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Good morning to all of you who have joined us on today's call. My name is Cheryl Grue, and I am the Director of Corporate Affairs for Athabasca Minerals Inc. Today's call will be a different format than previous updates as we will not be presenting any slides, but rather David Churchill, our CFO, will be speaking directly to the 2022 Q2 results that were posted last week. Also, as per the press release that went out this morning, Dana Archibald has been appointed as the permanent Chief Executive Officer of AMI, and he will be speaking to you this morning about the long-term vision as our company refocuses, realigns and renews our commitment to corporate growth and shareholder value.
We will have a question-and-answer period after Dana and David have spoken, so please feel free to submit questions during the call or in the Q&A session. [Operator Instructions]
Before we start, I'm required to acknowledge that some information provided today may contain forward-looking information regarding AMI's business. The information presented is subject to risks. I will -- and market changes and uncertainties that could cause actual results to differ materially.
I am now going to invite Dana Archibald to provide an update on the business information.
Good morning, everyone, and thank you for joining us on the call today.
Before David speaks to our second quarter results, I would like to speak for a few minutes regarding the business and initiatives that we've been working on over the last 60 days. I would also like to address the press release that went out this morning, announcing my appointment as Chief Executive Officer of Athabasca Minerals. I'm extremely excited and humbled by the opportunity that lies in front of me and the team here at AMI, and I want to thank the Board for their confidence in my ability to lead this group and move this business forward. I would like to reaffirm to our shareholder base that I'm committed to driving a sustainable growth strategy for the corporation, focused on transparency, profitability and action.
Two months ago at our Annual General Meeting, it was made very clear by our shareholders that our business needed to change, and that the status quo would not be acceptable. As such, the Board and management set in motion a mandate to reset and refocus the business. When looking at our growth and high-yield revenue opportunities, it's clear that AMI is a sand and gravel company, with the main driver of growth being our U.S. sand operations. With this in mind, we are realigning our business model around our sand and gravel divisions.
As part of the realignment and the commitment we made to our shareholders at the July 12 investor call, our senior management team did a comprehensive review of all our business lines and assets, and our second quarter results are a direct reflection of this review. There are a number of unusual and nonrecurring items in the second quarter financials that David is going to going through that had a direct impact on our overall results, and today, we will address these items and also identify why we are confident in AMI's future.
As part of our realignment, we also made the difficult decision to wind down operations of TerraShift Engineering. The decision was based on the fact that engineering is no longer part of AMI's core business strategy, and this reorganization and refocus also contributes to a reduction in personnel and overhead costs, which will be reflected in our Q3 financial statements. AMI has retained the proprietary TerraMaps application as well as a couple of the key personnel who will support the Aggregates and RockChain divisions and assist with the wind down of external projects.
We also took an extensive look at our assets through our current lens of optimizing opportunity and maintaining strong financial acumen. It is important to note that although write-downs occurred, AMI still owns the pit resources and could potentially monetize them in the future. However, we do not see a strong likelihood for realizing near or mid-term revenues from these assets at this time.
As an organization, we will continue to assess and align our SG&A with the vision and goals of our business to ensure that we have a solid structure in place and a strong revenue stream to support continued growth and future opportunities.
Looking briefly at each of our divisions, AMI Aggregates is seeing increased demand at our Coffey Lake Public pit, Hargwen pit, Pelican pit and the Kearl pit as well. With sales contracts in 2022 exceeding 0.5 million tons, we are also expecting increased demand in Q4 and Q1 of -- Q4 of 2022 and Q1 of 2023, confirming for us at the Aggregates division will be a key contributor to AMI in the quarters and years ahead. For the corporate pits that were written down, some of the contributing factors were lack of pit, access to the pit, high mining and transportation costs, permitting costs and/or lack of infrastructure near the resource.
In assessing AMI Silica Inc., our Canadian sand division, we looked -- we are looking closely at the capital requirements for both the Prosvita Sand Project and the Montney Sand Project. Since the Prosvita project was first announced, we have seen significant changes both in our company and the economics of executing a large-scale project such as inflation and supply chain challenges. Given the long regulatory process, the high capital requirements and likely revenue cycle, it is unlikely that we will see production from this resource for several more years. The Montney project remains a strategic importance to AMI as it is located in Northeast BC, Northwest Alberta, and continues to see significant interest from key operators in the region, assessing the sand for future reuse.
