from
Agriculture to Mineral Reservation. Source has the following local, Barron County, and Wisconsin State permits:
(a) Conditional Use Permit, which stipulates that Source mining operations shall maintain a minimum of five feet (1.5
m) separation from groundwater table (Barron County Zoning Committee); (b) Nonmetallic Mining Reclamation
Permit, which includes a Reclamation Plan (Barron County); (c) Air Pollution Control Permit (Wisconsin Department
of Natural Resources); (d) Nonmetallic Mining Operations General Permit (storm water; Wisconsin Department of
Natural Resources); and (e) High Capacity Well Permit (Wisconsin Department of Natural Resources).
There are no federal permits required. With respect to environmental work conducted to meet the criteria of the
permitting, an Endangered Resource Review was conducted prior to the issuance of new or revised permits by the
Wisconsin Department of Natural Resources.
There are no other significant factors or risks that may affect the access, land title, or the right or ability to
perform work on the Sumner Facility.
History
Four separate historical resource estimates have been prepared by independent contractors on behalf of Source.
Such historical Mineral Resource estimates are not a current Mineral Resource. The historical Mineral Resource
estimates are not NI 43-101 defined Mineral Resources and have not been verified by a QP. The historical estimates
should not be relied upon, particularly in light of preparation of the Sumner APEX Report.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The Sumner Facility, which encompasses the Sumner Open Pit Mine and Sumner Wet Processing Plant, is located
in east-central Barron County in the northwestern corner of Wisconsin. The Sumner Facility is adjacent to United
States Highway 8, which runs primarily east — west for 280 miles (451 km), mostly within the State of Wisconsin.
United States Hwy 8 connects to State Hwy 53 at Cameron, Wisconsin and to State Hwy 35 (I-35) at Forest Lake,
Minnesota. Except for a short freeway segment near Forest Lake, and sections near the St. Croix River Bridge and
Rhinelander, Wisconsin, US Hwy 8 is mostly undivided surface road. As a state highway running through three states,
US Hwy 8 is maintained by the Minnesota, Wisconsin and Michigan departments of transportation.
The Sumner Facility can be assessed by driving north from Eau Claire, Wisconsin to Cameron, Wisconsin, which
is approximately 50 miles (80 km) on paved double lane State Hwy 53. The Sumner Facility is then located another 8
miles (12.9 km) east of Cameron on the south side of single lane, paved US Hwy 8. The Weyerhaeuser Facility is
located at Weyerhaeuser, Wisconsin, which is an additional 8 miles (12.9 km) east of the Sumner Facility on US Hwy
8 and is situated on the north side of the highway. The Weyerhaeuser Facility is located away from the Sumner Facility
to allow for direct access to the Wisconsin Central Railroad, a subsidiary of the CN.
The annual weather patterns in Cameron, Wisconsin are seasonal. The annual average temperature is 42.5º F (5.8º
C), and the hottest and coolest months are typically July (80º F; 27º C) and January (21º F; -6º C), respectively. The
average annual rainfall is 31 inches (79 mm) and annual snowfall is 54 inches (137 cm). The Weyerhaeuser Facility is
not subject to seasonal conditions and operates year-round, 24 hours a day and seven days a week.
A-5
With respect to infrastructure and resources, it is important to note that Wisconsin accounts for nearly one-half of
all the frac sand capacity in the United States (Benson and White, 2015). Accordingly, the State of Wisconsin has a
significant infrastructure, and a knowledgeable and vibrant workforce for the development, and continuation of, silica
sand mining.
Regarding physiography, the Sumner Facility is landlocked, however, as noted earlier, it is located adjacent to
well-maintained, paved US highways.
Geological Setting, Mineralization and Deposit Types
Regional Geology, Local and Property Geology
In the general Sumner Facility area, silica sand units include the Cambrian Mount Simon, Wonewoc and Jordan
formations (Figure 10). These silica sand units are divided by the Eau Claire Formation and Tunnel City Group, which
can be differentiated from the silica sand by their variable lithologies including: mudstone; intercalated mudstone and
sandstone; very fine- to fine-grained sandstone; and cemented sandstone.
Figure 10. Regional bedrock geology (from Mudrey et al., 1987).
Cambrian Mount Simon Formation
In the northwest quadrant of Wisconsin, the Mount Simon Formation contains three informal quartzose sandstone
sub-units (Mudrey et al., 1987), including: (a) an uppermost sandstone that is quartzose, feldspar-bearing, white to light
gray to pale brown, medium to course grained, angular, medium bedded, locally lenticular bedded, and at least 170 feet
(52 m) thick; (b) a second sandstone horizon that is quartzose, pale yellow orange to pale gray orange, very fine
grained, thin to medium bedded, angular, limonite cemented, and 125 feet (38 m) thick, This unit is underlain by a 60
foot (18 m) thick, gray to pale-orange, silty shale; and (c) a basal sandstone unit that is quartzose, very pale orange,
very fine to fine grained, subangular to subrounded, and at least 115 feet (35 m) thick; this sub-unit is known only in
the northwestern Wisconsin subsurface.
The unit is overlain by very fine to fine grained sandstone and shale of the Eau Claire Formation.
Cambrian Wonewoc Formation
The Wonewoc Sandstone, which is the subject of the Sumner APEX Report, overlies the Eau Claire Formation
and is observed in Wisconsin, Michigan, Illinois, Indiana, Minnesota, Iowa and in northeastern Nebraska (Clayton and
Attig, 1990; Runkel et al., 1998); effectively throughout the area known as the Hollandale Embayment. The reference
section for the Wonewoc Sandstone is near the village of Wonewoc in Juneau County, Wisconsin.
A-6
The Wonewoc Formation is characterized by a stratigraphically complex cratonic sheet of sandstone that was
deposited from a continuously abundant supply of quartzose sand in a slowly and uniformly subsiding low-relief basin
(Hollandale Embayment) under fluctuating sea level conditions during the Sauk II and Sauk III subsequences (Palmer,
1981; Runkel et al., 1998). The Wonewoc Formation sandstone varies in thickness from 50 to 150 feet (15 to 46 m)
and is principally medium to coarse grained quartzose sandstone with high-angle cross-stratification. It is divided into
two major lithofacies — the Ironton Member and Galesville Member; however, the two members are commonly
classified together as the Wonewoc Sandstone because lithostratigraphic studies have shown that it is difficult to
consistently distinguish the two formations.
The Wonewoc Formation is overlain by the Tunnel City Group, which varies in thickness from 140-180 feet (43
to 55 m) and is divided into two sub-formations: the Mazomanie Formation and the Lone Rock Formation (Mossler,
2008). The Mazomanie Formation is dominantly white to yellowish-gray, fine- to medium-grained, cross-stratified,
generally friable, quartz sandstone. Some beds contain brown, intergranular dolomite as cement. Skolithos burrows and
sandstone intraclasts are common along discrete horizons. The Lone Rock Formation underlies the Mazomanie
Formation and the two sub-units are often inter-tongued. It consists of pale yellowish-green, very fine- to finegrained glauconitic, feldspathic sandstone and siltstone, with thin, greenish-gray shale partings. Thin beds with
dolomitic intraclasts are common.
Cambrian Jordan Formation
The Jordan Sandstone was named for the city of Jordan, Wisconsin and consists of two distinct, intercalated
quartzose sandstone members that are summarized by Mudrey et al. (1987) as: (a) the uppermost Van Oser Member,
which is a quartzose, white to brown to yellow or orange, fine to medium grained, poorly sorted, medium to thin
bedded, cross bedded, with calcite-cemented nodules, is iron cemented in places, may be locally interbedded with the
underlying unit, and is 30-49 feet (9 to 15 m) thick; and (b) the lower Norwalk Member is a quartzose, white, finegrained, rounded, moderately-sorted, medium-bedded sandstone with a trace of garnet, and a thickness of 49-59 feet
(15 to 18 m). In the extreme western Wisconsin, the Norwalk is a fine- to very fine-grained feldspathic sandstone
(Ostrom,1987; Runkel, 2000).
The Van Oser and Norwalk members are characterized as the “quartzose” and “feldspathic” lithofacies,
respectively, and as such, they are interpreted as high energy, marine intertidal sand deposited as the sea shallowed,
and a low-energy, below wave base, marine deposits (Runkel, 1994).
Pleistocene Surficial Geology
The Sumner Facility occurs on the approximate margin of an unglaciated region known as the “driftless” area.
The surficial geology of the Sumner Facility area is predominantly comprised of Pokegama Creek of the Copper Falls
Formation. These surficial deposits consist of yellowish-red, slightly gravelly sandy-loam till deposited by the
Chippewa Lobe (Johnson, 1986).
Generally, the Pokegama Creek till is thin and discontinuous and outcrops of Cambrian sandstone bedrock and
Precambrian Barron Quartzite are common. Johnson (1986) did not conduct a surficial auger program in the Sumner
Facility, but generally reported that the area consists of till that is less than 50 feet thick (15 m). Source’s auger test
work (see “Drilling”) shows that the surficial material is highly variable in the Sumner Facility area with surficial
deposit thicknesses of between zero and 27.9 feet (8.5 m and averaging less than 2.5 m thick).
The southeastern-most portion of the Sumner Facility (Scoville sub-claim) includes undifferentiated Cambrian
formations, which are comprised of Cambrian sand and sandstone exposed at the surface or capped by a thin layer of
silt or till of the Pokegama Creek Member.
To the southwest of the southwestern-most sub-claims (CPS5 sub-claim) several northeast-trending “lobes” of
Chetek Member occur (C5sp — s=stream sediment; p=pitted stream plain). These surficial deposits include sand and
gravelly sand deposited by melt-water streams that flowed from the Superior and Chippewa lobes (Johnson, 1986).
Their orientation could indicate that the southwestern-most claims are influenced by paleochannels that would deposit
this kind of surficial deposit.
A-7
Property Geology
Silica (frac) sand mining activity in the northwestern part of Wisconsin, primarily in Barron and Chippewa
counties, has concentrated on mining the Wonewoc and Jordan formations from silica sand-strata that is situated on
lower hillsides and hilltops, respectively. At the Sumner Facility, the Wonewoc Formation is the primary silica (frac)
sand mining target as the sandstone unit is generally situated right through the middle of the Sumner Facility.
In general, the upper Wonewoc contact(s) is sharp and easily distinguished. The mine process confidently strips
off the Pleistocene surficial deposits (overburden) and/or the Tunnel City Group to access the Wonewoc Formation
silica sand. The overburden consists of dark grey to reddish dark grey, clay-rich sandy till with abundant pebbles and
minor cobbles; a thin (<1’) iron-stained regolith occurs at the base of the overburden. The basal portion of the Tunnel
City Group consisted of fine grained sandstone and siltstone with a higher component of mudstone in comparison to
the underlying Wonewoc Formation. It is evident that there is “regional”, and even “local” variation associated with the
thickness of the overburden and Tunnel City Group overlying the Wonewoc Formation.
The Wonewoc Formation is dominated by white to iron-stained, medium to coarse grained quartzose sandstone.
The overall observation of the mine pit face(s) is that the Wonewoc is stratigraphically continuous, and uniformly, is
composed of clean, white silica sand. The stratigraphy can be traced laterally with the aid of minor, thin, continuous
clay-mudstone bands that are likely associated with inter-tidal and/or transitions in marine, near-marine and
non-marine deposition. In general, the mudstone and/or mudstone-sandstone intercalated horizons appear to be thin
less than one foot (<31 cm) in thickness.
The basal portion and lowermost contact of the Wonewoc Formation is not as clearly understood as the upper
contact. This is because the majority of the auger drilling to date, including deeper groundwater monitoring holes, has
defined a water table elevation of approximately 1140 feet (347.5 m) above mean sea level (“amsl”) on the Sumner
Facility. This groundwater elevation establishes the lowermost mining extents as defined by the Conditional Use
Permit, which states that mining operations shall maintain a minimum of five feet (1.5 m) separation from groundwater
table. Accordingly, Source has not drill tested below this depth with regularity to define the detailed extent of the
lowermost Wonewoc Formation.
Mineralization
Paleozoic age bedrock layers of quartzose sandstone in the central mid-continent of North America are known as
some of the most mineralogically pure sandstone on Earth with greater than 95% of the sand grains consisting of
silicon dioxide (SiO2). Whole rock chemical analysis (x-ray fluorescence) of the Wonewoc Formation sandstone,
which was conducted by the Department of Natural Resources (Brown, 2012), shows that the Wonewoc silica sand
consists of: (a) Silicon dioxide (SiO2), 99.20-99.70%; (b) Aluminum oxide (Al2O3), 0.10-0.19%; (c) Calcium oxide
(CaO), 0.08-0.21%; (d) Iron oxide (Fe2O3), 0.06-0.03%; (e) Potassium oxide (K2O), 0.05-0.14%; (f) Sodium oxide
(Na2O), 0.002-0.003%; (g) Magnesium oxide (MgO), 0.01-0.02%; (h) Titanium oxide (TiO2), <0.01%.
In addition to being composed mostly of quartz, a mineral known for being of high-strength and relatively inert,
the grains are especially well-rounded, well-sorted, coarse-grained and poorly cemented. The advanced level of textural
maturity in Cambrian quartz grains, including the Wonewoc Formation, remains more uncertain, but is believe to be
related to chemical weathering that may have preferentially dissolved plagioclase and similarly unstable minerals, and
a long history of abrasion in marine conditions and wind abrasion (Morey, 1972; Odom, 1975, 1978; Dott et al., 1986;
Runkel, 1998; Dott, 2003; see “Description of the Sumner Facility — Deposit Types”).
Lastly, grain size is an important factor in determining the value of a silica sand deposit because, for example, the
20/40 mesh sand fraction typically has a relatively high value because of its demand for specific hydrofracturing
procedures, and the 20/40 fraction is relative scarce in silica sand deposits elsewhere on the continent (Beckwith,
2011). Runkel and Steenberg (2012) synthesized grain size data from Ostrom (1971) and Thiel (1957) for the Jordan,
Wonewoc, Mt. Simon and St. Peter formations from throughout Wisconsin; the histogram shows that: (a) St. Peter
sandstone has a relatively small percentage of 20-40 mesh sand and contains the highest proportion of sand finer than
100 mesh; (b) the Wonewoc and Mt. Simon sandstones generally have a diminished coarser fraction compared to the
Jordan; and (c) the St. Peter, Jordan and Wonewoc have similar 40/70 mesh contents.
Despite the relatively finer grain size in comparison to the Jordan Formation, the Wonewoc sandstone can be
mined for multiple markets including those oil and gas hydrofracking plays that are asking for a smaller proportion of
coarser grained silica sand (Brown, 2014).
A-8
Deposit Types
The most prospective settings for the accumulation of mineralogical and mechanically competent frac sand occur
in marine shoreline, marine shoreface, marine intertidal and deltaic settings, and coastal aeolian environments (e.g.,
Winfree, 1983; Dott et al., 1986; Dott, 2003; Hickin et al., 2010). A well-documented example of a geological setting
that has produced high-quality frac sand occurred during the Cambrian in central mid-continental North America
(Minnesota, Wisconsin and Iowa). This setting coincides with the Sumner Facility area, which is the focus of the
Sumner APEX Report.
The Cambrian Period was characterized by a major transgressive event that was bracketed between two ice ages,
one during the late Proterozoic and the other during the Ordovician. With the retreat of Proterozoic ice, the sea level
rose significantly and extensive sequences of Cambrian marine sedimentary rocks (sandstone, shale and fossil-bearing
limestone) show that much of the world was covered by shallow epeiric seaways. The North America
Craton was almost completely drowned in Late Cambrian time by what came to be known as the Sauk
transgression, and subsequently, the central mid-continent is characterized by a series of sedimentary rock depositional
cycles known as the Sauk sequence (Sloss, 1963; Palmer, 1981).
The Precambrian surface had significant and variable relief prior to deposition of Sauk sedimentary rocks. In
northern Wisconsin, the Wisconsin Dome (with its southward extending arch) and nearby regions of the Canadian
Shield represented a vast upland area composed of Precambrian igneous and metamorphic rocks. In contrast to the
Wisconsin dome upland, a broad lowland area named the Hollandale Embayment developed during the Upper
Cambrian and extended across southeastern Minnesota and eastern Iowa, and was situated directly southwest of the
Wisconsin Dome (Austin, 1969, 1970). For long periods of time, broad positive features such as the Wisconsin Dome
were subject to weathering and shed significant volumes of detrital sediment, including eroded Precambrian granite
and metamorphic rock, and Late Precambrian Keweenawan volcanic rock to the Cambrian eiperic seaway and
shorelines that covered the Hollandale Embayment.
The sand, silt and clay sized particles were carried by wind and in rivers across the cratonic interior to the oceanic
shoreline where shallow ocean currents formed a texturally graded shelf (Runkel, 1998, 2007). On this shelf the
coarsest sand, composed mostly of quartz grains, was deposited in shoreface deposits where currents were strongest.
Finer-grained, feldspathic sand, silt and clay sized particles were carried seaward to deeper water. Fluctuations in sea
level caused the shoreface settings to relocate resulting in quartzose sand being deposited for hundreds of miles/
kilometres.
While the shoreface setting naturally modifies the textural maturity of the quartz grains, an advanced level of the
super-mature Cambrian quartz grains in central mid-continental North America remains uncertain. The physical
maturity of the Cambrian sands could not been achieved solely by fluvial transport, but probably involves other factors
such as: (a) a long history of abrasion in marine conditions (Odom, 1975, 1978) along with wind abrasion, which is far
more effective at rounding grains than abrasion in water (Dott et al., 1986); and (b) chemical weathering in the cratonic
interior, which is believed to have preferentially dissolved plagioclase and similarly unstable minerals, creating a
source area that is dominated mineralogically by quartz (Morey, 1972; Runkel, 1998; Dott, 2003).
Lastly, much of the silica (frac) sand mining in central mid-continental North America occurs in the “driftless
area” (Syverson and Colgan, 2004), which is defined as an area of Wisconsin that was untouched by the advance of the
Wisconsinan ice sheets (pre-35,000 to 10,000 years before present; Syverson and Colgan, 2004; Syverson and others,
2011). Because the area is largely devoid of surficial deposits, the Cambrian silica sand strata is accessible to surface
mining. In addition, post-glacial processes has resulted in the exposure of near-surface silica (frac) sand source units in
incised terrains (e.g., rivers and hillsides) such that some silica sand deposits are amenable to surface and/or side-entry
mining.
