RBC Capital Markets Downgrades US Silica Holdings, Projects Pricing Pressure Over Next Year

Industrial mineral company U.S. Silica Holdings, Inc. (NYSE: SLCA) faces pricing pressure, frac sand oversupply and negative revisions, according to RBC Capital Markets. 

The Analyst

Analyst Kurt Hallead downgraded U.S. Silica Holdings from Outperform to Sector Perform and lowered the price target from $36 to $24.

The Thesis

Several Permian mines have opened, creating excess capacity in the market, Hallead said in the downgrade note. (See the analyst's track record here.) 

This excess should outstrip demand significantly by 2019, the analyst said, adding that the primary driver of surplus capacity has been a surge of mesh supply in the Permian.

The supply could drive pricing toward a breakeven point, Hallead said. “We anticipate pricing pressure could persist over the course of the next 12 months. [The] worst-case scenario is excess capacity could drive minegate price to cash break-even, from $25-30/ton.”

For investors, Hallead outlined three positive investment drivers for U.S. Silica:

• A convergence of supply and demand, which could occur via lower sand mine production.
• Less intense pricing degradation.
• Industry consolidation. “Consolidation would support a more rational deployment of supply at better pricing and margins. In our view, the industry only needs five to six frac sand suppliers.”

Companies that have the ability to deliver any type of sand for a good price are well-positioned, while smaller players lacking scale, supply and diversity face industry headwinds, in the analyst's view. 

Price Action

U.S. Silica Holdings shares were down 3.12 percent at $19.86 at the close Thursday.

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