I do want to emphasize to our shareholder base that although there are challenges with these projects, we are actively pursuing opportunities to advance them. AMI Silica LLC, our U.S.-based business, has quickly become the key contributor to AMI's revenue generation and growth strategy. We are seeing consistent sales of over 100,000 tons per month with demand continuing to grow. One of our key challenges continues to be logistics, and we are actively pursuing strategic partnerships to expand our rail capacity and network, which would allow us to increase our throughput in both Canada and the U.S. Since the acquisition in March, we have continued to look for and successfully initiated opportunities to increase revenues and margins outside of the mine gate. With demand in this market growing and supply limited, we are seeing tremendous opportunity in this division.
We've also taken a close look at the RockChain division, which we are realigning their strategy to more closely position them with the refocused business strategy of AMI. Over the last 60 days, RockChain has taken steps to reduce their overhead, and from now until the end of 2022, they will be delivering over $5 million worth of aggregate orders. Although margins continue to be tight in this commodity industry, AMI is committed to creating a unique offering in the aggregates market through the RockChain platform. AMI continues to evaluate all divisions to ensure the maximum performance and profitability are achieved.
Before I pass things over to David, I would like to reiterate that I'm very excited about the future for AMI, and I'm proud to be able to lead this team in its new chapter. We are a team that is focused and aligned on growing the corporation, creating value and future opportunities. I want to thank our shareholders for their commitment and support of AMI and reaffirm that our leadership team is dedicated to creating a focused, sustainable, profitable growth strategy.
And I'll hand it over to David.
Thank you, Dana. Good morning, everyone, and thank you for joining the call today. I'm David Churchill.
[Technical Difficulty]
I'm sorry, everybody. That was a gap by me. I had it on mute.
Good morning, everybody, and thank you for joining the call. I'm David Churchill, and I'm the Chief Financial Officer for AMI. I'll be speaking to you about AMI's second quarter results for the 3 months ended June 30, 2022, and I'll be making reference to information contained in the August 26 press release, the second quarter financial statements and second quarter MD&A that are posted on SEDAR and the AMI website.
As Dana mentioned earlier, our second quarter had some unusual or one-off items, or items that I would characterize as not normal course, that I would like to address and help to put into context as we move the business forward under the new strategy.
Firstly, revenue, net of royalties for the 3 months ended June 30, 2022, was $7.3 million compared to $3.2 million in the second quarter of 2021. The increase in revenue is due mainly to our 50% interest in the Hixton Wisconsin Industrial Sand Operations that we own through Silica LLC. A reminder, we didn't own that business in 2021. We closed this acquisition in March 2022, so this is really the first full quarter of operations we've had from this important business segment.
Our gross profit for the second quarter was negative $0.4 million or negative 5.5% compared to $0.5 million or 14.4% in Q1 2022. In the second quarter, there were a number of one-time operating expenses in Silica LLC of about $0.8 million that decreased that net margin. So these expenses included railcar mobilization, increased maintenance costs for ramping up the facility for increased production and other acquisition costs. There was also a depreciation expense of $0.9 million year-over-year increase in quarter-over-quarter as we started to book the depreciation on the Silica LLC assets. If we adjusted for this $0.8 million one-time operating expense, the adjusted gross profit was positive $0.2 million or 5.5%.
Important to note that given the dollar value of those depreciable assets with Silica LLC business, the depreciation expense will be higher for our business going forward than in previous quarters and the prior year and will lower our 2022 net income.
Our operating loss for the 3 months ended June 30, 2022, was negative $5.4 million compared to an operating loss of $0.6 million in 2021. As Dana touched on earlier, there were some significant one-time expenses that contributed to this increased loss. There was severance expense of $0.64 million for 2 senior executives who left AMI in May and June, respectively. There was a $3.32 million write-off of certain contract costs and some resource properties.
As Dana mentioned earlier, in the last 2 months, AMI management has commenced a comprehensive review of all of our business assets to determine ways to drive profitability, efficiency and effectiveness. And as a result of this review, some business assets didn't show immediate or mid-term viability, and they were written down.
As Dana touched on earlier, the write-down consisted of a number of items. AMI wrote off $1,000,735 of costs incurred to obtain an offtake agreement for the Prosvita Sand Project. Due to the lengthy regulatory approvals and increasing cost estimates for the production facilities, it's unlikely silica sand will be produced from the Duvernay site before mid-2026, meaning AMI will not be able to meet the terms of this contract. Therefore, the contract costs were written off at June 30, 2022.