Exploration
As a current silica (frac) sand miner, processor and transporter, Source has successfully completed numerous
exploration programs on the Sumner Facility. These programs took place between 2011 and 2015. The primary method
of testing the Wonewoc Formation for its stratigraphic position and silica sand potential has been through auger drill
testing. A detailed summary of 77 auger holes that have been drilled to test the stratigraphy and the grain size
distribution of the Wonewoc Formation silica sand is presented in “Drilling”. The results and evaluation of analytical
A-9
work conducted on the auger returns from these drillholes, which includes particle size/gradation analysis and proppant
test work characterization, is presented in: “Description of the Sumner Facility Sample Preparation, Analyses and
Security”; “Description of the Sumner Facility Mineral Processing and Metallurgical Testing”; and “Description of the
Sumner Facility Mineral Resource Estimate”.
Summary of Archival Sampling Conducted During the Site Inspection
An initial review of the data provided to APEX by Source revealed that there were very few bulk density
measurements. As part of a personal site inspection of the Sumner Facility, which was completed on September 14-17,
2015 by the QP, it was decided to collect archived samples for additional bulk density analysis. The sampling also
allowed the QP to review complete stratigraphic sections from selected drillholes occurring throughout the Sumner
Facility to verify the stratigraphy, geology and silica sand mineralization at the Sumner Facility: (a) Source’s archival
auger clippings are preserved in zip-lock plastic bags at Source’s lab located at the Sumner
Facility. In general, the archived samples consist of ~1-3 lb (0.45-1.36 kg) of sample material that are labelled in
permanent marker by their borehole ID and sample interval; (b) the archive collection appears to include samples of
every borehole completed on the Sumner Facility; however a few of the archived samples could not be matched to
boreholes (due to naming discrepancies; e.g., “hole 1”, “hole 2” and “hole 3”, which are poorly identified); (c) the QP
reviewed over half of the archive samples and a total of 31 samples were collected for bulk density analysis; the
sampling included both bulk sample material (i.e., a representative, un-sieved sample), and 20/40, 40/70 and 70/140
screened fractions, which were screened on site at Source’s lab (Table 8); and (d) the samples were labelled, bagged,
tied, placed in a plastic 5-gallon pail and delivered via UPS to Stim-Lab Inc. in Duncan, OK.
The results of the density analysis show that the bulk, 20/40, 40/70 and 70/140 fractions have varying densities
(Table 8). With respect to selecting a bulk density value for the resource estimation, the QP used the average density
value of the bulk samples (1.57 g/cm3) in the resource modelling due to the following: (1) Source is mining the entire
Wonewoc sequence, which is blasted from the mine face and then mined as a bulk sample. Hence, the density of the
bulk samples is the most representative density measurement of the material being mined (as opposed to using the
densities of the individual size fractions); (2) The average density analyses of the “individual size fractions” averages
out to 1.46 g/cm3 (20/40 = 1.51; 40/70 = 1.48; 70/140 = 1.37 g/cm3), all of which are lower than the bulk density value
(1.57 g/cm3). These size fractions do not take into consideration the +20 sizing and the -140 material, which means the
individual size fractions do not factor in, for example, the mudstone/clay material that is ubiquitously present in the
Wonewoc Formation albeit in relatively small amounts. Because mudstone/clay has a higher density (clay typically
ranges from 1.63 to 2.6 with an average of 2.21 g/cm3; Berkman, 1995), a typical mine sample would be expected to
have a higher density in comparison to the ‘individual size fractions’; and (3) The samples collected to measure the
density of the ‘individual size fractions’ were dried prior to sieving; this drying process would create a lower density.
Accordingly, the Sumner APEX Report converts the volumes of the various size fractions to tonnages using a
bulk density of 1.57 g/cm3.
A-10
Table 8. Description of samples collected during the site inspection and analyzed for bulk density.
Sample ID
15RER-SES01
15RER-SES02
15RER-SES03
15RER-SES04
15RER-SES05
15RER-SES06
15RER-SES07
15RER-SES08
15RER-SES09
15RER-SES10
15RER-SES11
15RER-SES12
15RER-SES13
15RER-SES14
15RER-SES15
15RER-SES16
15RER-SES17
15RER-SES18
15RER-SES19
15RER-SES20
15RER-SES21
15RER-SES22
15RER-SES23
15RER-SES24
15RER-SES25
15RER-SES26
15RER-SES27
15RER-SES28
15RER-SES29
15RER-SES30
15RER-SES31
SES Sample ID
Unit
STB-01_60-65
JJ-01_30-35
HO-2_20-25
HO-9_15-20
HO-9_15-20
HO-9_10-25
K-3_30-35
P-2_65-70
P-2_65-70
P-2_60-80
STB-2
HO-6_40-45
HO-10_50-55
HO-10_50-55
HO-10_50-55
Vincent-B-2_90-95
LG-1_35-40
BR-TB-1_55-60
HO-11_45-50
HO-11_45-50
HO-11_45-55
DJ-1_65-70
SL-3_30-35
SL-3_30-35
SL-3_30-35
JW-1_0-10
JW-1_10-20
JW-1_20-26
JW-1_40-45
TB-1_15-20
Site sample
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Wonewoc
Overburden
Overburden
Overburden
Wonewoc
Wonewoc
Wonewoc
Elevation
(top)
Elevation
(bottom)
1185
1180
1174
1169
1178
1173
1175
1172
1175
1172
1182
1167
1220
1225
1191
1186
1191
1186
1196
1176
1180
1175
1138
1133
1160
1155
1160
1155
1160
1155
1165
1160
1189
1184
1147
1142
1160
1155
1160
1155
1160
1150
1166
1159
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Open pit sample
Bulk
20/40
40/70
70/140
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Bluk
density
(g/cm3)
1.60
1.66
1.64
1.50
1.48
1.37
1.58
1.52
1.48
1.37
1.67
1.46
1.54
1.50
1.42
1.58
1.54
1.52
1.54
1.51
1.43
1.58
1.46
1.43
1.35
1.32
1.43
1.35
1.53
1.47
1.52
Drilling
As of the date of the Sumner APEX Report, Source auger drilled a total of 77 test holes throughout the Sumner
Facility, which include: 66 auger holes to test the stratigraphy and the grain size composition of the Wonewoc
Formation silica sand; and 11 holes for groundwater monitoring. The 77 holes do not include auger drilling related to
current mine operations such as auger holes designed for grid blasting of the mine face. The auger holes were drilled in
consecutive years between 2011 and 2015. A spatial depiction of the auger test hole locations throughout the Sumner
Facility is presented in Figure 17. The auger programs are summarized in the text that follows.
The auger drilling generally had two primary objectives: (1) Test and obtain sub-surface geological information
towards definition of the lithostratigraphic contacts between, from stratigraphic top to bottom: Pleistocene surficial
deposits; Tunnel City Group; and the silica sand target unit — the Cambrian aged Wonewoc Formation; and
(2) Investigate and characterize the lateral and vertical grain-size distribution, and proppant quality, of the silica sand
within the Wonewoc Formation.
The initial location of the auger test holes was designed by Source. Source marked the proposed boring locations
and coordinated access on to the Sumner Facility for various third-party consulting companies who conducted the
auger drilling, lithological logging and sampling of the auger returns on behalf of Source. Third party consultants
included: Source; Summit; and Foth.
Regardless of year or contractor, the auger programs generally adopted the same auger methodology. Truck
mounted air rotary auger rigs were used to drill vertical (-90º) auger holes with zero orientations. The diameter of the
auger stem was generally 6 inches (15 cm). The average depth of the auger test holes is 88.5 feet (27 m); the
groundwater monitoring holes have slightly deeper average depths of 134.5 feet (41 m). As of the date of the Sumner
Report, none of the auger collars have surveyed collar locations or elevations; rather the auger collar information was
A-11
initially recorded by the respective drill company in either lambert conformal projection (Latitude, Longitude) or
Public Land Survey System (Township, Range, and Section) land descriptions.
In 2014, the collar elevations were reviewed by, who accordingly, adjusted the collar elevations to correlate with
their respective positions on topographic contour maps. As part of the Sumner APEX Report, APEX acquired remotesensing technology, Light Detection and Ranging (LiDar), from Barron County, and the high-resolution bare-earth
LiDar data were used to fine-tune the collar elevations.
Figure 17. Location of 2011-2015 auger test holes and groundwater monitoring wells drilled by Source. The
outline of the current Sumner Open Pit Mine workings and two historical water wells that were drilled within
the boundaries of the Sumner Facility are also shown.
Chronologically, the auger test hole programs has generally advanced the Sumner Facility as follows: (a) the 2011
and 2012 programs focused on parcels CSP-1, CSP-2, CSP-3, CSP-4 and CSP-5, which defined the Sumner Facility at
the time (the Sumner Facility was expanded to the current land position in 2013-2015); (b) 2011: Initial auger drill
testing on CSP-1, CSP-2, CSP-3, CSP-4 and CSP-5 parcels to ascertain the top of the Wonewoc Formation and
conduct initial test work on the silica sand. These auger holes typically penetrated to depths of 52.5 to 88.5 feet (16 to
27 m); (c) 2012: Minimal auger drilling to test and initiate groundwater monitoring holes on CSP-1 and CSP-4. This
auger work was significantly deeper (up to 279 feet or 85 m deep) and represents the deepest sub-surface work on the
Sumner Facility; (d) 2013: A small auger drill program (n=three groundwater monitoring holes) tested areas northeast
of the original CSP parcels coincident with an expansion of the Sumner Facility (to its current land package); (e) 2014:
An extensive infill auger drill program was conducted to define the present Sumner Open Pit Mine area (on the CSP
parcels); in addition the program tested the Wonewoc Formation with large-scale drill-spacing in other parts of the
Sumner Facility; and (f) 2015: An infill auger drill program focused on the Vincent parcel, which is directly east of the
current Sumner Open Pit Mine area.
Another objective of Source’s auger work was to create groundwater monitoring wells that provide access to
Cambrian aquifers for mine operations and to enable Source to monitor the groundwater table and conditions on the
Sumner Facility. The groundwater monitoring holes, which interactively satisfy the criteria of the auger test holes (i.e.,
provide additional stratigraphic information and sample material for grain-size testing), have defined a mean water
table elevation of approximately 1140 feet (347.5 m) above mean sea level (amsl) on the Sumner Facility. The
groundwater elevation of 1140 feet (347.5 m) establishes the lowermost mining extents as defined by the Conditional
Use Permit, which states that mining operations shall maintain a minimum of five feet (1.5 m) separation from
groundwater table, and accordingly, Source has not drill tested below this depth with regularity.
A-12
The groundwater monitoring holes are constructed by drilling enlarged (upper) and reduced (lower) hole
diameters of 12” and 8” (30 and 20 cm), respectively, and then securing access to the well with 8” (20 cm) steel pipe
casing and screens. The monitoring holes are measured regularly (once a month) to record the depth to the groundwater
table.
No diamond drillhole coring has been conducted on the Sumner Facility. Alternatively, the auger returns and
clippings are extensively relied on to provide: (a) the lithological contact information; and (b) the lateral and vertical
grain-size distribution of the Wonewoc Formation. To test the viability of using auger returns to model the Sumner
Facility subsurface, the QP, extensively reviewed archived sample material that is stored on-site and consist of a
representative archive sample for every sample that has been taken and analyzed on the Sumner Facility to date.
The geological lithologies and contacts associated with the Pleistocene surficial deposits, Tunnel City Formation
and Wonewoc Formation are straightforward, and hence the uppermost sub-surface at the Sumner Facility is well
mapped. The lower contact between the Wonewoc Formation and the underlying Eau Claire and/or Mount Simon
formations is not well understood as the auger test holes have generally not penetrated deep enough through the
groundwater table to fully understand or map this contact. This uncertainty about the lower Wonewoc Formation
contact does not detract from this resource evaluation as the authors have estimated the resource by using only the
Wonewoc Formation information that is available (i.e., we have not extrapolated the Wonewoc to an estimated
stratigraphic depth).
Sampling, Analysis, and Data Verification
Sample Preparation, Analyses and Security
Auger returns, or clippings, from the 2011 to 2015 auger test hole programs (all auger holes) and from some of the
groundwater monitoring holes (MW-4, MW-5 and MW-6) were analyzed for particle size/gradation analysis. The drill
cutting samples were recovered from the auger rigs air discharge exhaust by bagging representative handfuls of auger
returns for every 5 feet (1.5 m) of auger drilling. The samples were hand-mixed and split into at least two separate
sample splits: one for particle size/gradation analysis; and one for archival at the on-site laboratory located on the
Sumner Facility. In some instances, a third sample split was taken for proppant test work characterization.
A total of 891 samples were analyzed for particle size/gradation analysis and form the main “assay” database for
the resource estimation presented in the Sumner APEX Report. With the exception of samples from the 2011 CSP-1 to
CSP-8 auger holes, the particle size/gradation analyses was conducted by third-party consultants: SEH Inc., FracTal
LLC (associated with Summit) and Foth; in conjunction with their respective handling of the auger drill programs. The
2011 CSP-1 to CSP-8 particle size/gradation analysis was completed ‘in-house’ at Source’s laboratory facility located
on the Sumner Facility.
The particle size/gradation analysis followed analytical procedures that generally included: drying the sample;
sieving out the >8 mesh fraction; washing and drying the sample; and sieving the resulting sample using the sieve test
procedure outlined in ASTM E11 (ASTM, 1995). The resulting sieve results are reported in the following mesh size
fractions: 12 (1.820 mm), 16 (1.270 mm), 18 (1.080 mm), 20 (925 μm), 25 (775 μm), 30 (660 μm), 35 (550 μm), 40
(471 μm), 45 (396 μm), 50 (337 μm), 60 (283 μm) 70 (242 μm), 100 (174 μm), 140 (126 μm), 200 (91 μm), and Pan (or
<91 μm). Note that the 140 mesh fraction was not analyzed or recorded for 200 of the 891 samples from 17 auger holes
(STB-, STB-22, HO-1 to HO-11, and BR-TB1 to BR-TB3).
In addition to the particle size/gradation analyses, a smaller subset of samples and their respective size fractions
(n=12) was analyzed for proppant test work following the specifications of ISO 13503-2:2006/ Amd.1:2009E
(International Standards, 2009). This test work is described “Mineral Processing and Metallurgical Testing”. Proppant
characterization test work was completed at Stim-Lab Inc. in Duncan, OK.
The proppant test work samples were dried, weighed and washed through a 200 mesh sieve. The sample retained
on the sieve was then dried and reweighed. The percent loss was calculated from the material that washed through the
sieve. The 20/40, 30/50 and 40/70 size fractions were isolated for testing, which includes: (a) Bulk density: The unit
mass of an untapped or unsettled proppant that will occupy a specific known volume; e.g., how many grams per cubic
centimeter. Bulk Density includes both the mass of the proppant and the mass of air occupying the interstitial spaces
between proppant particles; (b) Sphericity and Roundness (Krumbein Shape Factors): Sphericity is the measure of how
spherical a given proppant particle is. Roundness is the measure of the lack of sharp edges or angularity. Proppants
must be highly spherical and well-rounded in order to maximize interstitial space between adjacent proppant particles
to allow passage of oil, gas, condensate, etc., through the proppant pack in the frac width; (c) Acid Solubility: A mass
A-13
loss (gravimetric) test method that determines the degree of solubility of natural sand in a 12:3 blend of Hydrochloric
and Hydrofluoric acids. The technique effectively measures the resistance of proppants to acid attack, which is an
indication of the presence of contaminants that may negatively affect proppant performance; (d) Turbidity: A method
using transmittance or reflectance of light to measure the amount of fines that are <200 mesh in diameter, including
clay, silt, proppant fines, etc. A fixed mass of proppant is added to a fixed mass of deionized water, agitated, and the
water is drawn off and measured in a turbidity meter; and (e) Crush Resistance: A measurement of the strength of a
mass of screened, fines-free dry proppant to force applied over a fixed cross-sectional area, providing an equivalent
stress to the proppant under test. The mass of proppant introduced to the crush cylinder is a function of its bulk density
and the specified loading of 4.0 pounds per cubic foot. The load is applied in a controlled rate and held at the final test
stress level for 2.0 minutes. The mass is rescreened to determine the amount of fines generated by the applied stress,
and the highest stress attained without producing more than 10.0% fines is the “K Number.” For example, if Crush
Resistance of a proppant yielded 9.78% fines at 10,000 psi and 10.44% fines at 11,000 psi, the K Number (K=1000) of
that proppant would be “10K,” because the generated fines were below 10.0% at 10,000 psi (10K psi) and exceeded
10% at 11,000 psi.
The laboratory selected by Source is an independent laboratory. The analytical methods carried out by the
laboratory is standard and routine in the field of silica sand and proppant characterization test work, and are pursuant to
International Standard ISO 13503-2.
Data Verification
The drilling, logging, sampling and test work processes employed during the 2011-2015 auger test drilling and
sampling programs was conducted by independent, recognized and established third-party consultants, including SEH,
Summit and Foth. The resulting auger specifications, drill logs, sample collection and analytical test methods applied
by these firms’ meets industry standards for accuracy and reliability.
With respect to particle size/gradation analyses, the Lab Manager at FracTAL (subsidiary of Summit), was asked
if the particle size/gradation analyses conducted at various laboratories was compatible and valid for use in NI 43-101
resource estimation. FracTAL used a “Camsizer” to complete the gradation analysis. In contrast, the other labs (Source,
SEH and Foth) used the ASTM standardized particle size distribution or gradation method using a “sieve stack”.
FracTAL feels the standardized method is not as accurate as the Camsizer, but is still used widely because most labs do
not have access to a Camsizer. Importantly, the resulting breakdown of the gradation analysis still follows the ASTM
E11 specification. FracTAL’s Lab Manager concluded that while the methodologies used to sieve-out the samples are
not identical, the results are still reported using the same mesh increments, and therefore, yield a valid combined
dataset that is representative of the particle size/gradation distribution at the Sumner Facility (personal communication,
FracTAL LLC, 2015).
