An oil sands eco-saviour may also be a profit machine

I am lining up outside a government lab on the outskirts of Edmonton awaiting my turn to get a peek at what's touted as a revolutionary technology for cleaning up the oil sands.

The group I'm in is full of bankers, analysts and investors. The group ahead of us is government people. The group after ours is more bankers and analysts and investors. Politicians are also taking the tour. James Cameron might even be interested one day.

Inside, sludge from Fort McMurray tailings is being turned into valuable commodities: crude oil, re-useable water, recyclable solvent and zircon. As you watch this chemistry and physics experiment, it's easy to imagine how profitable it could turn out to be - if and when the technology is fully proven.

Our host is Titanium Corp. founded in 2001 and based in Edmonton. The company is in the final stages of testing its process for cleaning up waste from oil sands production. Its "bench-scale" testing project is a jumble of steel, hissing valves and noisy pumps. The waste goes in one end and the good stuff comes out the other. So far, the test results have been glowing, but there's more work to be done before the company can sign its first customer. That, if all goes well, will probably happen next year.

I won't tax you with the details of how Titanium's process works. Suffice it to say that the company spent years and more than $20-million developing its technology. It has attracted almost $10-million in grants from various levels of government, all of which want to clean up the oil sands, given the onslaught of poor publicity the industry attracts thanks to Mr. Cameron and others.

While Titanium still isn't earning revenue, it has cleared a lot of hurdles. If it can clear a few more, the next step will be to negotiate with producers and build its first plant.

Negotiations

Those negotiations will be fascinating, should they happen. A typical big oil sands site casts off large amounts of waste, much of it in the form of what is called froth treatment tailings. There is enormous value in this particular stream of tailings: on an annual basis, tens of millions of litres of water, thousands of tons of metals, up to three million barrels of bitumen and a few hundred thousand barrels of solvents. (See table.)

Titanium's technology can, in theory, recover as much as 80 per cent of these precious resources. Using the middle of the range of company-provided estimates, one big project could produce $153.3-million of revenue a year. Capital costs would be large at about $300-million, but operating costs would be relatively modest, and therefore profit margins healthy. And keep in mind that this is only one plant. There's already room for more and the oil sands is growing.

The return on investment, in other words, would be very good and the return on Titanium stock also very good if all this happens as planned. Byron Capital Markets, whose analyst was on my tour, calls the stock a speculative buy with a lot of upside.

Who Gets What?

The company's success will depend on one crucial factor: a breakdown of who gets what. How much of this bounty does Titanium get to keep and how much do producers get?

Normally you would have to be wary. Lots of companies have invented a great solution to a serious problem for a big company or industry. But they often don't do as well as investors hope because they can't negotiate a good revenue-sharing deal.

I think this situation will be different for one simple reason: the intense pressure on oil sands producers to clean up their act. That pressure comes from the public, but it also comes from regulations, which are only getting tougher.

Take the water produced by Titanium's process. It has no quoted value, but to reuse that volume of water rather than sending it to tailings ponds clearly has huge environmental value to producers, beyond the money they would save from smaller ponds.

Don't get me wrong: Producers will want a cut of all the salvaged resources, particularly the bitumen and solvents. But I think they will recognize the intangible "green" value too and therefore Titanium should be well positioned to get a fair deal.

The technology appears to have a good chance of full commercialization. Titanium's market capitalization is $123-million. It's not hard to assume that it will be substantially higher if the company strikes a good deal. If you can handle the risk, the reward is there.

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An estimate of Titanium Corp.'s potential revenues from a large recycling project