There was a write-down on the Kearl pit as management reassessed the recovery of the pit development costs compared to the salable product on hand and determined there was a shortfall of about $542,000, and that was written down.
For the House River pit, there was also a reassessment of the recovery of pit development costs compared to the salable product and additional costs required for production and determined there was a shortfall and wrote off cost of $175,267. Management -- the Logan pit was also reassessed by management for recovery of pit development costs compared to salable product and determined there was a shortfall and wrote down cost of $370,000.
The Richardson Quarry Project was reassessed by management, again for the recovery of pit development costs compared to salable product and the significant additional costs required for production and the viability of market for the products in that area. Based on this, management wrote down costs of over $1.23 million.
Working capital. We recognize that our consolidated working capital of about $406,000 at June 30, 2022, [ is tight ]. There's 2 distinct operations within AMI, being the Canadian gravel and sand operations through AMI Silica Inc., our Aggregates business and RockChain, and then we have the 50% interest in the Silica LLC business based in Hixton, Wisconsin. Our Canadian operations continue to run with little working capital required given the nature of their business. Our U.S. operations have been able to operate within their [ operating ] cash flow, and we expect to be able to continue to grow that business with cash flow and possibly low amounts of debt that are tied specifically to AMI Silica LLC.
As Dana mentioned, we will continue to work on aligning our SG&A and operating expenses for our businesses and ensure we have the right structure in place and a revenue stream that will support them.
I do want to conclude with some comments on our forecast from our July 2022 investor updates. We are looking to provide another update for you later in the fall. At this time, we're still confident in our revenue forecast for 2022 of [ $34 million ]. We expect the Silica LLC sales volumes to be strong for the second half of 2022 with improving margins. Again, a reminder that our first half results for 2022 for Silica LLC have about 4 months of revenue as we acquired that business in March, so our second half will have the 6-month revenue for LLC.
RockChain has secured some large projects with several customers that have started in the last half of 2022, and they total over $5 million. While these projects continue to be at lower margins, these [ are awards that ] are positive as they give RockChain some momentum in the last half of 2022 and into 2023. Our Aggregate business remains on track for their year-end forecast.
Net income will be lower by approximately $5 million due to the write-downs for -- due to the write-downs we mentioned earlier and increased depreciation.
Thank you again for attending our call this morning, and I'll now pass it back over to Dana Archibald to close out discussions.
Thanks, David.
And I just wanted to thank everyone for attending this morning. In the last 60 days that David and I have been leading this team, we've had to make some significant changes to AMI and we're confident for the direction that the company is moving in. I appreciate the support of the shareholders and look forward to continued communication as we update you on the progress we are making.
I'd like to leave you with a quote that seems to fit well for us these days. In life, change is inevitable, and business is vital. And with that, I'll pass it back to Cheryl to lead the Q&A session for our call. Thanks.
Thank you, David and Dana. I appreciate that. So we're going to head into the question-and-answer period. [Operator Instructions]. We do have a couple of questions that were sent to us earlier, so I'm just going to throw those out and wait for any other ones to come in through our participants.
So David, I'm going to send this one over your way. One of the questions is, in your Q2 financial statements, what is included in your cost of goods sold?
Thanks, Cheryl.
So cost of goods sold, included in there would be all of the operating costs associated with the various divisions. Anything -- so that would be wages, maintenance costs or recurring maintenance costs, operating materials, your standard run-of-the-mill costs for operating the, say, the Aggregates business, the Sand business. To the extent there's any -- if there's any cost related to pit development or moving things forward to the extent that we can capitalize those, those are capitalized. So operating costs would strictly be what we consider directly related to the revenue stream for the particular division.
Thank you, David.
Dana, I've got one here for you. For Silica LLC, have you signed or are you planning to sign long-term sand contracts?
Very good question.
So right now, we have not contracted any of our volume, which has provided us a lot of optionality. I think that as we're looking towards Q4 and Q1, we will start looking at locking in or contracting out some of our volumes.
Thank you, Dana.
There's one here. I'm not sure whether Dana or David wants to take it, but the question is, will RockChain launch in the United States?
I can take that one on.
I guess, not to get too far ahead of our skis here, but yes, I think the RockChain, we have always looked at the U.S. as a great opportunity for expansion. And we have been working with key individuals down in the U.S. to look at opportunities for that. So I would say that, that is a stay-tuned question, and it's -- yes, it's definitely something that we are looking to pursue.