With respect to proppant characterization, Stim-Lab Inc. is an independent laboratory and accredited to ISO
17025:2005 in North America offering all ISO 13503-2, ISO13503-5, API RP19C, and API RP56 tests for sand, resincoated sand, and engineered ceramic proppants.
The QPs reviewed all geotechnical and geochemical data and taken the necessary steps to understand the
analytical methodologies that were conducted by the independent laboratory. The QP, has found no significant issues
or inconsistencies that would cause one to question the validity of the data and is satisfied to include these data in
resource modelling, evaluation and estimations as part of Sumner Indicated and Inferred Silica (Frac) Sand Resource
estimate presented in the Sumner APEX Report.
Mineral Processing and Metallurgical Testing
International Standards ISO 13503-2:2006/Amd.1:2009E provides the specifications for the measurement of
properties of proppants used in hydraulic fracturing operations. Source has conducted proppant test work on nine
separate samples, which includes derivate size fractions from individual samples. The analytical test work was
conducted at Stim-Lab Inc. in Duncan, OK, an independent laboratory offering ISO 13503-2 tests for sand proppant.
The size fractions tested includes: 20/40, 30/50, 40/70 and 50/140. The results of the test work are presented in Table
10 and summarized in the following text.
A-14
Fracturing Proppant Sizes
ISO 13503-2:2006/Amd.1:2009E states that a minimum of 90% of the tested proppant sample shall pass the coarse
designated (or first primary) sieve and be retained on the fine designated (or second primary) sieve (i.e., 12/20, 20/40,
40/60, etc.). For 20/40 sieve sizes, a minimum of 90% of the tested proppant sample shall pass the 20 mesh sieve and be
retained on the 40 mesh sieve. Not over 0.1 % of the total tested proppant sample shall be larger than the first sieve size in
the sieve stack specified in ASTM E11, and not over 1.0% of the total tested proppant sample shall be smaller than the last
designated sieve size. All Source samples met the ISO 13503-2:2006 proppant size specification.
Table 10. Summary of proppant characterization test work conducted by Source.
Crush resistance (to 10% psi)1
Sample ID
Apparent Krumbein Krumbein Mean
Silt and
Grain
Date
Bulk density
shape
shape
partical
Acid
fines:
size Received density
oil
factor
factor diameter 4000 5000 6000 7000 8000 9000 10000 solubility turbidity
3
3
fraction by lab (g/cm ) (g/cm ) (roundness) (sphericity) (mm) (psi) (psi) (psi) (psi) (psi) (psi) (psi) (12:3 HCl:HF) (NTU)2
SES 20/40
20/40
St Louis Prop
15# composite 20/40
SES 30/50
30/50
SES 30/50
30/50
St Louis Prop
15# composite 30/50
SES 40/70
40/70
CSP 40/70
40/70
St Louis Prop
15# composite 40/70
SES 50/140
50/140
5-Nov-13 1.56
2.65
0.7
0.8
0.7
2.00
/
/
/
0.5
20
4-Sep-13 1.54
29-Jan-14 1.54
5-Nov-13 1.54
2.63
2.63
2.64
0.7
0.7
0.7
0.7
0.7
0.7
0.6
0.5
0.4
3.90 6.80 10.60
/
/
1.30
/
/ 8.20 11.20
0.80
/
/ 8.30 12.60
/
/
/
/
/
/
1.2
0.6
0.6
17
57
21
4-Sep-13 1.52
22-Aug-14
/
11-Oct-13 1.52
2.63
2.63
/
0.7
/
0.7
0.7
/
0.7
0.4
/
0.3
2.80
/ 7.40 10.40
/
/
/
/
/
/
/
/
/ 3.90
/
/ 8.70 10.70
/
/
/
1.4
/
1.4
10
52
/
4-Sep-13 1.50
29-Jan-14 1.48
2.64
2.64
0.7
0.6
0.7
0.7
0.3
0.2
/ 9.40 13.50
/
/
/ 9.10 11.20
1.5
3.4
9
41
1
psi is pounds per square inch
2
NTU = nephelometric turbidity unit; FTU = formazine turbidity Unit
/ 7.30 10.90
/ 2.50
/ 3.40
/
/
Highest stress level in which the proppant generates no more than 10% crushed material, rounded to the nearest 1,000 psi (or K-value)
International standards for proppant specification (ISO 13503-2; 2009-11-01):
- Average sphericity of 0.6 or greater
- Average roundness of 0.6 or greater
- Maximum acid solubility of grains <30/50 is 3.0% and for grains ≥30/50 is 2.0%
- Turbidly shall not exceed 250 NTU (FTU)
Sphericity and roundness
Sphericity is a measure of how close the grain is to a sphere, and roundness is a measure of the relative sharpness of
grain corners. ISO 13503-2:2006/Amd.1:2009E states that sphericity and roundness for proppant is 0.6 or greater, and the
recommended sphericity and roundness for high-strength proppant is 0.7 or greater.
Table 10 shows that all of the samples sent to Stim-Lab have sphericity shapes of greater than 0.7 meeting the criteria
for high-strength proppant. With the exception of one 50/140 size fraction all of the roundness results were 0.7 meeting
the criteria for high-strength proppant.
Acid Solubility
Acid Solubility provides an indication of the amount of undesirable contaminants in a sand sample by determining its
solubility when soaked in a hydrochloric-hydrofluoric acid (HCL-HFL) solution. ISO 13503-2:2006/Amd.1:2009E states
that the acid soluble material in proppants shall not exceed 2.0 and 3.0 for proppant larger than or equal to the 30/50 and
smaller than 30/50 mesh fractions, respectively.
Table 10 shows that all of the samples measured with smaller than 30/50 size fractions (two 20/40 fractions) have
acid solubility’s of less than 1.2%, which is below the specification of 3.0%. With respect to the larger than or equal to
30/50, the 30/50 and 40/70 fractions have acid solubility’s of less than 1.5%, which is below the specification of 2.0%.
The 50/140 fraction has an acid solubility of 3.4%, which is above the specification of 2.0%.
A-15
Maximum Proppant Turbidity
Turbidity is the measurement of the amount of clay and silt sized particles contained in sand sample by placing it
in water and measuring the overall turbidity of the liquid. ISO 13503-2:2006/Amd.1:2009E states that the turbidity of
all fracturing proppants shall not exceed 250 nephelometric turbidity units (NTU). All of the Source samples easily
satisfy this specification with turbidity’s of <57 NTU (Table 10).
Maximum Crush Material
Crush resistance is determined by subjecting a sand sample to specific pressures for a designated amount of time
and measuring the resulting amount of fines (percent by weight). As per ISO 13503-2:2006/Amd.1:2009E,
determination of the highest stress level at which proppant generates no more than 10% crushed material, rounded
down to the nearest 6.9 MPa (1,000 psi), represents the maximum stress that the material can withstand without
exceeding 10% crush (International Standards, 2009).
The crush resistance, “k” value for the various size fractions include: (a) three 20/40 fractions resulted in 5k, 6k
and 7k crush resistance; (b) four 30/50 fractions resulted in 6k, 7k (n=2) and 8k crush resistance; (c) three 40/70
fractions resulted in 7k and 8k 9n=2) crush resistance; and (d) a single 50/140 fraction resulted in a 9k crush resistance
(Table 10).
These “k” values are typical for Cambrian Wonewoc sandstone in western Wisconsin. For example, Brown
(2012) cited 20/40, 30/50 and 40/70 crush resistance values of 6k, 7k and 10k, respectively.
To conclude, the published specifications and standards for industrial minerals should be used primarily as a
screening mechanism to establish the marketability of an industrial mineral. The suitability of an industrial mineral for
use in specific applications can only be determined through detailed market investigations and discussions with
potential consumers. In Source’s case, the proppant test work results show that the Sumner Facility Wonewoc
Formation silica sand meets the recommendations set forth in International Standards ISO 13503-2:2006/Amd.1:2009E
for sieve size fractions, sphericity, roundness, acid solubility, turbidity and crush classification.
Accordingly and with respect to reporting a resource estimate that abides by NI 43-101, the Source proppant test
work results show that the Wonewoc Formation silica sand from the Sumner Facility has demonstrated prospects of
economic viability for an industrial mineral deposit. This fact is clearly demonstrated in that Source is mining,
processing, transporting and selling its silica sand to North America markets.
Mineral Resource Estimate
The resource has been estimated within three-dimensional solids that were created from cross sectional
interpretation. The upper contact of Wonewoc Formation is either in contact with the overlying Tunnel City Group or
Pleistocene surficial deposits, or has been cut by the topography surface using a combination of 1 m resolution LiDar
survey and STRM data. The sizing percent was estimated into a block model with parent block size of 164 feet East x
164 feet North x 10 feet Elevation (50 m x 50 m x 3 m) with sub-blocking down to 33 feet East x 33 feet North x 3.3
feet Elevation (10 m x 10 m x 1 m). A nominal density of 1.57 g/cm3 was applied to all blocks, which was based on
thirteen representative density samples. The percent concentrations for the grain sieve size fraction estimation were
performed using inverse distance squared methodology. Indicated Mineral Resource and the Inferred Mineral Resource
is constrained within the Wonewoc Formation, and to a depth of 82 m below surface. The Indicated Mineral Resource
has been constrained around the highest density of drilling and in and around the Sumner Facility. The remainder of the
resource was classified as Inferred Mineral Resource.
Using a lower cutoff of +70 sand fractions being greater than 60% in total abundance, this Sumner Indicated and
Inferred Silica (Frac) Sand Resource estimate predicts total (i.e., global) resources of: 23.73 million short tons
(21.53 million metric tonnes) of silica sand of indicated; and 103.72 million short tons (94.10 million metric tonnes) of
silica sand of inferred classification is present at Sumner Facility (Tables 21 and 22). The Sumner Indicated and
Inferred Resource in Tables 21 and 22 is also presented in selected proppant size fraction distributions of 20/40, 30/50,
40/70 and 50/140 (or ‘100’) mesh, and estimated tonnages of the individual fractions are as follows:
•
Indicated Mineral Resource: (a) 20/40 mesh fraction: 5,530,000 short tons (5,010,000 metric tonnes);
(b) 30/50 mesh fraction: 11,430,000 short tons (10,370,000 metric tonnes); (c) 40/70 mesh fraction:
11,830,000 short tons (10,730,000 metric tonnes); and (d) 50/140 mesh fraction: 7,730,000 short tons
(7,020,000 metric tonnes).
A-16
•
Inferred Mineral Resource: (a) 20/40 mesh fraction: 23,950,000 short tons (21,730,000 metric tonnes);
(b) 30/50 mesh fraction: 43,540,000 short tons (39,500,000 metric tonnes); (c) 40/70 mesh fraction:
44,680,000 short tons (40,540,000 metric tonnes); and (d) 50/140 mesh fraction: 34,230,000 short tons
(31,060,000 metric tonnes).
The Sumner Open Pit Mine is located within the Indicated Mineral Resource area, which lends credibility to its
economic viability. The Indicated Mineral Resource presented in the Sumner APEX Report has compensated for the
mined out section of Wonewoc Formation silica (frac) sand, the open pit boundaries of which were mapped by Source
in the summer 2015 using an unmanned aerial vehicle (i.e., a drone). Mineral Resources are not Mineral Reserves and
do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be
converted into a Mineral Reserve.
Table 1. The Sumner Indicated Silica (Frac) Sand Resource estimate as of December 16, 2015. The highlighted
main indicated resource is reported from the Wonewoc Formation as a total (global) volume and tonnage using
a nominal bulk density of 1.57 g/cm3 and a lower reporting cutoff of the sum of the +70 sand fractions being
greater than 60% total abundance. The Table also presents selected proppant size distributions of 20/40, 30/50,
40/70 and 50/140 (or ‘100’) mesh.
Note 1:
Note 2:
Note 3:
Note 4:
Note 5:
Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that
all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate of Mineral Resources may
be materially affected by geology, environment, permitting, legal, title, taxation, socio-political, marketing or other
relevant issues. Source has not based its production decisions and ongoing mine production on Mineral Reserve
estimates, preliminary economic assessments, pre- feasibility studies or feasibility studies. As a result, there may
be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery
and historically projects without any Mineral Reserves have increased uncertainty and risk of failure.
The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or 907.2 kg).
Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000 unit).
The ‘Total’ volume and weights are estimated on a global basis and represent the main Sumner Indicated Silica (Frac)
Sand Resource.
The estimation of the individual sieve size fractions was completed using no cutoff, however, the Sumner indicated and
inferred resource is reported using a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60%.
Wonewoc formation indicated mineral resource total (global) resource and selected size fractions volume (m3) tones (T) tons (t) total 13,710,000 21,530,000 23,730,000 20/40 3,190,000 5,010,000 5,530,000 30/50 6,600,000 10,370,000
11,430,000 40/70 6,830,000 10,730,000 11,830,000 50/140 4,470,000 7,020,000 7,730,000
A-17
Table 2. The Sumner Inferred Silica (Frac) Sand Resource estimate as of December 16, 2015. The highlighted
main inferred resource is reported from the Wonewoc Formation as a total (global) volume and tonnage using a
nominal bulk density of 1.57 g/cm3 and a lower reporting cutoff of the sum of the +70 sand fractions being
greater than 60% in total abundance. The Table also presents selected proppant size distributions of 20/40,
30/50, 40/70 and 50/140 (or ‘100’) mesh.
Note 1:
Note 2:
Note 3:
Note 4:
Note 5:
Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee
that all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate of Mineral
Resources may be materially affected by geology, environment, permitting, legal, title, taxation, socio-political,
marketing or other relevant issues. Source has not based its production decisions and ongoing mine production on
Mineral Reserve estimates, preliminary economic assessments, pre- feasibility studies or feasibility studies. As a
result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost
of such recovery and historically projects without any Mineral Reserves have increased uncertainty and risk of
failure.
The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or 907.2 kg).
Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000 unit).
The ‘Total’ volume and weights are estimated on a global basis and represent the main Sumner Inferred Silica (Frac)
Sand Resource.
The estimation of the individual sieve size fractions was completed using no cutoff, however, the Sumner indicated and
inferred resource is reported using a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60%.
The Sumner Indicated Silica (Frac) Sand Resource, which is situated in the Wonewoc Formation, is overlain by,
or intercalated withy: 3.22 million short tons (2.92 million metric tonnes) of Pleistocene surficial deposits; 1.83 million
short tons (1.66 million metric tonnes) of Tunnel City Group sedimentary rock; and 6.33 million short tons
(5.74 million metric tonnes) of waste Wonewoc Formation, defined as Wonewoc sand that did not satisfy the cutoff of
+70 sand fractions being greater than 60% in total abundance. The Sumner Inferred Silica (Frac) Sand Resource, which
is focused solely on the Wonewoc Formation, is overlain by, or intercalated with: 16.71 million short tons
(15.16 million metric tonnes) of Pleistocene surficial deposits; 18.83 million short tons (17.08 million metric tonnes) of
Tunnel City Group sedimentary rock; and 28.14 million short tons (25.53 million metric tonnes) of waste Wonewoc
Formation, defined as Wonewoc sand that did not satisfy the cutoff of +70 sand fractions being greater than 60% in
total abundance.
The waste material tonnages were calculated using densities of 1.37 g/cm3 for the overburden, and 1.57 g/cm3 for
the Tunnel City Group and waste Wonewoc Formation. The overburden bulk density value of 1.37 g/cm3 is based on
three till samples that were analyzed for bulk density by the senior author during and Wonewoc bulk density analytical
work. There is currently no known density information for the Tunnel City Group; hence, we used the same bulk
density value as the Wonewoc Formation.
Exploration and Development
Source has no current intentions of undertaking a preliminary economic analysis or any additional drilling or
exploration activities as the Sumner Facility is currently sufficiently producing to support Source’s operations.
Wonewoc formation inferred mineral resource total (global) resource and selected size fractions volume (m3) tonnes (T) tons (t) total 59,930,000 94,100,000 103,720,000 20/40 13,840,000 21,730,000 23,950,000 30/50 25,160,000
39,500,000 43,540,000 40/70 25,820,000 40,540,000 44,680,000 50/140 19,780,000 31,060,000 34,230,000
A-18
DESCRIPTION OF THE BLAIR FACILITY
AND THE D95 NORTH PROPERTY
Current Technical Report
The information in this section of the prospectus related to the Blair Facility and the D95 North Property is based
upon the Blair APEX Report authored by the QPs. The QPs have verified the data disclosed, including sampling,
analytical, and test data underlying the information contained in the prospectus. Any reference to figures, tables or
citations below correspond to such items in the Blair APEX Report. For an explanation of certain technical terms used
in this prospectus, see “Scientific and Technical Information”. Portions of the following information are based on
assumptions, qualifications and procedures which are not fully described herein. Reference should be made to the full
text of the Blair APEX Report, which is available for review under the Company’s profile on the SEDAR website at
www.sedar.com.
The D95 North Property is incorporated in the Blair APEX Report, but does not have the same amount of
subsurface drilling information as the Blair Facility. Accordingly, a Mineral Resource estimate has not been prepared
for the D95 North Property, but rather, the QPs evaluated the D95 North Property as a potential target for future
exploration.
See “Accessibility, Climate, Local Resources, Infrastructure and Physiography” for information regarding access
to the these properties.
Project Description, Location, and Access
Introduction to the Blair Facility and the D95 North Properties
Source US LP has entered into the Blair Purchase Agreement to acquire 100% of the membership interests of
Sand Products. Sand Products has two subsidiaries that, by virtue of the Blair Purchase Agreement, will also be fully
owned by Source: Spartan Sand LLC, and Sand Products Rail LLC. Sand Products has a land lease for silica sand
properties at the Blair Facility that are situated within Trempealeau County in west-central Wisconsin. Spartan Sand
LLC has a land lease for silica sand properties at the D95 North Property that are situated within Trempealeau County
in west-central Wisconsin. The ownership and leases of both the Blair Facility and the D95 North Property are
summarized as follows:
Blair Facility Ownership History
•
Private (deeded) land owners within the boundaries of the Blair Facility formed a coalition group entitled the
Highway 53 Group LLC.
•
Highway 53 Group LLC executed a Mining Option and Lease Agreement with Sand Products, with an
effective date of November 28, 2012.
D95 North Property Ownership History
•
Private (deeded) land owners within the boundaries of the D95 North Property formed a coalition group
entitled the FTBB Holdings LLC.
