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HeliumOne, poised to gain from growing market and a supply crisis (250% to 1500% upside based on price targets from analysts) : UKInvesting


My last post about HeliumOne was deleted as I broke one of the rules, so I decided to re-post my DD with a few updates.

Who are HeliumOne?

HeliumOne is listed on the London Stock Exchange (AIM:HE1) and listed on OTCMarkets (OTC:HLOGF) and is currently trading at around £0.08. 

HeliumOne is an exploration company who own multiple areas of land in Tanzania, the biggest believed to have the potential to hold the world’s largest primary source of Helium.

Helium Market:

Helium isn’t just used a balloon filler and its use is expected to only increase:

  • Helium is known as a super-cooler and is used to cool superconductors – an industry expected to grow massively in the next decade.

  • Helium is used in many high tech applications such as MRI Scanners and Cryogenics. (20% of all Helium is used in the manufacture and use of MRI Scanners)

  • Helium is used to pressurise and stiffen rocket tanks – another growth industry.

  • Helium is used in Heliox mixtures in respiratory medicine for people with Asthma and Bronchitis.

  • Used by the department of defence in missile tech.

The Helium market was valued at $10.6 billion in 2019, expecting to grow 11% to $15.73 billion by 2023.

However, there is one small issue with this ever-growing demand for Helium, SUPPLY IS RUNNING OUT.

The global supply of Helium is running out:

Helium is actually a finite resource meaning when it’s gone, it’s gone. Not only this, we have found no way to manufacture or synthesise Helium. At current rates of supply and demand some scientists believe we may run out in as soon as 10 years. Not only this, current the global supply of Helium only comes as a by-product of hydrocarbon production. With the global shift to renewable energy, inevitably oil and gas fields will eventually shut, again reducing the supply of helium.

Global demand of helium is estimated to be 6 billion cubic feet per annum with the unit price per thousand cubic feet has risen 135% in the past two years

On top of this, there seems to not be any perfect replacements for Helium due to its long list of desirable properties:

  • Inert.

  • Lighter than air/low density (preferred over hydrogen due to being inflammable).

  • High diffusion rate – used to test for leaks in machinery.

  • Very low boiling point – used to give metals superconductivity.

  • High thermal conductivity.

Who’s using Helium?:

*I have struggled to find up to date data as Helium deals tend to be fairly ‘behind closed doors’ with only a few major companies distributing Helium such as Linde/Praxair, AirGas, AirLiquide being a few; this is also why it’s hard to find prices for Helium currently.*

In 2017 the US consumed 42% of the worlds demand, with Europe consuming 20%. This will have been made up partly by NASA and the DoD; In 2012, NASA was the largest consumer of Helium at 75mcf which has since been dwarfed by China. However, with the rise of private space exploration from companies such as SpaceX, Helium demand is going to increase further. The US Department of Defence also consumes a significant amount of Helium to cool to cool liquid hydrogen and oxygen for rocket fuel.

China as you may expect, due to their production of super conductors, uses a large amount of Helium, in 2019 they used 700mcf (million cubic feet) of Helium which equates to around 1/10th of the global supply which at the time was 6.2bcf. I expect this number has grown to even more due to the growth of their superconductor production.

On top of this you have the classic use of Helium being party-balloons which accounts for only 10% of demand according to one expert.

Why this could create issues:

As Helium supply dwindles and currently the only new reserve close to being opened being in Russia you can imagine the issues this could cause.

There may become a situation where no Western countries have any major Helium supplies at all resulting in a dependence on countries like Russia and Qatar. This is all while China will also be depending on them to get their hands on the Helium. As seen before we can not rely on Russia to supply us, as they will and have done before use this as bargaining (Russia/Ukraine Gas Dispute). The same can be said for Qatar who have before cut off their supply until an issue with the other Arab countries was sorted.

Now drop into the mix the uses of Helium. It is vital for rockets and heat-guided-missiles. Wouldn’t it be nice if Russia could effectively stop use of these weapons by just shutting off their Helium supply.