And sorry. And Cheryl, maybe I'll just jump in on that, too, just to the RockChain discussion.
The numbers that we did mention of the $5 million of orders we have right now, those are Canadian at this time. So anything that we forecasted at the end of 2022 is our current -- is based on our current business in Canada.
Got another question here. I'm pretty sure it's going to go to Dana. But when you purchased the U.S. Sand business, it was stated that the capacity was 2 million tons per year. Is that still accurate? And also, you also mentioned challenges on ramping up capacity. Can you elaborate?
Yes. No, good question. So I'll talk about the first one.
With regards to throughput capacity of 2.4 million, yes, that -- our plant is still very much capable of 2.4 million tons of production. When we're talking about the logistics and outside of things there, really, what we're talking about is railcars and also our receiving transloads. And so that's really what we're looking at doing right now is sort of increasing our rail throughput capacity.
And it's something that we've got opportunities to bring on more railcars, but it's something we have to do very methodically because with the railcars, it's all about utilization and then it goes to how many parking spots we have available if we all of a sudden need to park our fleet. And so we are going to be increasing our fleet, but we are sort of doing that carefully and cautiously here so that we don't get ourselves into trouble.
And actually, maybe just one other item there, too. So our capacity is very much 2.4 million in the plant. And then sort of going back again to the rail and the transloads there is that, like, our capacity right now is probably sitting in that 100,000 to 150,000 tons a month of rail capacity, and that depends on our railcar turns and everything else there.
Thank you, Dana.
Another one that's probably for you, Dana. How are the frac sand sales or acceptance in Northwest Alberta proceeding?
Yes. So we're seeing extremely strong demand in Northwest Alberta and Northeast BC. Really, the positive that we're seeing from our sand sales is that we're not really displacing any of our competitors, it's -- we're actually just filling a void right now in demand. And we're seeing from our customers and what we're hearing in the market there is that, that demand is -- it really sounds like it's going to continue to increase here in the near and mid-term future here, at least.
Thank you, Dana.
David, this one is probably more in your direction. Why did you choose now to write down your assets?
Well, I think the -- I think as a business, every quarter you go through, and you look at your assets, I think the key driver on that is what Dana touched on earlier, is there was a very, very clear mandate from the shareholders that this business needed to reset and refocus. So as part of that, we looked at everything across the business.
And for a number of items we touched on earlier, one was the decision to wind down the TerraShift businesses as it wasn't strategic. The other was to look at and taking on new information. And as we pivoted -- I think what was a big game changer for this business was the opening of Hixton and what that's meant to the business for sales of the sand in the U.S. and in Canada. And so from -- and then that takes us to looking at the Prosvita business, where we look at it and given the regulatory environment we're in and the challenges that we have with a high inflation environment and supply chain issues, it's just whether that production facility, then is it likely to be in production here within the term of that contract? So that drove that decision.
The other one was, again, just looking at the various assets and deciding in the near or mid-term, what is the viability of those assets going forward.
I think it's important to remember that the write-down notwithstanding, it's an accounting write-down. And those assets, we still own them. There's still -- it still gives us some optionality. Things can change, and -- but as we look at the business going forward today, we made those decisions, and you see those results reflected in the Q2 statements. And you'll see the impact of the TerraShift wind down in the Q3 financials.
Thank you, David.
Probably just kind of adding on to the back of that, there's a question here, and I'll let you just continue on. Regarding the write-downs, do you expect more of these types of expenses in the second half of 2022?
I think we've taken the assessment. Again, things change. Obviously, we've all seen that. I mean, the market in general is -- there's a lot of things and moving parts going on out there. At this time, I don't foresee that we have -- we've done a thorough review. I don't foresee any more changes in the back half of the year for that.
But you never -- again, it's a quarterly assessment. At this time, I don't foresee anything. And in our forecasting, we're not forecasting any more write-downs to the back half of 2022.
Thank you, David. Just looking to see if there's any other questions popping up here. I will remind people again, if you have a question after the presentation, please feel free to reach out to myself or any of the leadership team here, and we'll try and answer your questions as best we can.
So it looks like that may be all for this morning. So again, just to reiterate what David and Dana said, I appreciate everybody taking the time to join us this morning so that we would have an opportunity to speak to you. We look forward to continued communications with our shareholders in the days to come, and we look forward to the future of Athabasca Minerals. So thank you again for joining us, and we will talk to you in the future.