•
FTBB Holdings LLC executed a Mining Option and Lease Agreement with Spartan Sand LLC (a subsidiary
of Sand Products), with an effective date of November 21, 2016.
Closing of the Blair Facility Acquisition is pending at the effective date of the Blair APEX Report. Per the Blair
Purchase Agreement, Source will own 100% of the membership interests of Sand Products; all agreements pertaining
to Sand Products (i.e. leases, royalties, permits, etc.) will transfer to the benefit of Source. A summary of the
agreements for both the Blair Facility and D95 North Property are discussed in the text that follows.
The Blair Facility includes 25 contiguous parcels totalling 756.19 acres (306.02 hectares; Table 3). The parcels
range in size from 0.05 acres to 73.68 acres. Within the Blair Facility, Sand Products has constructed an open pit to
access Wonewoc Formation silica sand, a wet-processing plant adjacent to the open pit, and a dry processing plant and
rail-loading terminal situated on CN’s Whitehall subdivision. This rail line links with rail lines associated with the
Weyerhaeuser Facility, which is also on CN’s Barron subdivision.
A-19
The D95 North Property includes 17 contiguous parcels totalling 336.68 acres (136.25 hectares; Table 3; Figure
4). The parcels range in size from 0.16 acres to 40.00 acres (Note: 40 acres represents a quarter-quarter section). The
Blair Facility and the D95 North Property are not contiguous, and are separated by a distance of approximately 4 km.
Table 3. Permit descriptions and status for the Blair Facility and D95 North Property.
A) Blair Facility
Parcel #
206005700000
206005700001
206005710000
206005740000
206005750000
206005760000
206005800000
206005810000
206005820000
206005830000
206005840000
206005850000
206005860000
206005870000
206005880000
206005890000
206005900000
206005910000
206005920000
206005930000
206005940000
206005950000
206005970000
206005980000
206005990000
Public Land Survey System
(township-range-section-quarter
section-quarter quarter section)
Area
(acres)
Area
(hectares)
T21N-R7W-S6-NW-SW
T21N-R7W-S6-NW-NW
T21N-R7W-S6-SW-NE
T21N-R7W-S6-SW-NW
T21N-R7W-S6-SW-SW
T21N-R7W-S6-SW-SE
T21N-R8W-S1-NE-NE
T21N-R8W-S1-NE-NE
T21N-R8W-S1-NE-NW,NE
T21N-R8W-S1-NE-NW
T21N-R8W-S1-NE-SW
T21N-R8W-S1-NE-SE
T21N-R8W-S1-NW-NE
T21N-R8W-S1-NW-NW
T21N-R8W-S1-NW-SW
T21N-R8W-S1-NW-SW
T21N-R8W-S1-NW-SE
T21N-R8W-S1-SW-NE
T21N-R8W-S1-SW-NW
T21N-R8W-S1-SW-SW
T21N-R8W-S1-SW-SE
T21N-R8W-S1-SE-NE,NW
T21N-R8W-S1-SE-NW,SW
T21N-R8W-S1-SE-NW,SW,NE
T21N-R8W-S2-SW-NE
8.98
0.05
4.27
36.60
41.52
33.84
32.08
9.68
26.76
32.47
39.35
39.36
52.23
51.87
37.21
2.58
39.62
40.27
39.87
9.91
39.76
41.78
3.08
73.68
19.39
3.63
0.02
1.73
14.81
16.80
13.69
12.98
3.92
10.83
13.14
15.92
15.93
21.14
20.99
15.06
1.04
16.03
16.29
16.13
4.01
16.09
16.91
1.25
29.82
7.85
756.19
306.02
Public Land Survey System
(township-range-section-quarter
section-quarter quarter section)
Area
(acres)
Area
(hectares)
T21N-R08W-S22-SW-NE
T21N-R08W-S22-SE-NE
T21N-R08W-S22-SE-NE
T21N-R08W-S22-NE-SE
T21N-R08W-S22-NE-SW
T21N-R08W-S22-NE-SW
T21N-R08W-S22-SE-SW
T21N-R08W-S22-SE-SW
T21N-R08W-S22-NE-SE
T21N-R08W-S22-NW-SE
T21N-R08W-S22-NW-SE
T21N-R08W-S22
T21N-R08W-S22-SE-SE
T21N-R08W-S22-SE-SE
T21N-R08W-S27-NE-NE
T21N-R08W-S27
T21N-R08W-S27-NE-NW
15.61
39.84
0.16
4.85
0.94
17.31
18.78
10.64
35.15
5.14
22.96
40.00
6.98
33.02
40.00
39.46
5.84
6.32
16.12
0.06
1.96
0.38
7.01
7.60
4.31
14.22
2.08
9.29
16.19
2.82
13.36
16.19
15.97
2.36
336.68
136.25
Totals
Private (deeded) land owner
Thompsand Farms LLC
Thompsand Farms LLC
Thompsand Farms LLC
Thompsand Farms LLC
Thompsand Farms LLC
Thompsand Farms LLC
Kulig Estenson, Kimarie Lynn
Thompsand Farms LLC
Kulig, Kevin J & Tanya M
Kulig Estenson, Kimarie Lynn
Osgood Family LLP
Osgood Family LLP
Kulig Estenson, Kimarie Lynn
Jones Revocable Trust, Richard Y & H
Pederson, Kermit E & Sharon J
Sand Products Wisconsin LLC
Osgood Family LLP
Osgood Family LLP
Pederson, Kermit E & Sharon J
Pederson, Kermit E & Sharon J
Kindschy, Eugene W & Tammy
Kindschy, Eugene W & Tammy
Kindschy, Eugene W & Tammy
Green Acre Investments LLC
Pederson, Kermit E & Sharon J
B) D95 North Property
Parcel #
024012130000
024012140000
024012140005
024012340000
024012240000
024012240010
024012310000
024012310005
024012340005
024012350000
024012350010
024012360000
024012370000
024012370005
024013200000
024013210000
024013260000
Totals
A-20
Private (deeded) land owner
Flaten Land Company LLC
Flaten Land Company LLC
Flaten Land Company LLC
Flaten Land Company LLC
Robert & Lorna Tenneson
Flaten Land Company LLC
Robert & Lorna Tenneson
Flaten Land Company LLC
Flaten Land Company LLC
Robert & Lorna Tenneson
Flaten Land Company LLC
Robert & Lorna Tenneson
Robert & Lorna Tenneson
Flaten Land Company LLC
Flaten Land Company LLC
Robert & Lorna Tenneson
Robert & Lorna Tenneson
Figure 3. The Blair Facility is comprised of 25 separate parcels (to accompany Table 3).
Figure 4. Source Energy Services D95 North Property is comprised of 17 separate parcels (to accompany Table 3).
A-21
Property Location
The Blair Facility and the D95 North Property are located near the Town of Preston, Trempealeau County in westcentral Wisconsin. The Blair Facility is located between the cities of Whitehall and Blair and is transected by Highway
53 (4.5 km south of Whitehall and 5.2 km northwest of Blair). The approximate center of the Blair Facility, in
Universal Transverse Mercator coordinates is: 636000 m Easting, 4909600 m Northing, Zone 15, North American
Datum 83. Using the Public Land Survey System, the property is located in Section 1 of Township 21, Range and 8W
and section 6 of Township 21, Range 7W.
The D95 North Property is located approximately 4 km to the southwest of the Blair Facility and about 7.5 km
east-southeast of the City of Blair. The approximate center of the D95 North Facility, in Universal Transverse Mercator
coordinates is: 632900 m Easting, 4904300 m Northing, Zone 15, North American Datum 83. Using the Public Land
Survey System, the property is located in Section 2 of Township 21, Range and 8W.
Nature and Extent of Sand Products Land Titles
Two agreements form the basis of the land titles for the Blair Facility: (a) an Annexation Agreement with the City
of Blair; and (b) a Mining Option and Lease Agreement.
The Annexation Agreement was signed on March 27, 2014 between the City of Blair and Sand Products, and
provides Sand Products approval to engage in mining operations from Trempealeau County, subject to Sand Products
meeting certain conditions imposed by Trempealeau County.
As per the Annexation Agreement, a summary of the obligations of Sand Products include:
1.
Compliance with State and Federal laws;
2.
Property tax payments paid annually to the Town of Preston and pursuant to Wisconsin Statutes; this
includes an Annexation Payment for a five year term, and for an additional 15 years, or at the cessation of
mining operations, whichever occurs first.
3.
Property value guarantee paid to all residential property owners.
4.
Sand Products shall not operate any commercial vehicles used for the purpose of transporting non-metallic
minerals.
5.
Annual inspection and regulation costs, including Sand Products paying to the city a fee of US$0.25 cents per
ton of non-metallic minerals processed and shipped from the Blair Facility.
6.
Sand Products will provide a minimum royalty payment of US$100,000 to be paid the year the construction
commences on the annexed property and the first year thereafter.
7.
All reasonable consulting, inspection and engineering fees incurred for the City of Blair’s administration of
the Annexation Agreement.
A reclamation plan was devised and approved by the City of Blair; the plan is consistent with the terms of Chapter
295 of the Wisconsin Statutes, N.R. 135 of the Wisconsin Administrative Code, and Chapter 52 of the City Code of
Ordinances for the City of Blair.
The Mining Option and Lease Agreement (effective date of January 28, 2012) binds a formal agreement between
the Blair Facility land holders and Sand Products. A due diligence period (four months) included the payment of the
sum of US$115,000 by Sand Products to the Blair Facility land owners upon the execution of the Mining Option and
Lease Agreement. In addition to due diligence rights, Sand Products exercised the option to the Mining Option and
Lease Agreement by paying US$575,000 to the Blair Facility land owners to lease the Sand Rights (as defined herein).
This granting rights permits Sand Products exclusive right to mine in, on and under the Blair Facility, which includes,
without limitation, entering upon exploring, drilling, developing, surface or open pit or strip mining, auger mining, or,
mining sand by any other method (whether now or hereafter known), using all water rights appurtenant to the Blair
Facility, and producing, processing, drying, removing, loading, transporting, and marketing sand from the Blair Facility
for Sand Products own account (collectively the “Sand Rights”). The Sand Rights include full and complete rights of
ingress to and egress from and over the Blair Facility and the right to blast, excavate, remove, pile up and dispose of
overburden and waste. The rights include the ability to erect use and maintain on the Blair Facility such buildings,
A-22
plants, equipment, machinery, offices, shops, tracts, storerooms, tipples, scale houses, pump houses, drainage ditches,
power and telephone lines, haul roads and any other improvement as may be necessary or desirable in performing the
mining operations and removing sand.
The Mining Option and Lease Agreement is for a term of 10 years, beginning on the commencement date, and
shall automatically be extended for two additional 10-year terms so long as no less than the Minimum Production
Royalty is paid. The Production Royalty schedule is presented in Table 4.
Table 4. Blair Facility Royalty schedule. The rate is determined for each month, based on the average of:
(a) prior 6-months average sand shipped; and (b) the prior 6-month West Texas Intermediate index.
Monthly tons of
Blair Facility sand
shipped (6-month
rolling average)
0-10,000
>10,000
>20,000
>30,000
>40,000
>50,000
>60,000
>70,000
>80,000
>90,000
>100,000
West Texas
Intermediate
(WTI; 6-month
rolling average)
Royalty
per tone
40
45
50
55
60
65
70
75
80
85
90
95
100
$1.00
$1.10
$1.20
$1.30
$1.40
$1.50
$1.65
$1.80
$2.00
$2.20
$2.45
$2.70
$3.00
In the event Sand Products constructs a processing plant on the Blair Facility, Sand Products shall pay an annual
Siting Fee of US$1,000 per acre. The Siting Fee has been paid and shall not be applied to the Minimum Production
Royalty. In addition to the Siting Fee, Sand Products shall pay a Wheel Tax Royalty of US$0.50 per ton of sand
processed on the Blair Facility; provided, however, that Sand Products shall not be obligated to pay any Wheel Tax
Royalty amounts on sand processed on the Blair Facility, but which was extracted from the Blair Facility. The Wheel
Tax Royalty shall not be applied to the Minimum Production Royalty. The tons of sand to which the Wheel Tax at the
Blair Facility apply shall not exceed 50% of the gross tons shipped by Sand Products from its collective Wisconsin
Mining Operations unless Sand Products shall have mined all of the available sand from the Blair Facility. The Wheel
Tax shall be paid through the lifetime of the Blair Facility.
Nature and Extent of the Land Titles: D95 North Property
At present, the D95 North Property is bound by a single agreement, the Mining Option and Lease Agreement, as
amended, which is effectively dated November 21, 2016. The agreement is signed by the land owners, FTBB Holdings
LLC, and a 100% subsidiary of Sand Products, Spartan Sand LLC. Stipulations of the current agreement show that the
Mining Option and Lease Agreement for the D95 North Property is currently suspended as summarized below:
•
All terms, conditions and financial obligations of the 1st, 2nd and 3rd agreements are suspended.
•
Spartan Sand LLC has until April 1, 2017 to provide written notice to FTBB Holdings LLC to restore the
suspended terms, conditions and financial obligations of the Mining Option and Lease Agreement.
Permitting and Environmental Approvals: Blair Facility and D95 North Property
Sand Products has the following local, Trempealeau County, and Wisconsin State permits that will be transferred
to Source with execution of the Blair Purchase Agreement:
•
Conditional Use Permit: Available via the Department of Land Management, Trempealeau County Land and
Water Plan and the Comprehensive Zoning Ordinance. The permit stipulates standard operation requirements
(e.g., extraction and processing hours of operation; audible noise emissions; blasting hours; public road
usage; etc.).
A-23
•
With respect to groundwater, the Conditional Use Permit states that:
•
Non-metallic mining operations must at all times remain at least 10 feet (3 m) above the water table
level, unless an alternative level proposed by the applicant and established by water table elevation
monitoring is approved by the county;
•
The county may require monitoring wells to establish the groundwater level prior to the commencement
of non-metallic mining operations on a site;
•
Non-metallic mining within 10 feet (3 m) of the water table level or within the water table may be
permitted provided the applicant receives a favorable letter from the town board regarding the mining
proposal and receives the approval of the county; and
•
Lastly, the applicant must demonstrate that the operation does not pose a legitimate risk as determined
by the county to water table level or groundwater quality of the area.
•
Non-metallic Mining Reclamation Ordinance: Chapter NR 135 of the Wisconsin Administrative Code
requires counties to adopt and implement a Non-Metallic Mining Reclamation Ordinance to establish a local
program to ensure the effective reclamation of non-metallic mining sites on which non-metallic mining takes
place. Administration of the reclamation programs is conducted by either county or local regulatory
authorities;
•
Air Pollution Control Permit (Wisconsin Department of Natural Resources);
•
Non-metallic Mining Operations General Permit (storm water; Wisconsin Department of Natural Resources);
and
•
High Capacity Well Permit (Wisconsin Department of Natural Resources).
There are no federal permits required. With respect to environmental work conducted to meet the criteria of the
permitting, an Endangered Resource Review was conducted prior to the issuance of new or revised permits by the
Wisconsin Department of Natural Resources. There are no other significant factors or risks that may affect the access,
land title, or the right or ability to perform work on the Blair Facility.
History
No historical resource estimates have been prepared by independent contractors on behalf of Sand Products.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The properties are located near the Town of Preston, Trempealeau County in west-central Wisconsin. The closest
large cities are Eau Claire to the north and La Crosse to the south. Other nearby communities include: Taylor, Arcadia,
Independence, Hixton, and Galesville. The Blair Facility is located between the cities of Whitehall and Blair and is
transected by Highway 53 (4.5 km south of Whitehall and 5.2 km northwest of Blair). Whitehall represents the
Trempealeau County seat. The D95 North Property is located approximately 4 km to the southwest of the Blair Facility
and about 4 km east-southeast of the City of Blair.
The Blair Facility and D95 North Property are landlocked, but are located adjacent to well-maintained, paved US
highways. The driving distance from Eau Claire to the Blair Facility is approximately 43 miles (69 km) on paved
double lane State Hwy 53. The D95 North Property, which is southwest of the Blair Facility, is accessed by continuing
south on State Hwy 53, southwest on State Hwy 95 and west on Peterson Coulee Road to the D95 North Property. The
driving distance between the Blair Facility and the D95 North Property is approximately 6.5 miles (10.5 km).
Geological Setting and Mineralization
Regional Geology, Local and Property Geology
In the general Blair Facility and D95 North Property areas, silica sand units include the Cambrian Wonewoc and
Jordan formations (Ostrom, 1966, 1970, 1987; Mudrey et al., 1987). These silica sand units are divided by the Eau
Claire Formation and Tunnel City Group (also known as the Lone Rock Formation), which can be differentiated from
the silica sand by their variable lithologies including: mudstone; intercalated mudstone and sandstone; very fine- to
fine-grained sandstone; and cemented sandstone.
A-24
Figure 10. Surface exposures of silica sand source units in the upper Midwest U.S. The polygons outline the
Ordovician St. Peter sandstone (light yellow) and the combined Cambrian sandstone (green), which includes the
Jordan, Wonewoc, and Mount Simon formations. The approximate positions of the Wisconsin Dome,
Hollandale Embayment and the Driftless Area are also shown.
Cambrian Mount Simon Formation
In the northwest quadrant of Wisconsin, the Mount Simon Formation contains three informal quartzose sandstone
sub-units (Mudrey et al., 1987), including: (a) an uppermost sandstone that is quartzose, feldspar-bearing, white to light
gray to pale brown, medium to course grained, angular, medium bedded, locally lenticular bedded, and at least 170 feet
(52 m) thick; (b) a second sandstone horizon that is quartzose, pale yellow orange to pale gray orange, very fine
grained, thin to medium bedded, angular, limonite cemented, and 125 feet (38 m) thick, This unit is underlain by a 60
foot (18 m) thick, gray to pale-orange, silty shale; and (c) a basal sandstone unit that is quartzose, very pale orange,
very fine to fine grained, subangular to subrounded, and at least 115 feet (35 m) thick; this sub-unit is known only in
the northwestern Wisconsin subsurface.
The unit is overlain by very fine to fine grained sandstone and shale of the Eau Claire Formation.