Geopolitical situation of Tanzania:

As you may know, China is making major moves into Africa, providing large loans for huge infrastructure projects for their on-going Belt and Road initiative. This initiative aims to connect China to the rest of the world, however for the pessimists such as myself, this looks terrifying in the case China goes rogue.

Tanzania initially accepted these developments but has now gone on to suspend these indefinitely. On top of this, Tanzania is in good relations with most of the western world, especially the United Kingdom who is Tanzania’s largest source of foreign investment, contributing 35%. Not only this, Tanzania is one of 5 African countries the UK has signed a High Level Prosperity Partnership, focussing on 4 priority areas: agriculture, extractives, renewable energy and improving the business environment.

Tanzania is also home to many mineral exploration and mining companies already so currently there is little worry of red tape for HeliumOne.

How can HeliumOne solve this crisis?:

In 2016 when the University of Oxford and the University of Durham couldn’t continue with their research due to an ongoing Helium crisis, they set about trying to scour the globe for where they believed Helium would be abundant.

What they found was the Tanzanian East African Rift Valley. They then partnered with HeliumOne who went to the valley and brought back samples confirming the presence of Helium at the surface.

Oxford and Durham then stepped to the side and HeliumOne continued exploration of the grounds. HeliumOne set up three projects, one in Rukwa, Eyasi and Balandiga. I will be focussing on the Rukwa project as that is currently most developed and by far the largest.

The Rukwa area is 3,590km2 and the company holds 15 prospecting licenses in this area. From measurements of surface seepage, aerial gravity surveys and the studying of 1,100 line kilometres of re-processed seismic data, this area has been independently verified as the ‘largest known primary resource of Helium in the world’ due to a best estimate un risked prospective recoverable Helium resource of 138 billion cubic feet. 

This means that if this Helium is found to be there once drilled, HeliumOne would have enough Helium to supply the market 20-100 years depending on global consumption. As CEO David Minchin said, this would be globally strategic, a price maker and not a price taker.

Hannam & Partners:

Hannam & Partners are an independent investment bank who initiated coverage on Helium One in mid-december 2020. I advise you read their report on HeliumOne to fully understand the risks/gains of the stock. Here is a brief overview of the main points:

  • Risked Net Asset Value (NAV) of £0.11 (~50% upside) – this is what Hannam and Partners believe HeliumOne’s assets to currently be worth.

  • Un-risked NAV of £1.04 (1500% upside) – this is what Hannam and Partners believe HeliumOne’s assets to be once the volume of Helium can be confirmed after drilling.

  • Other Helium exploration companies have seen their share prices increase by >650% over the last year.

  • HeliumOne will see 50% of the free cash flow over the life time of the project after tax and duty charges.

  • Competent person reports see a chance of success at each target prospect of 10% to 17%, however each prospect has multiple targets. HeliumOne sees chance of success at 20%.

  • Biggest risk surrounds the sealing structure of the ground, whether the Helium is able to be held in a way which allows it to be retrieved.

  • Successful development would still be profitable at helium prices of $100/mcf, which is 60% lower than base case scenario (current prices)

  • Each successful well is worth £0.34 in unrisked share value. Therefore 3 successful wells results in £1.02 of unrisked share value.

  • HeliumOne holds $7.7mn in cash, 15% of its market cap at the time of report.

  • Has committed $5.6mn in license fees and minimum spend over the next 5 years.

  • If a reserve of 6billion cubic feet is confirmed, Hannam and Partners predict HeliumOne to generate $87 million in 2023, with a post tax free cash flow of $56 million. As the plant is only predicted to cost $50mn, this showcases a very rapid payback time.

Cannacord Genuity:

Cannacord Genuity is a Canadian investment bank and financial service provider which manages $72.8bn CAD in assets. At the start of March, HeliumOne appointed Cannacord Genuity as their new joint broker with the aims to increase access to the company for investors:

– Given HeliumOne a fully risked target price of £0.20 (250% upside), and a speculative buy rating. This price targeted was generated as an average of their successful well price estimate of £0.36 and their estimate of a share price of £0.03 if HeliumOne have multiple dry wells (unsuccessful drilling).

