Despite management teams talking a lot about a severe shortfall in helium gas supply with reverberations that are leading to a comprehensive rethinking of security of supply & ESG initiatives, most investors don’t know much about helium. It’s simply not as SEXY as high-tech battery metal/EV plays or high-grade gold discoveries.
Yet, end-users are demanding that key industrial commodities be sourced regionally — you’ve probably been hearing of onshoring, the opposite of offshoring… Onshoring significantly reduces the time, cost & logistics of supply chains, and cuts emissions.
Furthermore, the source of essential materials like helium needs to be more carefully considered. Countries in the West can no longer rely on supplies originating from Russia & China (or countries they influence/control).
In addition to widespread use in MRI machines, helium is vitally important in public & private scientific, R&D, manufacturing, high-tech, aerospace, medical & military applications. The U.S. Departments of Defense (DoD), Energy (DoE) & NASA increasingly are using this gas in mission-critical programs.
A perfect storm of supply disruptions, most notably out of Russia, is widely expected to keep pricing strong for years to come. My favorite name continues to be Desert Mountain Energy (TSX-V: DME) / (OTCQX: DMEHF), a primary clean helium developer sitting on 85,000+ acres in Arizona, (USA).
Helium, (and eventually other gasses + hydrogen) will be sold at the finishing facilities and travel regionally around the southwestern U.S., not thousands of miles across countries & oceans. Management has about C$10M in cash to finish developing the McCauley processing facility.
President & Director Don Mosher has been more open lately about the potential to achieve insane margins on helium sales that his team believes could be done near $2,500/mcf. At that level, margins would be north of 90%! In the chart below I assume an 80% margin and a weighted average selling price of $2,000/mcf.
Assuming the McCauley finishing facility (starting up this quarter) operates at eight million mcf/day of raw gasses [vs. nameplate capacity of 10.5M mcf/day] processing a blended average helium grade of 3.0, that would deliver 240 mcf/day of helium.
If the plant can operate at 90% capacity, Desert’s annualized cash flow ($2,000/mcf @ 80% margin) would be ~C$145M. Therefore, Desert Mountain is valued at a 1.3x multiple of its prospective EBITDA.
I calculated a potential dividend yield assuming management paid out 50% of its operating cash flow. At C$145M/yr., a 50% payout would equate to an annual dividend of ~C$0.88, for a yield of 38%! (based on 82M fully-diluted shares & the current share price of C$2.32). How realistic is an outcome involving a C$0.80+ dividend?
It all depends on what mgmt. wants to do with such a massive cash-flowing enterprise. Even after paying out 50% to shareholders, ~C$72.5M/yr. would be available to cover taxes, G&A, plus sustaining & growth cap-ex.
There will be ample opportunities to acquire more helium prospective properties in Arizona (and surrounding states) and develop a winning strategy to eventually monetize other gasses & hydrogen.
Combined, the McCauley & Rohlfing finishing facilities alone could keep Desert Mountain’s mgmt. team busy for a decade or more, with cash flow growing into the C$100’s of millions/yr. as soon as 2025.
Cap-ex over the next several years is quite manageable. Although development of a second helium processing plant is underway, (Rohlfing Helium
Field finishing facility) it should cost under C$15M (in total) over a two-year period.
Desert Mountain could be one of the fastest growing AND highest margin natural resource companies in N. America from 2023 to 2025 (after that, who knows?). I’m talking organic growth, not even considering acquisitions that could be made.
Compare tiny Desert Mountain to dozens of newly minted high-tech battery metals & EV automakers valued in the billions of dollars that won’t be EBITDA positive for years to come (if ever).
Any company with a financial profile boasting robust & sustainable cash flows becomes highly valued in the market and/or a prime takeover target. In the chart below are 10 industrial/specialty gas companies that should be very interested in Desert Mountain.
These companies are valued at an average of 8.6x their respective 2023 EBITDA estimates. By acquiring Desert Mountain, any of these players would greatly enhance their product portfolio & geographic footprint while improving ESG credentials.
Precious Metals royalty & streaming companies Franco-Nevada, Wheaton Precious Metals, Sandstorm & Royal Gold have an average 12-month trailing EBITDA margin of 76.6% and trade at an average multiple of 16.3x EBITDA. In my view, the sky’s the limit on high helium specialist producer Desert Mountain’s valuation could go once operations are ramped up.
In addition to the 10 companies mentioned, semiconductor companies could be very interested, as well as space/(rockets)/satellite companies, not to mention fiber optics/data center giants. Even automakers & medical equipment manufacturers could be interested.
I believe there are dozens of global companies — each worth billions upon billions — that could have an interest in a company like Desert Mountain Energy and could comfortably afford to pay a single billion for one of the best new natural resource opportunities in N. America.
Let me end this bullish commentary with some thoughts on risk factors. Yes, there are plenty of risks, but I believe the risks are comparatively minor vs. the risks other natural resource companies face.
Desert Mountain enjoys superior commodity-specific fundamentals (a perfect storm) leading to what should be strong pricing for years to come. The U.S. is a very safe jurisdiction (as is Canada, Mexico & Australia) but much better positioned regarding end-user demand.
A substantial (high-grade) resource has already been found, and the Company has tremendous exploration + M&A potential.
Operations & logistics should be straightforward, no new technologies are being relied upon. Desert Mountain will run a very green, low-cost, efficient operation, including being the first vertically-integrated helium producer to use solar power with a stated goal of zero carbon emissions.
It doesn’t get much greener than zero emissions… plus, end products will mostly be consumed locally.
Commercial production & positive free cash flow is expected within six months, with very substantial free cash flow (relative to its market cap) possible within a year. If all goes reasonably as planned, Desert Mountain is fully-funded (or fairly close) to achieving profitability.
Other natural resource companies, even excellent ones (such as select Athabasca basin uranium companies) can be 5-10 years from production, or in far less friendly countries, or reliant on new technologies (such as lithium companies proposing to use unproven at commercial-scale “DLE” techniques).
Emerging producers often take years to ramp up to full production. Many companies face years of environmental/permitting challenges with unpredictable timelines & outcomes and/or have projects that are hundreds of miles from critical infrastructure like roads, water, ports & power.
Companies can be highly reliant on future provincial or federal gov’t infrastructure buildouts (like rail lines & new ports) that can be subject to serious delays.
Most natural resource companies have large upfront capital requirements years before positive cash flow begins. Natural resource companies have to partner with local communities and native/indigenous groups (some of whom aren’t mining-friendly).
Most natural resource companies have to spend years & millions of dollars preparing Feasibility and various other studies/reports. The key point is that Desert Mountain Energy (TSX-V: DME) / (OTCQX: DMEHF) has been greatly de-risked since 2019 yet is still valued at just 1.3x prospective annualized EBITDA from its first helium finishing facility alone.
The chances of peer natural resource companies entering commercial production next year with blockbuster margins AND stellar growth is remarkably low. Moreover, pre-revenue companies that could make it really big already have large market caps.
Some great very early-stage gold juniors are valued at 2x-3x that of Desert Mountain. By early-stage I mean pre-maiden mineral resource estimate, and with market caps > C$400M. These companies have 5+ years + hundreds of millions of dollars in cap-ex ahead of them before producing a single troy ounce.
Yes, helium gas is not that SEXY, but buoyant, long-lasting cash flows are very SEXY! Readers are encouraged to take a closer look at Desert Mountain Energy as operations begin this quarter and aggressively liftoff next year.
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