Cambrian Wonewoc Formation
The Wonewoc Sandstone, which is the subject of the Blair Apex Report, overlies the Eau Claire Formation and is
observed in Wisconsin, Michigan, Illinois, Indiana, Minnesota, Iowa and in northeastern Nebraska (Clayton and Attig,
1990; Runkel et al., 1998); effectively throughout the area known as the Hollandale Embayment (see Figure 10). The
reference section for the Wonewoc Sandstone is near the village of Wonewoc in Juneau County, Wisconsin.
A-25
The Wonewoc Formation is characterized by a stratigraphically complex cratonic sheet of sandstone that was
deposited from a continuously abundant supply of quartzose sand in a slowly and uniformly subsiding low-relief basin
(Hollandale Embayment) under fluctuating sea level conditions during the Sauk II and Sauk III subsequences (Palmer,
1981; Runkel et al., 1998). The Wonewoc Formation sandstone varies in thickness from 50 to 150 feet (15 to 46 m)
and is principally medium to coarse grained quartzose sandstone with high-angle cross-stratification. It is divided into
two major lithofacies — the Ironton Member and Galesville Member; however, the two members are commonly
classified together as the Wonewoc Sandstone because lithostratigraphic studies have shown that it is difficult to
consistently distinguish the two formations. Mudrey et al. (1987) characterized the two sub-members as the: (a) Ironton
Member — a quartzose, white to brown with iron staining, medium to coarse grained, subrounded, poorly sorted,
wavy-bedded, vertically burrowed, calcite-cemented, 16-59 feet (5 to 18 m) thick sandstone; and the underlying; and
(b) Galesville Member — a quartzose, white, fine-to medium grained, rounded to subrounded, well-sorted, thickbedded, cross-bedded, poorly cemented, 16-59 feet (5 to 18 m) thick sandstone with bedding units 10-16 feet (3 to 5 m)
thick.
The Wonewoc Formation is overlain by the Tunnel City Group (Ostrom, 1966, 1970, 1987), which varies in
thickness from 140-180 feet (43 to 55 m) and is divided into two sub-formations: the Mazomanie Formation and the
Lone Rock Formation (Mossler, 2008). The Mazomanie Formation is dominantly white to yellowish-gray, fine- to
medium-grained, cross-stratified, generally friable, quartz sandstone. Some beds contain brown, intergranular dolomite
as cement. Skolithos burrows and sandstone intraclasts are common in discrete horizons. The Lone Rock Formation
underlies the Mazomanie Formation. It consists of pale yellowish-green, very fine- to fine-grained glauconitic,
feldspathic sandstone and siltstone, with thin, greenish-gray shale partings. Thin beds with dolomitic intraclasts are
common.
Cambrian Jordan Formation
The Jordan Sandstone was named for the city of Jordan, WI and consists of two distinct, intercalated quartzose
sandstone members that are summarized by Mudrey et al. (1987) as: (a) the uppermost Van Oser Member, which is a
quartzose, white to brown to yellow or orange, fine to medium grained, poorly sorted, medium to thin bedded, cross
bedded, with calcite-cemented nodules, is iron cemented in places, may be locally interbedded with the underlying
unit, and is 30-49 feet (9 to 15 m) thick; and (b) the lower Norwalk Member is a quartzose, white, fine-grained,
rounded, moderately-sorted, medium-bedded sandstone with a trace of garnet, and a thickness of 49-59 feet (15 to 18
m). In the western Wisconsin, the Norwalk is a fine- to very fine-grained feldspathic sandstone (Ostrom,1987; Runkel,
2000).
The Van Oser and Norwalk members are characterized as the ‘quartzose’ and ‘feldspathic’ lithofacies,
respectively, and as such, they are interpreted as high energy, marine intertidal sand deposited as the sea shallowed,
and a low-energy, below wave base, marine deposits (Runkel, 1994).
Pleistocene Surficial Geology
The Blair Facility and the D95 North Property occur within an unglaciated region of west-central and
southwestern Wisconsin that is referred to as the ‘driftless’ area (see Figure 10). The thickness of the overburden at the
Blair Facility and D95 North Property varies from as little as 5-10’ (1.5-3.0 m) to as much as 50’. Auger drill programs
show that the area is covered by a thin veneer of overburden that is characterized by brown clay to brown fine-grained
clay-sand with traces of gravel.
Property Geology
Bedrock underlying Trempealeau County consists of Cambrian sandstone, shale and sandy dolomite, overlain by
Ordovician dolomite and sandstone. Cambrian rock units include: Elk Mound Group (Mount Simon, Eau Claire and
Wonewoc formations), the Tunnel City Group (undifferentiated) and the Trempealeau Group (St. Lawrence and Jordan
formations).
The lower Eau Claire-Wonewoc (Galesville Member) contact marks the end of one transgressive/regressive
sequence and the beginning of a major transgressive sequence associated with the Wonewoc Formation. The Wonewoc
transgression is defined by high-energy conditions with a noticeable lack of clay, silt, very fine sand and a total lack of
fossils. Above the Galesville Member, the Wonewoc (Ironton Member) formed in an alternating high and low energy
A-26
environment seaward of the beach front. Ironton Member sandstone is well sorted, clean, medium-to coarse-grained
quartzarenite. The uppermost Ireton Member ends in a sharp contact with the Lone Rock Formation of the Tunnel City
Group. The lithology of the Lone Rock Formation is easily distinguished from the underlying Wonewoc Formation in
that the Lone Rock comprises fine-grained glauconitic, thin-bedded shaly units.
Mineralization
As per Trempealeau County Zoning Ordinance documentation, “Industrial Sand” is defined as
“… a high purity silica sand or silicon dioxide (SiO2). It is nearly pure quartz, very well rounded, of uniform
particle shape and size, having a high compressive strength, and meeting size gradation standards for its
various uses. Industrial sand is sold for any of the following uses: glassmaking, metal casting, metal
production, chemical production, paint and coatings, ceramics and refractories, moldings, abrasives, and
otherwise preparing sand for uses other than construction. It is most commonly used by the oil and gas
industry as a proppant for the hydraulic fracturing of shale for the exploration, drilling, production, and
recovery of oil and gas (i.e. “frac sand”). This sand is classified as 212322 Industrial Sand Mining according
to the NAICS (North American Industry Classification System), and as 1446 Industrial Sand, and 1481
Non-metallic Mineral Services except fuels, according to the SIC (Standard Industrial Classification)
System.”
Paleozoic age bedrock layers of quartzose sandstone in the central mid-continent of North America are known as
some of the most mineralogically pure sandstone on Earth with greater than 95% of the sand grains consisting of
silicon dioxide (SiO2). Whole rock chemical analysis (x-ray fluorescence) of the Wonewoc Formation sandstone,
which was conducted by the Department of Natural Resources (Brown, 2012), shows that the Wonewoc silica sand
consists of: (a) Silicon dioxide (SiO2) 99.20-99.70%; (b) Aluminum oxide (Al2O3) 0.10-0.19%; (c) Calcium oxide
(CaO) 0.08-0.21%; (d) Iron oxide (Fe2O3) 0.06-0.03%; (e) Potassium oxide (K2O) 0.05-0.14%; (f) Sodium oxide
(Na2O) 0.002-0.003%; (g) Magnesium oxide (MgO) 0.01-0.02%; and (h) Titanium oxide (TiO2) <0.01%.
In addition to being composed mostly of quartz, a mineral known for being of high-strength and relatively inert,
the grains are especially well-rounded, well-sorted, coarse-grained and poorly cemented. The advanced level of textural
maturity in Cambrian quartz grains, including the Wonewoc Formation, remains more uncertain, but is believe to be
related to chemical weathering that may have preferentially dissolved plagioclase and similarly unstable minerals, and
a long history of abrasion in marine conditions and wind abrasion (Morey, 1972; Odom, 1975, 1978; Dott et al., 1986;
Runkel, 1998; Dott, 2003; see “Description of the Blair Facility and the D95 North Property — Geological Setting and
Mineralization Deposit Types”).
Lastly, grain size is an important factor in determining the value of a silica sand deposit because, for example, the
20/40 mesh sand fraction typically has a relatively high value because of its demand for specific hydrofracturing
procedures, and the 20/40 fraction is relative scarce in silica sand deposits elsewhere on the continent (Beckwith,
2011). Runkel and Steenberg (2012) synthesized grain size data from Ostrom (1971) and Thiel (1957) for the Jordan,
Wonewoc, Mt. Simon and St. Peter formations from throughout Wisconsin; the histogram shows that: (a) St. Peter
sandstone has a relatively small percentage of 20-40 mesh sand and contains the highest proportion of sand finer than
100 mesh; (b) the Wonewoc and Mt. Simon sandstones generally have a diminished coarser fraction compared to the
Jordan; and (c) the St. Peter, Jordan and Wonewoc have similar 40/70 mesh contents.
Despite the relatively finer grain size in comparison to the Jordan Formation, the Wonewoc sandstone can be
mined for multiple markets including those oil and gas hydrofracking plays that are asking for a smaller proportion of
coarser grained silica sand (Brown, 2014).
Deposit Types
The best deposits of frac sand are characterized by super-mature marine shoreline sandstone deposits that have a
long history of reworking, were never deeply buried, and underwent diagenesis that reduced or removed cements
(Winfree, 1983; Dott et al., 1986; Dott, 2003). The depositional environment and factors to increase mineralogical
maturity must include multiple cycles of mechanical reworking that enhance roundness, sphericity and sorting of grains
(Benson and Wilson, 2015). The most prospective settings for the accumulation of mineralogical and mechanically
competent frac sand, therefore, occur in marine shoreline, marine shoreface, marine intertidal and deltaic settings, and
coastal aeolian environments (e.g., Winfree, 1983; Dott et al., 1986; Dott, 2003; Hickin et al., 2010). A well-
A-27
documented example of a geological setting that has produced high-quality frac sand occurred during the Cambrian in
central mid-continental North America (Minnesota, Wisconsin and Iowa). This setting coincides with the Blair Facility
and the D95 North Property areas, which are the focus of the Blair APEX Report.
The Cambrian Period was characterized by a major transgressive event that was bracketed between two ice ages,
one during the late Proterozoic and the other during the Ordovician. With the retreat of Proterozoic ice, the sea level
rose significantly and extensive sequences of Cambrian marine sedimentary rocks (sandstone, shale and fossil-bearing
limestone) show that much of the world was covered by shallow epeiric seaways. The North America Craton was
almost completely drowned in Late Cambrian time by what came to be known as the Sauk transgression, and
subsequently, the central mid-continent is characterized by a series of sedimentary rock depositional cycles known as
the Sauk sequence (Sloss, 1963; Palmer, 1981).
The Precambrian surface had significant and variable relief prior to deposition of Sauk sedimentary rocks. In
northern Wisconsin, the Wisconsin Dome (with its southward extending arch) and nearby regions of the Canadian
Shield represented a vast upland area composed of Precambrian igneous and metamorphic rocks. In contrast to the
Wisconsin dome upland, a broad lowland area named the Hollandale Embayment developed during the Upper
Cambrian and extended across southeastern Minnesota and eastern Iowa, and was situated directly southwest of the
Wisconsin Dome (Austin, 1969, 1970; see Figure 10). For long periods of time, broad positive features such as the
Wisconsin Dome were subject to weathering and shed significant volumes of detrital sediment, including eroded
Precambrian granite and metamorphic rock, and Late Precambrian Keweenawan volcanic rock to the Cambrian epeiric
seaway and shorelines that covered the Hollandale Embayment.
The sand, silt and clay sized particles were carried by wind and in rivers across the cratonic interior to the oceanic
shoreline where shallow ocean currents formed a texturally graded shelf (Runkel, 1998, 2007). On this shelf the
coarsest sand, composed mostly of quartz grains, was deposited in shoreface deposits where currents were strongest.
Finer-grained, feldspathic sand, silt and clay sized particles were carried seaward to deeper water. Fluctuations in sea
level caused the shoreface settings to relocate resulting in quartzose sand being deposited for hundreds of miles/
kilometres.
While the shoreface setting naturally modifies the textural maturity of the quartz grains, an advanced level of the
super-mature Cambrian quartz grains in central mid-continental North America remains uncertain. The physical
maturity of the Cambrian sands could not been achieved solely by fluvial transport, but probably involves other factors
such as: (a) a long history of abrasion in marine conditions (Odom, 1975, 1978) along with wind abrasion, which is far
more effective at rounding grains than abrasion in water (Dott et al., 1986); and (b) chemical weathering in the cratonic
interior, which is believed to have preferentially dissolved plagioclase and similarly unstable minerals, creating a
source area that is dominated mineralogically by quartz (Morey, 1972; Runkel, 1998; Dott, 2003).
Lastly, much of the silica (frac) sand mining in central mid-continental North America occurs in the “driftless
area” (Syverson and Colgan, 2004), which is defined as an area of Wisconsin that was untouched by the advance of the
Wisconsinan ice sheets (pre-35,000 to 10,000 years before present; Syverson and Colgan, 2004; Syverson and others,
2011; see Figure 10). Because the area is largely devoid of surficial deposits, the Cambrian silica sand strata is
accessible to surface mining. In addition, post-glacial processes has resulted in the exposure of near-surface silica (frac)
sand source units in incised terrains (e.g., rivers and hillsides) such that some silica sand deposits are amenable to
surface and/or side-entry mining.
Exploration
As part of preparation for the Blair APEX Report, Source conducted sampling on an open pit/excavation at the
Blair Facility, and on archival auger return material from both the Blair Facility (drillhole SEH-1) and the D95 North
Property (drillhole SEH-3) properties for density and proppant characterization test work. The location and results of
the bulk density sample test work is presented in Table 9. The location of the bulk density samples collected in the
open pit/excavation at the Highway 53 Property is shown in Figure 16.
A total of 12 samples were collected and analyzed for bulk density analysis at Stim-Lab. The results of the
analysis yield minimum, maximum and average bulk density values of 1.50 g/cm3, 1.64 g/cm3 and 1.55 g/cm3,
respectively (Table 9). As any material taken from the Blair Facility would be bulk mined, the QPs have, therefore,
selected a conservative bulk density value of 1.55 g/cm3 for the conversion of volume to tonnes.
A-28
In addition, a single sample from SEH-01 was collected for proppant characterization at Stim-Lab. The results of
this sample analysis are presented in “Description of the Blair Facility and the D95 North Property — Mineral
Processing and Metallurgical Testing”.
Table 9. Description of samples collected during the site inspection and analyzed for bulk density.
Sample ID
Property
Latitude
Longitude
Elevation
(feet
above sea
level)
PHX-01-A
PHX-01-B
PHX-02-A
PHX-02-B
PHX-03-A
PHX-03-B
PHX-04-A
PHX-04-B
PHX-05-A
PHX-05-B
SEH-1
SEH-3
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
BLAIR FACILITY
D95 North
44°19’19.68”N
44°19’20.16”N
44°19’19.86”N
44°19’20.34”N
44°19’20.16”N
44°19’20.58”N
44°19’20.58”N
44°19’22.26”N
44°19’22.20”N
44°19’22.44”N
44°19’50.46”N
44°16’37.87”N
91°18’2.76”W
91°18’5.40”W
91°18’2.94”W
91°18’5.34”W
91°18’3.06”W
91°18’5.16”W
91°18’2.82”W
91°18’4.50”W
91°18’3.00”W
91°18’4.14”W
91°18’7.52”W
91°20’18.80”W
990
990
980
980
970
970
960
960
950
950
/
/
Collection location
description
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Open pit/excavation
Drillhole composite
Drillhole composite
Material
(kg)
Bulk
density
(g/cm3)
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
5.0
0.5
1.52
1.50
1.56
1.56
1.55
1.58
1.54
1.53
1.53
1.52
1.64
1.61
Minimum
Maximum
Average (all)
Average (Highway 43)
1.50
1.64
1.55
1.55
Drilling
2012, 2013 and 2015 auger drill programs at the Blair Facility and D95 North Property, and open pit excavation at
the Blair Facility were conducted by Sand Products and Spartan Sand LLC are considered historical, and are therefore
presented in Section 6, History.
Sand Products has completed (within the boundaries of the Blair Facility): (a) a 2012-2013 auger drillhole test
program, which consists of 9 holes (TB-1 to TB-9) totalling 959.0‘(292.3 m) conducted by Summit on behalf of Sand
Products. A 2015 auger drillhole test program, which consisted of one hole (SEH-01; 129.0‘; 39.3 m) conducted by
SEH on behalf of Sand Products. Total drilling is ten holes totalling 1,088.0’ (331.6 m); (b) open pit excavations on the
west side of the Blair Facility conducted by Sand Products; (c) construction of a wet-processing plant, which is located
directly north of the open pit; (d) construction of a dry-processing plant on the east side of the Blair Facility; the dry
processing plant was built adjacent to the railroad tracks; and (e) a rail terminal on the east side that is intended to ship
product to the various sites and consists of 5.2 miles of track.
The holes were collared at higher elevation ridge locations on the western side of the Blair Facility where
Wonewoc Formation bedrock occurs. Example Wonewoc Formation intersections include: (a) Drillhole SEH-1
interested a 109.4’ (33.3 m) continuous section of light brown to orange, subrounded to well-rounded, moderately to
well-sorted Wonewoc Formation sandstone.
Sampling, Analysis, and Data Verification
Sample Preparation, Analyses and Security
Auger returns from the 2012, 2013 and 2015 auger test hole programs (all auger holes) were analyzed for particle
size/gradation analysis. The drill cutting samples were recovered from the auger rigs air discharge exhaust by bagging
representative handfuls of auger returns for every 5 feet (1.5 m) of auger drilling. The samples were hand-mixed and
split into at least two separate sample splits: one for particle size/gradation analysis; and one for archival at Sand
Products. In some instances, a third sample split was taken for proppant test work characterization.
A total of 152 samples were analyzed for particle size/gradation analysis at the Blair Facility and the D95 North
Property. These data were used to form the ‘assay’ database for the resource estimation presented in the Blair APEX
A-29
Report (see “Description of the Blair Facility and the D95 North Property — Mineral Resource Estimate” for a statistical
summary of the resulting gradation data). The particle size/gradation analyses were conducted by third-party consultants:
FracTal and SEH; in conjunction with their respective handling of the auger drill programs (Summit and SEH).
