Desert Mountain Energy; rising to the top of the #helium (gas) space

I’ve been hearing bullish commentary about the helium gas (“He”) sector, including prognostications that the world is running out of accessible deposits of the second most abundant element in the universe.

Element #2 on the periodic table, a noble gas, He is non-toxic, non-flammable, colorless, odorless, tasteless & inert. Unlike the only lighter element, hydrogen, He cannot be manufactured — it’s a finite resource.

Helium is vital for cooling superconducting magnets in MRI and other machines.

Although He is routinely transported, it’s costly, time consuming & pollutive to ship long distances. Helium is most valuable when mined & consumed close to end users.

The largest reserves of He are found in Qatar, Algeria & Russia. Therefore, on top of environmental, cost & timing issues of long distance shipping — security of supply (especially from Russia) is a growing concern in the world’s largest market — the U.S.

In addition to MRI machines, He is critically important in a number of other applications including semiconductors / fiber optics, data centers, LCD displays, hard drives, quantum computers, nuclear fuel rods, rocketry, lasers & particle accelerators.

Very strong 10-yr. CAGRs of 5%-10% are forecast for rocketry, medical equipment, semiconductors, fiber optics & data centers.

Helium’s inert nature makes it ideal for creating controlled environments in semiconductor & fiber optics manufacturing, aerospace applications, and more.

One company I’m following closely is Desert Mountain Energy (TSX-V: DME) / (OTCQB: DMEHF). It has four high-grade, primary He wells drilled in Arizona. Unlike most He juniors, Desert Mountain expects to be generating modest cash flow within 6-7 months and then robust free cash flow from 2023 on.

In a press release this morning (Dec. 5th), the Company reiterated plans to sell finished He directly to the U.S. government and other end users. This represents a strong vote of confidence in management’s efforts to commercialize. From the PR,

“DME has completed the required filings to sell processed helium (up to 99.9999% pure) to the U.S. Government and has signed NDAs with end users. ‘The Company’s plan has always been to become a vertically-integrated helium producer selling directly to end users’ said CEO Robert Rohlfing. ‘Due to our location, we have the luxury of having 36 prospective customers within 300 miles of our finishing facility.‘”

A giant potential customer of DME (from 2024 on) is Taiwan Semiconductor Manufacturing Co, which is building a massive US$12B+ facility in Arizona. This move could attract other semiconductor or fiber optics companies to the state.

DME’s enterprise value {market cap + debt – cash} is $122M. Mgmt. is sitting on ~C$24M in cash, more than enough to reach initial commercial production this summer.

Over the next five years, mgmt. believes a total of 60-70 long-life, very high-margin primary He wells can potentially be put into production (from the current land package). By long-life I mean ~15 years, with payback periods of < 9 months. This year the Company is drilling at least three more wildcat wells.

Desert Mountain plans to be the first vertically-integrated (wildcat exploration through delivery of a finished / refined He product grading up to 99.9999%) player in the world. Moreover, it plans to be the greenest supplier by building its own solar farm and using its own produced hydrogen to run back-up power generation.

For the past century, up to 95% of He production has come as a byproduct of hydrocarbon extraction. Recently this has been changing as geologists, geoscientists & mining / petroleum engineers seek trapped He in formations across the western U.S. & Canada.

No one is better at this than CEO Robert Rohlfing.

Finding He outside the confines of hydrocarbon production is great, but it’s only half the battle. As standalone deposits, the He grade needs to be higher than those found in natural gas wells.

Besides the targeted He, all other gasses need to be 1) separated, 2) stored / sequestered, 3) vented, 4) flared, 5) shipped or 6) disposed of in some other way — at added cost & operating complexity.

A lot of planning, procurement & permitting goes into these activities. The fewer the # of gasses to contend with, the more likely a He deposit will be commercially viable and the faster wells can be placed online.

And then there’s the serious challenge of water management & disposal, which adds another layer of cost, logistics & permitting. DME does NOT have water to deal with.

With all the talk about decarbonization, clean, green energy / technology, conservation, security of supply, etc. — and the ESG mandates covering these & other initiatives — it seems increasingly likely that He deposits will be exploited for local & regional use. He production in the southwest U.S. may be preferable to production coming from Canada.

According to a May 2021 Edison Investment Research report,

For security of supply, it’s concerning that by the late 2020s, 75% of global helium supply will come from Qatar, Russia & Algeria (up from 50% in 2020). Some customers may be willing to pay a premium to secure supply of helium from outside of these three countries.

Emerging N. American supply in southern parts of Saskatchewan, Manitoba, Alberta & B.C., and western U.S. states incl. Arizona, Montana, Kansas, Texas, Wyoming, New Mexico, Utah & Colorado, could make a significant difference in the U.S. market.

Unlike some N. American pre-revenue He companies, management at DME is not providing operational guidance at this time. Although optimistic about 2022, there are uncertainties regarding the number & sequencing of production / offset wells.

And, the exact mix of gasses in each well has not been finalized. Therefore, the economics of each well is hard to pin down. Management believes they will have a better view on operating metrics in the 2nd qtr., after two offset wells are drilled & analyzed.

DME is building a modular processing plant designed to produce ~10M mcf of (up to) 99.9999% He, which depending on end user & shipment quantity, can potentially be sold for C$600 to $2,400/mcf.

Since Desert Mountain has ~C$24M in cash, it’s opting not to pursue major off-take agreements or strategic partnerships for now — leaving tremendous flexibility to capture most or all of the profits.

In looking at pre-revenue He plays, I believe that DME is 6-12 months ahead of most peers’ timelines and is more likely to reach commercial production this year. In other words, some He junior mgmt. teams are full of hot air.

As mentioned, the Company is cashed up through commercialization. That means no equity issuance should be necessary, unless for accretive acquisitions.

Desert Mountain’s large cash balance & near-term production profile make it considerably less risky than peers facing more funding, permitting, and ongoing exploration / development risks.

DME is poised to be a N. American leader and the first vertically-integrated He producer. With that market power, it will have its pick of acquisition targets. And, it will grow at a brisk but prudent pace, largely funded with internal cash flow.

Institutions will gravitate to larger He players with share prices above C$2-$3 and higher trading volumes. I hope to see a NYSE American or full NASDAQ listing by late 2022 or early 2023. Lithium Americas, Standard Lithium, UEC & Energy Fuels are examples of companies with U.S. listings that enjoy strong trading liquidity & premium market valuations.

There are < 10 junior He plays listed in N. America. Each faces its own set of challenges & opportunities. DME remains a high risk company, but it has more upside potential than peers that are mostly not planning to upgrade their He.

Without finishing / refining, operating margins will be much lower. Most peers will be selling at roughly US$300/mcf to much larger specialty chemical / gasses companies like Linde plc, L’Air Liquide S.A and Air Products and Chemicals, Inc. DME expects to command prices that are 2x-8x higher.

Even if peers switch gears and try to refine He, delivery times for critical refining equipment has extended to 20-30 months. DME will have a moderate-sized facility up and running this summer that can be readily expanded.

2022 could be a big year for He and an even bigger year for Desert Mountain Energy.

Disclosures / disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Desert Mountain Energy, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Desert Mountain are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It’s assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned shares in Desert Mountain Energy and the Company is an advertiser on [ER]

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