– CEO David Minchin – “It’s a great number, however it could have been a lot higher.” “The sky is the limit (for SP) on a good discovery… we’re looking forward to getting on the ground and making 20 pence look like old news

– They estimate a ‘Phase 1’ development of the Rukwa site to cost in total $80mn. However, I’m not sure what this phase one development consists of/can’t find more info.

Ok how do HeliumOne progress?:

  • In Q1 2021, Helium One are currently gathering 150 more kilometres of seismic data to infill any gaps in their data.

  • In Q2 2021, Helium is beginning to start their drilling to test for the Helium. They are planning to drill one hole in mid-may, one in June, one in July. If just one of these holes confirms the presence of Helium then HeliumOne will have enough confidence to begin engineering planning and feasibility studies.

  • In Q3/Q4 they plan to begin feasibility planning and field evaluation of the project – Obviously if the first 3 drill holes come back negative, this will be delayed while they test more sites.

  • 2022/2023 they have planned for construction of their plants ready for Helium production.

  • The Rukwa project/basin is only 50km away from the Tanzam Highway joining Zambia to Tanzania, linking the port of Dar es Salaam to HeliumOne.

Mitchell Drilling Contract:

In mid March HeliumOne appointed Mitchell Drilling as their primary drilling contractor:

– Mitchell Drilling are a well established company with over 50 years experience, with 115 rigs worldwide.

– Upgraded rig available in Tanzania courtesy of Mitchell Drilling. This rig is to greatly improve mobilisation and make sure ‘drilling in mid-may is easily achievable’. The upgraded rig also suitable for appraisal well drilling, allowing HeliumOne to move from exploration to appraisal seamlessly ‘saving half a million dollars‘ and also saves HeliumOne ‘3-4 months’ as there is no need to re-mobilise a different drill/new equipment. THIS UPGRADED RIG WILL BE PROVIDED BY MITCHELL AT NO EXTRA COST!

– New rig should mean appraisal program can be pushed forward and completed THIS YEAR.

– Mitchell will take payment in shares for up to 50% value of the contract. Even the contractors believe in this company enough to take shares instead of cash! ‘Huge vote of confidence in the project and the quality of the prospects (wells)’

– Mitchell have given the option to drill an extra 4th whole at each site for payment in shares.

Comparison with similar companies:

Other publicly listed Helium exploration companies are Desert Mountain Energy (TSX:DME), Royal Helium (TSX:RHE) and Blue Star Helium (ASX: BNL).

These 3 companies are all exploration companies targeting Helium reserves in North America. However HeliumOne and Blue Star Helium are the only companies which are drill ready, so I will be comparing these two companies lightly:

  • Unrisked Prospective Resource (Amount of Helium they are expecting to find/Estimate there is) – BNL’s UPR is 3.02 billion cubic feet, HeliumOne’s is 138 billion cubic feet, which is 45.7x larger.

  • Market cap of BNL is £22.57mn ($40.69AUD) at a SP of £0.018 ($0.033AUD). HeliumOne’s market cap of £36.34mn at current share price of £0.073.

Taking valuation purely from their estimates of their respective Helium resources, HeliumOne should have a market cap 45.7x greater than BNL; however in reality at current prices, market cap of HeliumOne is only 1.6x greater. This doesn’t really say a lot as I don’t know the full ins and outs of BNL, however it seems very silly that a company with a Helium deposit estimated to be almost 50x greater, only to be valued 1.6x more.

Benefits of HeliumOne and Helium:

  • If they confirm the presence of Helium in their land they should have the confidence to declare they have the largest known primary resource of Helium in the world. With this amount of Helium they could control the prices of Helium by deciding how much they want to produce.

  • The grade of Helium they’ve found is greater than anywhere else on the market, 10% hydrogen, 90% nitrogen. Current grades of Helium gathered from hydrocarbons is > 1%.