The particle size/gradation analysis followed analytical procedures that generally included: drying the sample;
sieving out the >8 mesh fraction; washing and drying the sample; and sieving the resulting sample using the sieve test
procedure outlined in ASTM E11 (ASTM, 1995). The resulting sieve results are reported in the following mesh size
fractions: 12 (1.820 mm), 16 (1.270 mm), 18 (1.080 mm), 20 (925 μm), 25 (775 μm), 30 (660 μm), 35 (550 μm), 40
(471 μm), 45 (396 μm), 50 (337 μm), 60 (283 μm) 70 (242 μm), 100 (174 μm), 140 (126 μm), 200 (91 μm), and Pan
(or <91 μm). Note that the 140 mesh fraction was not analyzed or recorded for 200 of the 891 samples from 17 auger
holes (STB-, STB-22, HO-1 to HO-11, and BR-TB1 to BR-TB3).
In addition to the particle size/gradation analyses, a smaller subset of samples and their respective size fractions
(n=4) was analyzed for proppant test work following the specifications of ISO 13503-2:2006/ Amd.1:2009E
(International Standards, 2009). This test work is described in “Description of the Blair Facility and the D95 North
Property — Mineral Processing and Metallurgical Testing”. Proppant characterization test work was completed at
PropTester and Stim-Lab Inc.
The proppant test work samples were dried, weighed and washed through a 200 mesh sieve. The sample retained
on the sieve was then dried and reweighed. The percent loss was calculated from the material that washed through the
sieve. The 20/40, 30/50 and 40/70 size fractions were isolated for testing, which includes: (a) Bulk Density: the unit
mass of an untapped or unsettled proppant that will occupy a specific known volume; e.g., how many grams per cubic
centimeter. Bulk Density includes both the mass of the proppant and the mass of air occupying the interstitial spaces
between proppant particles; (b) Sphericity and Roundness (Krumbein Shape Factors): sphericity is the measure of how
spherical a given proppant particle is. Roundness is the measure of the lack of sharp edges or angularity. Proppants
must be highly spherical and well-rounded in order to maximize interstitial space between adjacent proppant particles
to allow passage of oil, gas, condensate, etc., through the proppant pack in the frac width; (c) Acid Solubility: a mass
loss (gravimetric) test method that determines the degree of solubility of natural sand in a 12:3 blend of Hydrochloric
and Hydrofluoric acids. The technique effectively measures the resistance of proppants to acid attack, which is an
indication of the presence of contaminants that may negatively affect proppant performance; (d) Turbidity: a method
using transmittance or reflectance of light to measure the amount of fines that are <200 mesh in diameter, including
clay, silt, proppant fines, etc. A fixed mass of proppant is added to a fixed mass of deionized water, agitated, and the
water is drawn off and measured in a turbidity meter; and (e) Crush Resistance: A measurement of the strength of a
mass of screened, fines-free dry proppant to force applied over a fixed cross-sectional area, providing an equivalent
stress to the proppant under test. The mass of proppant introduced to the crush cylinder is a function of its bulk density
and the specified loading of 4.0 pounds per cubic foot. The load is applied in a controlled rate and held at the final test
stress level for 2.0 minutes. The mass is rescreened to determine the amount of fines generated by the applied stress,
and the highest stress attained without producing more than 10.0% fines is the “K Number.” For example, if Crush
Resistance of a proppant yielded 9.78% fines at 10,000 psi and 10.44% fines at 11,000 psi, the K Number (K=1000) of
that proppant would be “10K,” because the generated fines were below 10.0% at 10,000 psi (10K psi) and exceeded
10% at 11,000 psi and the laboratories selected by Sand Products and Source are independent laboratories. The
analytical methods carried out by the laboratory is standard and routine in the field of silica sand and proppant
characterization test work, and are pursuant to International Standard ISO 13503-2.
Data Verification
The drilling, logging, sampling and test work processes employed during the 2012, 2013 and 2015 auger test
drilling and sampling programs was conducted by independent, recognized and established third-party consultants,
including Summit and SEH. Regardless of year or contractor, the auger programs generally adopted the same auger
methodology. Truck mounted air rotary auger rigs were used to drill vertical (-90º) auger holes at zero orientation. The
diameter of the auger stem was generally 6 inches (15 cm). The average depth of the auger test holes is 115 feet (35 m).
With respect to particle size/gradation analyses, we have reviewed sieve data obtained from the 2012-2015 auger
programs using: (a) quantile-quantile plots of 20/40 and 40/70 fractions using the entire Blair Facility dataset (n=10
auger holes and 152 sieve analyses) in a comparison between those samples analyzed at FracTal versus SEH; and
(b) swath plots comparing the abundance of 20/40 and 40/70 fractions from two ‘neighboring’ auger drillholes (TB-2
and SEH-1, which are separated by 185 m).
A-30
The quantile-quantile plots of 20/40 and 40/70 fractions show there is good agreement between the FracTAL and
SEH sieve results, particularly for the 40/70 size fractions. The 20/40 comparison includes some stepping, which is
attributed to a general lack of data from the single SEH auger drillhole used in the comparison (versus nine ‘TB’ series
holes, the samples of which were analyzed at FracTAL).
With respect to proppant characterization (see “Description of the Blair Facility and the D95 North Property —
Mineral Processing and Metallurgical Testing”), PropTester and Stim-Lab Inc. is an independent laboratory and
accredited to ISO 17025:2005 in North America offering all ISO 13503-2, ISO13503-5, API RP19C, and API RP56
tests for sand, resin-coated sand, and engineered ceramic proppants.
The QPs have reviewed all geotechnical and geochemical data and found no significant issues or inconsistencies
that would cause one to question the validity of the data and is satisfied to include these data in resource modelling,
evaluation and estimations as part of Blair Facility Silica (Frac) Sand Resource estimate presented in this Blair APEX
Report.
Mineral Processing and Metallurgical Testing
International Standards ISO 13503-2:2006/Amd.1:2009E provides the specifications for the measurement of
properties of proppants used in hydraulic fracturing operations. A total of 7 samples from the Blair Facility were
analyzed at PropTester and FracTal laboratories, and a single sample from the D95 North Property was analyzed at
PropTester. In addition, Source sent a single composite sample from drillhole SEH-1 at the Blair Facility to Stim-Lab.
These independent laboratories offer ISO 13503-2 tests for sand proppant. The size fractions tested includes: 20/40,
30/50 and 40/70. The results of the test work are summarized in the following text. The results of the proppant pre-test
sieve analysis and proppant characterization test work are presented in Table 11.
Fracturing Proppant Sizes
ISO 13503-2:2006/Amd.1:2009E states that a minimum of 90% of the tested proppant sample shall pass the
coarse designated (or first primary) sieve and be retained on the fine designated (or second primary) sieve (i.e., 12/20,
20/40, 40/60, etc.). For 20/40 sieve sizes, a minimum of 90% of the tested proppant sample shall pass the 20 mesh
sieve and be retained on the 40 mesh sieve. Not over 0.1% of the total tested proppant sample shall be larger than the
first sieve size in the sieve stack specified in ASTM E11, and not over 1.0% of the total tested proppant sample shall be
smaller than the last designated sieve size. All samples met the ISO 13503-2:2006 proppant size specification.
A-31
A-32
TB-1
Stim-Lab
Stim-Lab
Stim-Lab
SEH-1
SEH-1
SEH-1
Drillhole ID
30/50
Fractal
TB-1, TB-2 & TB-3
1.56
1.53
1.50
0.70
0.70
0.70
/
/
/
/
/
/
/
0.80
0.80
0.70
/
/
/
/
/
/
/
/
/
/
0.461
0.609
/
/
/
0.596
0.328
/
/
/
0.456
0.590
/
/
/
0.581
0.329
/
/
/
/
/
/
/
8.40 11.90
9.40 17.90
/
/
9.40 13.50 /
/
9.70 13.20
7.80 12.60
/
8.50 13.90 /
8.50 12.50 /
/
/
/
/
/
/
/
/
/
/
/
/
/
/
Crush resistance
(to 10% psi)1
2.60 / 7.50 14.40 /
/
/
1.50 /
/
7.60 10.40 /
/
/ 2.10 /
/
/
8.90 10.70
/
/
/
/
/
/
/
0.70
0.80
0.90
/
/
2.4
2.1
1.9
/
/
6
3
3
/
/
/
/
/
/
/
PropTester
1.56
0.80
0.70
/
0.569
psi is pounds per square inch
NTU = nephelometric turbidity unit FTU = formazine turbidity unit
19-Feb-13
/
/
8.10 11.00
/
/
/
1.70
Highest stress level in which the proppant generates no more than 10% crushed material, rounded to the nearest 1,000 psi (or K-value)
International standards for proppant specification (ISO 13503-2; 2009-11-01):
- Average sphericity of 0.6 or greater
- Average roundness of 0.6 or greater
- Maximum acid solubility of grains <30/50 is 3.0% and for grains ≥30/50 is 2.0%
- Turbidity shall not exceed 250 NTU (FTU)
2
1
20/40
9
Krumbein Mean
Median
Acid
Grain
Date
Bulk Krumbein
shape
partical partical
solubility Turbidity
size
Received density shape factor
factor
diameter diameter 4000 5000 6000 7000 8000 9000 10000 (12:3
Test
Laboratory fraction by lab (g/cm3) (roundness) (sphericity) (mm)
(mm) (psi) (psi) (psi) (psi) (psi) (psi) (psi) HCI:HF) (FTU)2
20/40 28-Jan-17
30/50 28-Jan-17
40/70 28-Jan-17
9-Nov-12
1.55
1.57
20/40
9-Nov-12
/
/
/
1.56
1.50
20/40 4-Mar-13
40/70 4-Mar-13
30/50 4-Mar-13
20/40 23-Jan-13
40/70 23-Jan-13
1799
Crush resistance
(to 10% psi)1
Krumbein Mean Median
Acid
Grain
Date
Bulk Krumbein
shape
partical partical
solubility Turbidity
size Received density shape factor
factor
diameter diameter 4000 5000 6000 7000 8000 9000 10000 (12:3
Test
Laboratory fraction by lab (g/cm3) (roundness) (sphericity) (mm)
(mm) (psi) (psi) (psi) (psi) (psi) (psi) (psi) HCI:HF) (FTU)2
TB-4
PropTester
TB-4
PropTester
TB-5
PropTester
TB-5
Fractal
TB-6
Fractal
TB-1
Fractal
TB-1, TB-2 & TB-3
Fractal
Drillhole ID
Sample ID
B) D95 North
2222
2222
2226
2226 & 2227 Composite
2229
1750
SPC20/40
(Composite of 1752, 1768 & 1782)
SPC30/50
(Composite of 1752, 1768 & 1782)
SEH-1
SEH-1
SEH-1
Sample ID
A) Blair Facility
Table 11. Summary of proppant characterization test work conducted by Source.
Sphericity and roundness
Sphericity is a measure of how close the grain is to a sphere, and roundness is a measure of the relative sharpness
of grain corners. ISO 13503-2:2006/Amd.1:2009E states that sphericity and roundness for proppant is 0.6 or greater,
and recommends sphericity and roundness for high-strength proppant is 0.7 or greater. A single sample from the Blair
Facility drillhole SEH-1 was analyzed for Krumbein shape factors at Stim-Lab. The 20/40, 30/50 and 40/70 fractions
all have sphericity shape factors of greater than 0.7 meeting the criteria for high-strength proppant; the 20/40 and 30/50
fractions from SEH-1 both have sphericities of 0.8. A single sample from the D95 North Property (from drillhole
TB-1) was analyzed for Krumbein shape factors at PropTester. This sample has a 20/40 size fraction roundness of 0.8
and a sphericity of 0.7, respectively, both of which meet the criteria for high-strength proppant.
Acid Solubility
Acid Solubility provides an indication of the amount of undesirable contaminants in a sand sample by determining
its solubility when soaked in a hydrochloric-hydrofluoric acid (HCL-HFL) solution. ISO 13503-2:2006/Amd.1:2009E
states that the acid soluble material in proppants shall not exceed 2.0 and 3.0 for proppant larger than or equal to the
30/50 and smaller than 30/50 mesh fractions, respectively. Three samples, which included various 20/40, 30/50 and
40/70 size fractions, from the Blair Facility were tested at PropTester and Stim-Lab (Table 11). Acid solubility results
met the ISO specification for the: 2222 (20/40 fraction), 2226 (30/50), SEH-1 (20/40), SEH-1 (30/50) and SEH-1
(40/70) samples. A single PropTester test, sample 2222 (40/70), failed the ISO acid solubility specification. A single
sample from the D95 North Property, TB-1 (20/40 fraction) satisfied the acid solubility ISO specification.
Maximum Proppant Turbidity
Turbidity is the measurement of the amount of clay and silt sized particles contained in sand sample by placing it
in water and measuring the overall turbidity of the liquid. ISO 13503-2:2006/Amd.1:2009E states that the turbidity of
all fracturing proppants shall not exceed 250 nephelometric turbidity units (NTU). All of the samples (n=3 from the
Blair Facility and n=1 from the D95 North Property) easily satisfy this specification with turbidity’s of <9 NTU (Table
11).
Maximum Crush Material
Crush resistance is determined by subjecting a sand sample to specific pressures for a designated amount of time
and measuring the resulting amount of fines (percent by weight). As per ISO 13503-2:2006/Amd.1:2009E,
determination of the highest stress level at which proppant generates no more than 10% crushed material, rounded
down to the nearest 6.9 MPa (1,000 psi), represents the maximum stress that the material can withstand without
exceeding 10% crush (International Standards, 2009).
The crush resistance, “k” value for the various size fractions from the Blair Facility include: (a) four of four 20/40
fractions all resulted in 6k crush resistance; (b) three 30/50 fractions resulted in 6k (n=1 sample) and 7k (n=2 samples)
crush resistance; and (c) three 40/70 fractions resulted in 6K, 7k and 9k crush resistance (Table 11).
A single 20/40 sample from the D95 North Property yielded a crush resistance of 6K.
These “k” values are typical for Cambrian Wonewoc sandstone in western Wisconsin. For example, Brown
(2012) cited 20/40, 30/50 and 40/70 crush resistance values of 6k, 7k and 10k, respectively. All of the 20/40 fractions
meet this general comparison. One the three samples from the 30/50 fraction yielded a low (6K) crush result. Two of
the three 40/70 fractions yielded low (6K and 7k) crush results are considered to have low crushability in comparison
to other western Wisconsin area Wonewoc fraction test results.
To conclude, the published specifications and standards for industrial minerals should be used primarily as a
screening mechanism to establish the marketability of an industrial mineral. The suitability of an industrial mineral for
use in specific applications can only be determined through detailed market investigations and discussions with
potential consumers.
Albeit a limited number of samples, the proppant test work results show that Wonewoc Formation silica sand
from the Blair Facility and the D95 North Property generally meets the recommendations set forth in International
Standards ISO 13503-2:2006/Amd.1:2009E for sieve size fractions, sphericity, roundness, acid solubility, turbidity and
crush classification.
A-33
Mineral Resource Estimate
The resource has been estimated within three-dimensional solids that were created from cross sectional
interpretation. The upper contact of Wonewoc Formation is either in contact with the overlying Tunnel City Group or
Pleistocene surficial deposits, or has been cut by the topography surface using a combination of 1 m resolution LiDar
survey and STRM data. The sizing percent was estimated into a block model with A parent block size of 328 feet x 328
feet x 10 feet (100 m x 100 m x 3 m) with sub-blocking down to 82 feet x 82 feet x 5 feet (25 m x 25 m x 1.5 m). A
nominal density of 1.55 g/cm3 was applied to all blocks, which was based on 12 representative density samples of
Wonewoc Formation from the Blair Facility. The percent concentrations for the grain sieve size fraction estimation
were performed using inverse distance to the power of one methodology. The Inferred Mineral Resource is constrained
within the Wonewoc Formation, and to a depth of 130 feet (39.6 m) below surface.
The Blair Facility estimation of the individual sieve size fractions was completed and reported using a cutoff of
the +70 sand fractions being greater than 60%. This Blair Facility Inferred Silica (Frac) Sand Resource estimate
predicts total (i.e., global) resources of: 27.57 million short tons (25.01 million metric tonnes) of silica sand of inferred
classification is present at the Blair Facility (Table 20).
The Blair Facility Inferred resource in Table 20 is also presented in selected proppant size fraction distributions of
20/40, 30/50, 40/70 and 50/100 mesh, and estimated tonnages of the individual fractions are as follows: (a) 20/40 mesh
fraction: 8.93 million short tons (8.10 million metric tonnes); (b) 30/50 mesh fraction: 11.84 million short tons
(10.74 million metric tonnes); (c) 40/70 mesh fraction: 10.86 million short tons (9.86 million metric tonnes); and (d)
50/100 mesh fraction: 7.95 million short tons (7.21 million metric tonnes).
Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no
guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve.
Table 20. The Blair Facility Inferred Silica (Frac) Sand Resource estimate as of February 12, 2017. The
highlighted main inferred resource is reported for the Wonewoc Formation as a total (global) volume and
tonnage using a nominal bulk density of 1.55 g/cm3 and a cutoff of the +70 sand fractions being greater than
60%. The Table also presents selected proppant size distributions of 20/40, 30/50, 40/70 and 50/100 mesh.
Note 1:
Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no
guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate
of Mineral Resources may be materially affected by geology, environment, permitting, legal, title, taxation,
socio-political, marketing or other relevant issues.
Note 2:
The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or
907.2 kg).
Note 3:
Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000
unit).
Total (global) resource and selected size fractions Volume (m3) Tonnes (t) Tons (t) Total 16,140,000 25,010,000 27,570,000 Wonewoc Formation Inferred Mineral Resource 20/40 5,230,000 8,100,000 8,930,000 30/50 6,930,000
10,740,000 11,840,000 40/70 6,360,000 9,860,000 10,860,000 50/100 4,650,000 7,210,000 7,950,000
A-34
Note 4:
The ‘Total’ volume and weights are estimated on a global basis and represent the Blair Facility Inferred
Silica (Frac) Sand Resource.
Note 5:
The Highway 53 estimation of the individual sieve size fractions was completed and reported using a cutoff
of the +70 sand fractions being greater than 60%.
Note 6:
Densities used: Wonewoc Formation (1.55 g/cm3; this study); Surficial deposits (1.37 g/cm3; from Eccles et
al., 2015); Tunnel City Group (1.57 g/cm3; from Eccles et al., 2015). Bulk densities are utilized to convert
volume (cubic metres) to tonnages.
Note 7:
The 50/100 fraction is reported, rather than the 50/140 or the 70/140 fractions because of the analytical
methodology used in the grain size distribution test work (i.e., variations in the selection of sieve mesh sizes).
The Blair Facility Inferred Silica (Frac) Sand Resource, which is situated in the Wonewoc Formation, is overlain
by, or intercalated with: (a) 1.71 million short tons (1.55 million metric tonnes) of Pleistocene surficial deposits; (b)
0.80 million short tons (0.73 million metric tonnes) of Tunnel City Group sedimentary rocks; and (c) 3.02 million short
tons (2.74 million metric tonnes) of “waste” Wonewoc Formation, or Wonewoc sandstone that does not satisfy the
cutoff (Table 20).
The overlying material tonnages were calculated using densities of 1.37 g/cm3 for the overburden and 1.57 g/cm3
for the Tunnel City Group (values from Eccles et al., 2015). The combined Pleistocene surficial deposits and Tunnel
City Group cover is thicker in the elevated western portions of the Blair Facility in comparison to the lower elevation
area of the current open pit/excavation.
Not all of the waste Wonewoc Formation material might end up being waste rock sensu stricto. That is, some of
Wonewoc sandstone that does not make the cutoff may end up being mined; for example, “islands” of below cutoff
Wonewoc may be mined based on the type of potential future mining method employed by Source.
Evaluation of the D95 North Property as a Target for Further Exploration
The D95 North Property has similar geology to that of the Blair Facility. The area is underlain by a thick sequence
of Wonewoc Formation sandstone, which is in turn, is overlain in topographically elevated areas by the Tunnel City
Group and Pleistocene surficial material.
The D95 North Property, however, does not have the same amount of geological information as the Blair Facility. The
D95 North Property’s subsurface has been defined by four auger drillholes and a single sample was analyzed for proppant
properties required to determine sand quality. Due to the tremendous horizontal continuity of the Wonewoc formation two
additional drillholes located 3372 feet (1028 m) from the southern end of the claim were also utilised in the estimation
process to support the geological information on the D95 North Property. A total of 69 sieve samples were used for the
calculation, of which 44 samples were collected from the four holes on the D95 North Property claim.
Consequently, the QPs have evaluated the D95 North Property as a target for future exploration.
The range of tonnages at the D95 North Property was determined by estimating the interpreted three-dimensional
wireframe volume multiplied by the nominal density of 1.55 g/cm3 multiplied by the estimated percent sizing’s using
the same criteria as the Blair Facility Inferred Silica (Frac) Sand Resource estimate. This includes adopting a cutoff of
the +70 sand size fraction being greater than 60% in total abundance. We have used plus or minus 30% to apply a
range to the estimation.
The D95 North Property Wonewoc Formation sand horizon has been classified as a potential target for future
exploration and comprises between 29,818,000 and 55,369,000 short tons (27,050,000 and 50,230,000 metric tonnes).
The Wonewoc is overlain by approximately 7,740,000 short tons (7,020,000 metric tonnes) of waste material including
surficial material, Tunnel City Group and waste Wonewoc Formation that does not make the cutoff. The potential
quantity and sizing is conceptual in nature as there has been insufficient exploration to define a mineral resource and it
is uncertain if further exploration, including proppant quality testing, will result in the target being delineated as a
‘mineral resource’.
Exploration and Development
Source has no current intentions of undertaking a preliminary economic analysis or any additional drilling or
exploration activities on the Blair Facility or the D95 North Property as the Blair Facility is currently sufficiently
producing to support Source’s operations.
A-35
APPENDIX “B”
MANDATE OF THE BOARD OF DIRECTORS
The members of the board of directors (respectively, the “Directors” and the “Board”) have the responsibility to
oversee the conduct of the business of Source Energy Services Ltd. (the “Company”) and to oversee the activities of
management who are responsible for the day-to-day conduct of the business.
Section 1
Composition
The Board shall be comprised of at least three independent Directors. The definition of independence is as
provided by applicable law and stock exchange listing standards. No Director will be considered independent unless
the Director has no “material relationship” (as such term is defined in National Instrument 52-110 of the Canadian
Securities Administrators) with the Company, either directly or indirectly as a partner, shareholder or officer of an
organization that has a relationship with the Company.
The Board shall appoint a Chair from among its members. The role of the Chair is to act as the leader of the
Board, to manage and coordinate the activities of the Board and to oversee execution by the Board of this written
mandate. If the Chair is not independent, a majority of the Board’s independent Directors shall appoint (and if the
Chair is in a conflict of interest with respect to a particular matter or matters, a majority of the Board’s independent
Directors may appoint) an independent lead Director from among the Directors, who will be responsible for ensuring
that the Directors who are independent (or non-conflicted) and management have opportunities to meet without
management and non-independent (or conflicted, as applicable) Directors, as required, and will assume such other
responsibilities as the independent Directors may designate in accordance with any applicable position descriptions or
other applicable guidelines that may be adopted by the Board from time to time.
The Board may, from time to time, engage consultants or members of the Company’s management team that are
not directors of the Company and these persons may attend meetings or portions of meetings as invited guests of the
Board. Otherwise, the Board will consist only of Directors and only Directors and a Corporate Secretary, appointed by
the Board, may attend meetings of the Board.
Section 2
Operation
The Board operates by delegating certain of its authorities to management and by reserving certain powers to
itself. The Board retains the responsibility of managing its own affairs including selecting its Chair, nominating
candidates for election to the Board, constituting Committees of the full Board and determining Director compensation.
Subject to the Articles, By-Laws and the Business Corporations Act (Alberta), the Board may constitute, seek the
advice of and delegate powers, duties and responsibilities to Committees of the Board.
The full Board considers all major decisions of the Company, except that certain analyses and work of the Board
will be performed by standing Committees empowered to act on behalf of the Board. The Company has a number of
standing Committees, including the Audit Committee, the Compensation and Corporate Governance Committee and
the Health, Safety and Environment Committee, and has the authority to appoint other committees to steward certain
other matters. Each standing committee must have a mandate that has been approved by the Board.
Each Committee shall operate according to the mandate approved by the Board and outlining its duties and
responsibilities and the limits of authority delegated to it by the Board. The Board shall review and reassess the
adequacy of the mandate of each Committee on a regular basis and, with respect to the Audit Committee, at least once
a year.
The Chair of the Board shall annually propose the leadership and membership of each Committee. In preparing
recommendations, the Chair of the Board will take into account the preferences, skills and experience of each Director.
Committee Chairs and members are appointed by the Board at the first Board meeting after the annual shareholder
meeting or as needed to fill vacancies during the year.
The Board will hold four regularly scheduled meetings each year. The Board shall meet at the end of its regular
quarterly meetings without members of management being present. Special meetings will be called as necessary.
Directors are expected to attend all Board meetings and all Board Committee meetings where such Director is a
member of such Committee, although it is understood that conflicts may occasionally arise that prevent a Director from
B-1
attending a meeting. Attendance at Board meetings and Board Committee meetings in person is preferred, but
attendance by teleconference or other electronic communication established by the Board or such Board Committee is
permitted. In advance of each regular Board and Committee meeting and, to the extent feasible each special meeting,
information and presentation materials relating to matters to be addressed at the meeting will be distributed to each
Director. It is expected that each Director will review presentation materials in advance of a meeting.
The Chair of the Board presides at all meetings of the Board and shareholders. Minutes of each meeting shall be
prepared by the Corporate Secretary (or in his or her absence a secretary who has been appointed for the purposes of
the meeting). The Chief Executive Officer (the “CEO”), if he or she is not a Director, shall be available to attend all
meetings of the Board or Committees of the Board upon invitation by the Board or any such Committee. Members of
management and such other staff as appropriate to provide information to the Board shall attend meetings at the
invitation of the Board. Following each meeting, the Corporate Secretary will promptly report to the Board by way of
providing draft copies of the minutes of the meetings. Supporting schedules and information reviewed by the Board at
any meeting shall be available for examination by any Director upon request to the CEO or Corporate Secretary.
Section 3
Responsibilities
The Board is responsible under law to supervise the management of the business and affairs of the Company. In
broad terms the stewardship of the Company involves the Board in strategic planning, risk identification, management
and mitigation, senior management determination and succession planning, communication planning and internal
control integrity.
Section 4
Specific Duties
Without limiting the foregoing, the Board shall have the following specific duties and responsibilities:
(1) Legal Requirements
(a) The Board has the oversight responsibility for meeting the Company’s legal requirements and for approving
and maintaining the Company’s documents and records;
(b) The Board has the statutory responsibility to:
(i)
manage or supervise the management of the business and affairs of the Company;
(ii) act honestly and in good faith with a view to the best interests of the Company;
(iii) exercise the care, diligence and skill that responsible, prudent people would exercise in comparable
circumstances; and
(iv) act in accordance with its obligations contained in the Business Corporations Act (Alberta) and the
regulations thereto, the Company’s Articles and other relevant legislation and regulations.
(c) The Board has the statutory responsibility for considering the following matters as a full Board which in law
may not be delegated to management or to a committee of the Board:
(i)
any submission to the shareholders of a question or matter requiring the approval of the shareholders;
(ii) the filling of a vacancy among the Directors;
(iii) the issuance of securities;
(iv) the declaration of dividends;
(v) the purchase, redemption or any other form of acquisition of shares issued by the Company;
(vi) the payment of a commission to any person in consideration of his/her purchasing or agreeing to
purchase shares of the Company from the Company or from any other person, or procuring or agreeing
to procure purchasers for any such shares;
(vii) the approval of management proxy circulars;
(viii) the approval of any take-over bid circular or directors’ circular; and
(ix) the approval of financial statements of the Company.
B-2
(2) Strategy Determination
The Board has the responsibility to adopt a strategic planning process for the Company and to participate with
management directly or through its Committees in approving goals and the strategic plan for the Company by which
the Company proposes to achieve its goals. The Board shall monitor the implementation and execution of the tasks
constituent to the corporate strategy.
To be effective, the strategy will result in creation of value over the long term while always preserving the
Company’s license to conduct its business among its various stakeholders. For the purpose of this clause, “stakeholder”
will mean any party, group or institution whose reasonable approval is required for the Company to execute its Boardapproved strategy.
(3) Managing Risk
The Board has the responsibility to identify and understand the principal risks of the business in which the
Company is engaged, to achieve a proper balance between risks incurred and the potential return to shareholders, and
to establish systems to monitor and manage those risks with a view to the long-term viability of the Company. It is the
responsibility of management to ensure that the Board and its Committees are kept well informed of changing risks.
The principle mechanisms through which the Board reviews risks are through the execution of the duties of the Audit
Committee, the Compensation and Corporate Governance Committee and the Health, Safety and Environment
Committee and through the strategic planning process. It is important that the Board understands and supports the key
risk decisions of management.
(4) Appointment, Training and Monitoring Senior Management
The Board has the responsibility:
(a) to appoint the CEO and establish a description of the CEO’s responsibilities and other senior management’s
responsibilities, to monitor and assess the CEO’s performance, to determine the CEO’s compensation, and to
provide advice and counsel in the execution of the CEO’s duties;
(b) to approve the appointment and remuneration of the Company’s senior management; and
(c) to establish provisions for the training and development of management and for the orderly succession of
management.
(5) Reporting and Communication
The Board has the responsibility:
(a) to ensure compliance with the reporting obligations of the Company, including that the financial performance
of the Company is properly reported to shareholders, other security holders and regulators on a timely and
regular basis;
(b) to recommend to shareholders of the Company a firm of certified professional accountants to be appointed as
the Company’s auditors;
(c) to ensure that the financial results of the Company are reported fairly and in accordance with generally
accepted accounting principles;
(d) to ensure the timely reporting of any change in the business, operations or capital of the Company that would
reasonably be expected to have a significant effect on the market price or value of the common shares of the
Company;
(e) to establish a process for direct communications with shareholders and other stakeholders through
appropriate Directors, including through the Company’s Whistleblower Policy;
(f)
to ensure that the Company has in place a policy to enable the Company to communicate effectively with its
shareholders and the public generally; and
(g) to report annually to shareholders on its stewardship of the affairs of the Company for the preceding year.
B-3
(6) Monitoring and Acting
The Board has the responsibility:
(a) to establish policies and processes for the Company to operate at all times within applicable laws and
regulations to the highest ethical and moral standards (advancing the interests of the Company, including the
pursuit of differentiating performance in meeting the reasonable needs of all stakeholders of the Company);
(b) to ensure that management has and implements procedures to comply with, and to monitor compliance with,
significant policies and procedures by which the Company is operated;
(c) to promote, and to ensure that management promotes, high environmental standards in the Company’s
operations in compliance with environmental laws and legislation;
(d) to ensure that management establishes appropriate programs and policies for the health and safety of the
Company’s employees in the workplace;
(e) to monitor the Company’s progress towards its goals and objectives and to revise and alter its direction
through management in response to changing circumstances;
(f)
to take action when performance falls short of its goals and objectives or when other special circumstances
warrant or when changing circumstances in the business environment create risks or opportunities for the
Company;
(g) to approve annual (or more frequent as the Board feels to be prudent from time to time) operating and capital
budgets and review and consider amendments or departures proposed by management from established
strategy, capital and operating budgets or matters of policy which diverge from the ordinary course of
business that may significantly impact the value of or opportunities available to the Company; and
(h) to implement internal control and information systems and to monitor the effectiveness of same so as to
allow the Board to conclude that management is discharging its responsibilities with a high degree of
integrity and effectiveness. The confidence of the Board in the ability and integrity of management is the
paramount control mechanism.
Governance
The Board has the responsibility:
(a) to develop a position description for the Chair of the Board;
(b) to facilitate the continuity, effectiveness and independence of the Board by, among other things:
(i)
appointing from amongst the Directors an Audit Committee, a Compensation and Corporate
Governance Committee, and a Health, Safety and Environment Committee and such other Committees
of the Board as the Board deems appropriate;
(ii) defining the mandate, including both responsibilities and delegated authorities, of each Committee of
the Board;
(iii) establishing a system to enable any Director to engage an outside adviser at the expense of the
Company;
(iv) ensuring that processes are in place and are utilized to assess the effectiveness of the Chair of the Board,
the Board as a whole, each Director, each Committee of the Board and each Committee’s Chair;
(v) reviewing annually the composition of the Board and its Committees and assess Directors’ performance
on an ongoing basis, and propose new members to the Board; and
(vi) reviewing annually the adequacy and form of the compensation of the Directors.
Section 5
New Director Orientation
New Directors will be provided with an orientation which will include written information about the duties and
obligations of Directors and the business and operations of the Company, documents from recent Board meetings and
opportunities for meetings and discussion with senior management and other Directors.
B-4
Section 6
Conflicts of Interest
(a) Directors have a duty to act honestly and in good faith with a view to the best interests of the Company and to
exercise the care, diligence and skill a reasonably prudent person would exercise in comparable circumstances.
Each Director serves in his or her personal capacity and not as an employee, agent or representative of any
other company, organization or institution, even if the Director is employed by a shareholder or any other
entity which does business with the Company. In providing direction to the Company, Directors
acknowledge that the wellbeing of the Company is their sole concern. Any Director must not be affected in
his or her deliberations and decision making by any relationship with any outside person or party including
any specific shareholder no matter which one and no matter what the relationship between the Director and
that Shareholder. Directors shall not allow personal interests to conflict with their duties to the Company and
shall avoid and refrain from involvement in situations of conflict of interest.
(b) A Director shall disclose promptly any circumstances such as an office, property, a duty or an interest, which
might create a conflict or perceived conflict with that Director’s duty to the Company.
(c) A Director shall disclose promptly any interest that Director may have in an existing or proposed contract or
transaction of or with the Company.
(d) The disclosures contemplated in paragraphs (b) and (c) above shall be immediate if the perception of a
possible conflict of interest arises during a meeting of the Board or any Committee of the Board, or if the
perception of a possible conflict arises at another time then the disclosure shall occur by e-mail to the other
Directors immediately upon realization of the conflicting situation and then confirmed at the first Board and/
or Committee meeting after the Director becomes aware of the potential conflict of interest that is attended
by the conflicted Director.
(e) Each Director will on an annual basis disclose all entities to which it is related, affiliated or in which it holds
a, direct or indirect, interest that may do business with the Company or operate in the same industry.
(f)
A Director’s disclosure to the Board or a Committee of the Board shall disclose the full nature and extent of
that Director’s interest either in writing or by having the interest entered in the minutes of the meeting of the
Board or such Committee of the Board.
(g) A Director with a conflict of interest or who may be perceived as being in a conflict of interest with respect
to the Company shall abstain from discussion and voting by the Board or any Committee of the Board on any
motion to recommend or approve the subject matter of such conflict unless the matter relates primarily to the
Director’s remuneration or benefits or as otherwise permitted by applicable law or regulation. If the conflict
of interest is obvious and direct, the Director shall withdraw while the item is being considered.
(h) Without limiting the generality of “conflict of interest”, it shall be deemed a conflict of interest if a Director,
a Director’s relative, a member of the Director’s household in which any relative or member of the household
is involved has a direct or indirect financial interest in, or obligation to, or a party to a proposed or existing
contract or transaction with the Company.
(i)
Directors shall not use information obtained as a result of acting as a Director for personal benefit or for the
benefit of others.
(j)
Any Director shall not use or provide to the Company any information known by the Director that through a
relationship with a third party the Director is not legally able to use or provide.
(k) Directors shall maintain the confidentiality of all information and records obtained as a result of acting as a
Director.
Section 7
Mandate Review
This Mandate shall be reviewed and approved by the Board each year after the annual general shareholder
meeting of the Company.
Section 8
General
The Board may perform any other activities consistent with this Mandate, the Company’s Articles and any
governing laws as the Board deems necessary or appropriate.