  • They don’t have to do anything with the nitrogen left over, it can just be vented to the atmosphere with no adverse effects.

  • Even if the concentrations of Hydrogen are not as great as the surface seeps show, even a far lower concentration is economically viable to gather and sell.

  • Construction of the processing plant is a lot simpler and cheaper than Oil and Gas plants. They believe they will need an extra $50mn to build their first plant, compared to hundreds of millions/billions needed to create an oil/gas plant.

  • Very experienced management team. All of them are experienced in the field of mineral exploration and have all contributed to the success of companies.

  • Tanzania has many exploration/mining companies already operating within its borders which increases the confidence in HeliumOne that the Tanzanian government wouldn’t push them out/revoke licenses.

  • They have recently renewed all their prospector licenses in late 2020 with extensions of 3 years with options to extend an extra 2 years.

  • They are fully funded for the exploration portion of the project.

  • Low debt (Under £500k)

  • Risked NAV of £0.11/share from analysts Hannam and Partners.

  • Un-Risked NAV of £1.04/share.

  • Rukwa site is only 100km away from Dar Es Salaam and only 30km away from the main highway to Dar es Salaam.

  • Very early on in the life of the company, only IPO’d in December.

  • High news flow/developments through 2021.

  • The next source of Helium after Earth’s supply is depleted is in space. We’re still quite a way off of that.

  • Tanzania is a pro-west country, with very good relations to the UK.

  • Helium is crucial for defence applications.

  • HeliumOne maybe the only pro-west company with a meaningful supply of Helium.

  • The site is only 50km from the main highway linking Zambia to Tanzania and Dar es Salaam. HeliumOne will have an easy route to export the Helium globally from the port of Dar es Salaam.

  • Great social media presence. HeliumOne post updates on Twitter 3-4 times a week.

  • Contractors wanting payment in shares is a great vote of confidence.

  • Speculative buy rating from Cannacord Genuity and a £0.20 risk loaded price target.

  • Everything moving along smoothly/is on time.

  • First mover advantage – the first mover for Helium in Tanzania.

  • Only publicly listed European Helium exploration company.

Risks:

  • HeliumOne could find that all the theory of seismic data and surface seeps may have all been misleading and when they drill they may not hit Helium

  • HeliumOne may find Helium however the geology of the valley may mean that it isn’t trapped well in the ground, which would make it hard to capture and drill. However, they have confidence the geology is fine due to comparisons between this valley and similar ones elsewhere.

  • Investor impatience in the case of any set-backs to the schedule.

  • Dilution to fund the capital to start production (No mention of this but is a possibility).

  • Gazprom also has a large helium field however it is still dwarfed by the potential size of HeliumOne’s. 

  • Very early on in the life of the company, only IPO’d in December. There could be a lot of delays and things that go wrong.

  • I believe that some uses of Helium re-circulate it once used. Especially in cryogenics, reducing demand.

  • Liquidity issues, I have chatted to a lot of people and received a lot of messages about how long orders have took to go through for this stock (especially on trading212). Some people have seen order times from hours to weeks.

  • Chance of success is estimated around 10% – 20% for the target prospects.

  • 3p share price target in the event of multiple dry wells.

Summary/TLDR:

HeliumOne are in a unique position of being on the edge of owning a high value, in demand asset in huge amounts. Not to forget the geopolitical impact as one of the only large Helium players in the western world if their resource is as large as expected.

More Info:

– Definite read (short length) – http://www.helium-one.com/presentations/ – January 2021 investor presentation.

– Watch for even more info (40mins) – https://youtu.be/ZhGrrxAi5qE – Crux Investor interview with CEO David Minchin.

– Hannam and Partners initiation of coverage – (longer read 20/30 mins) – https://cdn-ceo-ca.s3.amazonaws.com/1funjk8-Helium_One_Initiation_note_Final_14_Dec_2020_RB2.pdf

– Cannacord Genuity initiation of coverage (short read 2 mins) – https://twitter.com/Belcourtoi/status/1374276613651771393/photo/1

Sources:





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