B-5
APPENDIX “C”
AUDIT COMMITTEE MANDATE
Section 1
Purpose
The Audit Committee (the “Committee”) is a committee of the board of directors (the “Board”) of Source
Energy Services Ltd. (the “Company”). The primary function of the Committee is to assist the Board by:
(a) working with the Chief Executive Officer to recruit persons to hold key positions in the financial
management of the Company including the Chief Financial Officer, the Controller and any other persons
hired to be the primary interface between the Company and its financial agents, lenders or shareholders;
(b) recommending to the Board for consideration and further recommendation to the shareholders the
appointment and compensation of the external auditor;
(c) overseeing the work of the external auditor, including gaining an understanding of disagreements between
the external auditor and management;
(d) overseeing the assignment of non-audit services to the external auditor, including but not restricted to
pre-approving all non-audit services (or delegating such pre-approval, if and to the extent permitted by law)
to be provided to the Company or its subsidiary entities (“subsidiaries”) by the external auditor;
(e) reviewing and approving any proposed hiring of any current or former partner or employee of the current or
former external auditor of the Company or its subsidiaries;
(f)
establishing procedures for the receipt, retention and treatment of complaints received by the Company
regarding accounting, internal controls or auditing matters, and for anything that may be required beyond the
Company’s Whistleblower Policy for the confidential, anonymous submission by employees of the Company
or its subsidiaries of concerns regarding questionable accounting or auditing matters;
(g) reviewing and approving the quarterly financial statements, the related Management Discussion and Analysis
(“MD&A”), and similar financial information provided by the Company to any governmental body, the
shareholders of the Company or the public, including by way of press release;
(h) reviewing and recommending that the Board approve annual financial statements, the related MD&A, and
similar financial information provided by the Company to any governmental body, the shareholders of the
Company or the public, including by way of press release; and
(i)
satisfying itself that adequate procedures are in place for the compilation, calculation and review of the
Company’s disclosure of financial information, other than as described in (g) above, extracted or derived
from its financial statements, including periodically assessing the adequacy of such procedures.
The Committee should primarily fulfill these roles by carrying out the activities enumerated in this Mandate.
Section 2
Composition and Meetings
(a) The Committee must be comprised of a minimum of three directors, as appointed by the Board, each of
whom shall be independent within the meaning of National Instrument 52-110 — Audit Committees (“NI
52-110”) of the Canadian Securities Administrators unless the Board determines that an exemption contained
in NI 52-110 is available and determines to rely thereon, and free of any relationship that, in the opinion of
the Board, would interfere with the exercise of his or her independent judgment as a member of the
Committee.
(b) All of the members of the Committee must be financially literate within the meaning of NI 52-110 unless the
Board has determined to rely on an exemption in NI 52-110. Being “financially literate” means members
have the ability to read and understand a set of financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and complexity of issues that
can reasonably be expected to be raised by the Company’s financial statements.
(c) The members of the Committee and its Chair shall be elected by the Board on an annual basis, or until they
are removed or their successors are duly appointed.
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(d) The members of the Committee may be removed or replaced by the Board at any time. The Chair of the
Committee may be removed by the Board at any time. Any member shall automatically cease to be a member
of the Committee on ceasing to be a director. The Board may fill vacancies on the Committee. If and
whenever a vacancy shall exist on the Committee, the remaining members may exercise all of the powers of
the Committee, so long as a quorum remains.
(e) The Committee shall meet at least four times annually, or more frequently as circumstances require. The
Committee should meet within 42 days following the end of the first three financial quarters to review and
discuss the unaudited financial results for the preceding quarter and the related MD&A, and should meet
within 85 days following the end of the fiscal year end to review and discuss the audited financial results for
the preceding quarter and year and the related MD&A.
(f)
The Committee may ask members of management or others to attend meetings and provide pertinent
information as necessary. For purposes of performing their duties, members of the Committee shall have full
access to all corporate information and any other information deemed appropriate by them, and shall be
permitted to discuss such information and any other matters relating to the financial position of the Company
with senior employees, officers and the external auditor, and others as they consider appropriate. For greater
certainty, corporate information includes information relating to the Company’s affiliates, subsidiaries and
their respective operations.
(g) In order to foster open communication, the Committee or its Chair should meet at least annually with
management and the external auditor in separate sessions to discuss any matters that the Committee or each
of these groups believes should be discussed privately. In addition, the Committee or its Chair should meet
with management quarterly in connection with the Company’s interim financial statements and the
Committee should meet not less than quarterly with the auditors, independent of the presence of
management.
(h) At all meetings of the Committee every question shall be decided by a majority of the votes cast. In case of
an equality of votes, the Chair of the meeting shall not be entitled to a second or casting vote and in such
cases the undecided matter should be referred to the Board as a whole.
(i)
A quorum for the transaction of business at any meeting of the Committee shall be a majority of the number
of members of the Committee or such greater number as the Committee shall by resolution determine.
(j)
Meetings of the Committee shall be held from time to time and at such place as any member of the
Committee shall determine upon 48 hours notice to each of its members. The notice period may be waived by
all members of the Committee. Each of the Chair of the Board, the external auditor, the Chief Executive
Officer, the Chief Financial Officer or the Corporate Secretary shall also be entitled to call a meeting.
(k) Agendas shall be circulated to Committee members along with background information on a timely basis
prior to the Committee meetings. Minutes of each meeting will be recorded and reviewed for errors or
omissions and then filed with the Corporate Secretary and made available to any director at any time. The
Committee should report on its activities at each quarterly meeting of the Board or more frequently as
material issues are addressed by the Committee. It will be the responsibility of the Chair to report to the
Board or delegate such reporting.
(l)
Section 3
Any issue arising from these meetings that bear on the relationship between the Board and management
should be communicated to the Board by a member of the Committee, the Committee being responsible to
designate the member responsible for such report.
Role
In addition to the matters described in Section 1, and any other duties and authorities delegated to it by the Board
from time to time, the role of the Committee is to:
(1) General
(a) Review and recommend to the Board changes to this Mandate, as considered appropriate from time to time.
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(b) Review any and all disclosure regarding the Committee as contemplated by NI 52-110.
(c) Oversee by direct involvement or by delegation to the Disclosure Committee of management the disclosure
of the Company’s quarterly and annual financial statements and related filings.
(d) Summarize in the Company’s disclosure materials the Committee’s composition and activities, as required.
(2) Internal Controls
(a) Satisfy itself on behalf of the Board with respect to the Company’s internal control systems, including in
particular but not exclusively:
(i)
matters relating to derivative instruments;
(ii) management’s identification, monitoring and development of strategies to avoid and /or mitigate
business risks;
(iii) the adequacy of the security measures that are in place in respect of the Company’s information systems
and the information technology that is utilized by the Company; and
(iv) ensuring compliance with legal and regulatory requirements.
(3) Documents/Reports Review
(a) (1) Review and recommend to the Board for approval the Company’s annual financial statements, and
(2) review and approve the Company’s quarterly financial statements, including in each case any
certification, report, opinion or review rendered by the external auditor, and related MD&A. The process of
reviewing annual and quarterly financial statements should include but not be limited to:
(i)
reviewing changes in accounting principles, or in their application, which may have a material impact
on the current or future years’ financial statements;
(ii) reviewing significant accruals, reserves or other estimates;
(iii) reviewing accounting treatment of unusual or non-recurring transactions;
(iv) ascertaining compliance with covenants under loan agreements;
(v) reviewing financial reporting relating to asset retirement obligations;
(vi) reviewing disclosure requirements for commitments and contingencies;
(vii) reviewing adjustments raised by the external auditors, whether or not included in the financial
statements;
(viii) reviewing unresolved differences between management and the external auditors;
(ix) obtaining explanations of significant variances with comparative reporting periods; and
(x) determining through inquiry if there are any related party transactions and ensure the nature and extent
of such transactions are properly disclosed.
(b) Review the financial statements, prospectuses, MD&A, annual information forms and all public disclosure
containing financial information that is based upon the financial statements of the Company that has not
previously been released, before release and prior to Board approval, if required.
(c) Seek to ensure that adequate procedures are in place for the review of the Company’s disclosure of financial
information extracted or derived from the Company’s financial statements and periodically assess the
adequacy of those procedures.
(4) External Auditor
(a) Recommend to the Board the nomination of the external auditor for shareholder approval, considering
independence and effectiveness, and review the fees and other compensation to be paid to the external
auditor. Instruct the external auditor that its ultimate client is the shareholders of the Company as a group.
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(b) Advise the external auditor that it is required to report directly to the Committee, and not to management of
the Company and, if it has any concerns regarding the conduct of the Committee or any member thereof, it
should contact the Chair of the Board or any other director.
(c) Monitor the relationship between management and the external auditor including reviewing any management
letters or other reports of the external auditor and discussing any material differences of opinion between
management and the external auditor.
(d) Review and discuss, on an annual basis, with the external auditor all significant relationships they have with
the Company, its management or employees to determine their independence.
(e) Review and approve requests for any material management consulting or other engagement to be performed
by the external auditor and be advised of any other material study undertaken by the external auditor at the
request of management that is beyond the scope of the audit engagement letter and related fees.
(f)
Review the performance of the external auditor and any proposed dismissal or non-renewal of the external
auditor when circumstances warrant.
(g) Periodically consult with the external auditor out of the presence of management about significant risks or
exposures, internal controls and other steps that management has or has not taken to control such risks, and
the fullness and accuracy of the financial statements, including the adequacy of internal controls to expose
any payments, transactions or procedures that might be deemed illegal or otherwise improper.
(h) Review with external auditors (and internal auditor if one is appointed by the Company) their assessment of
the internal controls of the Company, their written reports containing recommendations for improvement, and
management’s response and follow-up to any identified weaknesses.
(i)
Communicate directly with the external auditor, and arrange for the external auditor to report directly to the
Committee.
(j)
Communicate directly with the external auditor, and arrange for the external auditor to be available to the
Committee and the full Board as needed.
(5) Financial Reporting Processes
(a) Review the integrity of the financial reporting processes, both internal and external, in consultation with the
external auditor as the Committee sees fit.
(b) Consider the external auditor’s judgments about the quality, transparency and appropriateness, not just the
acceptability, of the Company’s accounting principles and financial disclosure practices, as applied in its
financial reporting, including the degree of aggressiveness or conservatism of its accounting principles and
underlying estimates, and whether those principles are common practices or are minority practices relative to
the Company’s peers.
(c) Review all material balance sheet issues, material contingent obligations (including those associated with
material acquisitions or dispositions) and material related party transactions.
(d) Consider proposed major changes to the Company’s accounting principles and practices.
(6) Reporting Process
(a) If considered appropriate, establish separate systems of reporting to the Committee by each of management
and the external auditor.
(b) Review the scope and plans of the external auditor’s audit and reviews. The Committee may authorize the
external auditor to perform supplemental reviews or audits as the Committee may deem desirable.
(c) Review annually with the external auditors their plan for their audit and, upon completion of the audit, their
reports upon the financial statements of the Company and its subsidiaries.
(d) Periodically consider the need for an internal audit function, if not present.
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(e) Following completion of the annual audit and quarterly reviews, review separately with each of management
and the external auditor any significant changes to planned procedures, any difficulties encountered during
the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to
required information and the cooperation that the external auditor received during the course of the audit and,
if applicable, reviews.
(f)
Review any significant disagreements among management and the external auditor in connection with the
preparation of the financial statements.
(g) Where there are significant unsettled issues between management and the external auditors that do not affect
the audited financial statements, the Committee shall seek to ensure that there is an agreed course of action
leading to the resolution of such matters.
(h) Review with the external auditor and management significant findings during the year and the extent to
which changes or improvements in financial or accounting practices, as approved by the Committee, have
been implemented. This review should be conducted at an appropriate time subsequent to implementation of
changes or improvements, as decided by the Committee.
(i)
Review the system in place to seek to ensure that the financial statements, related MD&A and other financial
information disseminated to governmental organizations and the public satisfy applicable requirements.
(j)
When there is to be a change in auditors, review the issues related to the change and the information to be
included in the required notice to securities regulators of such change.
(7) Risk Management
(a) Review program of risk assessment and steps taken to address significant risks or exposures of all types,
including insurance coverage and tax compliance.
(b) Review, not less than quarterly, a mark to market assessment of the Company’s hedge positions and
counterparty credit risk and exposure.
(8) General
(a) If considered appropriate, conduct or authorize investigations into any matters within the Committee’s scope
of activities. The Committee is empowered to retain independent counsel, accountants and other
professionals to assist it in the conduct of any such investigation or otherwise as it determines necessary to
carry out its duties. The Committee may set and pay (at the expense of the Company) the compensation for
any such advisors.
(b) Perform any other activities as the Committee deems necessary or appropriate.
Section 4
Complaint Procedures
(1) Submitting a Complaint
(a) Anyone may submit a whistle blower notice or complaint regarding conduct by the Company or its
subsidiaries or their respective employees or agents (including its independent auditors) reasonably believed
to involve questionable accounting, internal accounting controls or auditing matters. The Chair or in his/her
absence or by his/her delegation, any other member of the Committee should oversee the treatment of such
complaints.
(2) Procedures
(a) The Chair of the Committee is designated to receive and administer or supervise the administration of
employee complaints with respect to accounting or financial control matters.
(b) In order to preserve anonymity when submitting a complaint regarding questionable accounting or auditing
matters, the employee may submit a complaint in accordance with the Company’s Whistleblower Policy, and
such complaint shall be address in accordance with that policy.
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(3) Records and Report
The Chair of the Committee should maintain a log of complaints, tracking their receipt, investigation, findings and
resolution, and should prepare a summary report for the Committee.
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CERTIFICATE OF THE COMPANY
Dated: March 2, 2017
This prospectus and amended and restated prospectus (which includes the marketing materials included or
incorporated by reference) constitutes full, true and plain disclosure of all material facts relating to the securities
offered by this prospectus and amended and restated prospectus as required by the securities legislation of each of the
provinces and territories of Canada.
(signed) “BRAD THOMSON”
Chief Executive Officer
(signed) “DERREN NEWELL”
Chief Financial Officer
On behalf of the Board of Directors:
(signed) “CODY CHURCH”
Director
(signed) “JEFF BELFORD”
Director
CC-1
CERTIFICATE OF THE UNDERWRITERS
Dated: March 2, 2017
To the best of our knowledge, information and belief, this prospectus and amended and restated prospectus (which
includes the marketing materials included or incorporated by reference) constitutes full, true and plain disclosure of all
material facts relating to the securities offered by this prospectus and amended and restated prospectus as required by
the securities legislation of each of the provinces and territories of Canada.
Scotia Capital Inc.
Morgan Stanley Canada Limited
BMO Nesbitt Burns Inc.
By: (signed) “ANTHONY AULICINO”
By: (signed) “PATRICK READ”
By: (signed) “GREGORY STADNYK”
CIBC World Markets Inc.
Goldman Sachs Canada Inc.
Raymond James Ltd.
By: (signed) “CHRIS FOLAN”
By: (signed) “KEN N. DAVIS”
By: (signed) “JASON HOLTBY”
RBC Dominion Securities Inc.
By: (signed) “ANDREW MACNIVEN”
Canaccord Genuity Corp.
By: (signed) “ANDREW D. BIRKBY”
AltaCorp Capital Inc.
GMP Securities L.P.
Peters & Co. Limited
By: (signed) “J. CAMERON BAILEY”
By: (signed) “DEAN M. WILLNER”
By: (signed) “J.G. (JEFF) LAWSON”
CU-1
CERTIFICATE OF THE TRIWEST SELLING SHAREHOLDERS
Dated: March 2, 2017
This prospectus and amended and restated prospectus (which includes the marketing materials included or
incorporated by reference) constitutes full, true and plain disclosure of all material facts relating to the securities
offered by this prospectus and amended and restated prospectus as required by the securities legislation of each of the
provinces and territories of Canada.
TRIWEST CAPITAL PARTNERS IV (US), L.P. by its general partner, TRIWEST CAPITAL
PARTNERS IV (2011) INC.
By: (signed) “CODY CHURCH”
Senior Managing Director
SES SAND HOLDINGS 2 (CANADA) LP by its general partner, SES SAND HOLDINGS GP LTD.
By: (signed) “CODY CHURCH”
Senior Managing Director
SES SAND HOLDINGS 3 (CANADA) LP by its general partner, SES SAND HOLDINGS GP LTD.
By: (signed) “CODY CHURCH”
Senior Managing Director
CS-1
CERTIFICATE OF THE SOURCE SELLING SHAREHOLDERS
Dated: March 2, 2017
This prospectus and amended and restated prospectus (which includes the marketing materials included or
incorporated by reference) constitutes full, true and plain disclosure of all material facts relating to the securities
offered by this prospectus and amended and restated prospectus as required by the securities legislation of each of the
provinces and territories of Canada.
2024747 ALBERTA LTD.
By: (signed) “JIM MCMAHON”
Director
2024748 ALBERTA LTD.
By: (signed) “JIM MCMAHON”
Director
2024749 ALBERTA LTD.
By: (signed) “BRAD THOMSON”
Director
2024750 ALBERTA LTD.
By: (signed) “DERREN NEWELL”
Director
CS-2
Drivers for Increasing
Proppant Demand
Established Industry Trends Result
in Increased Proppant Demand
Proppant Intensity in the Montney
Has Doubled in Three Years
2,100 MT
4,200 MT
(Proppant per well, 2013 to 2016)
Increasing Proppant
per Stage
Increased proppant intensity driving
improved economics
Tighter Stage Spacing
Stages per well have increased >40%
basin-wide since 2013
Longer Laterals
Industry moving to longer laterals to
improve rate & recovery via increased
reservoir contact
Increasing Horizontal
Well Count
Capex forecasted to increase by
approximately 55% from 2016 – 2017
for key Canadian resource plays
Investment Highlights
Attractive Proppant Market Fundamentals
Western Canada drilling activity expected to
increase significantly, a positive indicator for
proppant demand and pricing
Market Leading Logistics Advantage
Largest proppant terminal network in
the WCSB with more than 50% of total
throughput capacity in Montney, Duvernay
and Deep Basin
Integrated Business Model
Enhances Margin
Integrated proppant provider from mine
to wellsite, enabling Source to capture
margin across supply chain
Strong Balance Sheet
Strong capital position to weather the oilfield
cycles and capitalize on strategic acquisitions
as opportunities arise
Proven Management and Board
of Directors
Over 75 years of collective experience at
diversified energy companies with longstanding customer relationships
CORPORATE HEADQUARTERS
100, 438 — 11 Ave SE
Calgary, AB Canada T2G 0Y4
P: 403 262 1312
sourceenergyservices.com