Check out this transcript of the recent interview with Dean and Andy from Royal Helium. I work the company as social media support. Thanks to Andrew O'Donnell with Super Charged Stocks!
Andrew O’Donnell: Good morning everyone. Welcome, it's Wednesday, April 21st and I'm happy to have you here to talk helium. Everyone knows I'm a fan big fan of Desert Mountain and I wanted to reach out to Royal Helium because I heard about them. I knew that they were a Canadian company and I knew a little bit about them, but I wanted to get them on because there's lots of room in the space for people charging after helium. It's such a vital component. I wanted to reach out to the President, CEO, and Chairman of the Board of Royal Helium, which is Andrew Davidson. And I've known Dean Nawata for a while here, as well. He is running communications and IR for the company. We've got you both here and we're going to talk about helium! What's the big deal, why do we need it, and what's going on with Royal Helium? What are your key factors for success?
Andrew Davidson: Great, thanks Andrew. I appreciate the time, thanks for reaching out to us. We're awfully bullish on helium as well.
Andrew O’Donnell: I love it. I love that's it's a Saskatchewan story and a Canadian story. What’s the short story here? If someone likes Desert Mountain and they want to hear what you guys are up to, then what’s up?
Andrew Davidson: You can boil it down to basically three points on why Royal Helium. One is that location matters. Saskatchewan's been producing primary helium since the 1960s. It's not new here. It’s an old industry, we're just shining new light on it. Two is the fact that we produce helium without methane, which provides some significant cost savings on the processing side. We produce it with nitrogen, which is simple to process-out. And number three is scale. We're a company that owns over a million acres of helium rights in Saskatchewan covering the highest known concentrations of helium ever recorded in Saskatchewan. Our project is massive. The intervals we've drilled through are very significant. In terms of a potential upside for gas-in-place, the reservoirs here are virtually unmatched. Those would be the three primary reasons. Most of your viewers and subscribers are going to understand the helium market to a great degree. We benefit here from being close to oil and gas infrastructure; drilling and everything is very commonplace. We're right in the middle of thousands of oil wells and we use the same rigs and the same crews. Lots of advantages to where we operate.
Andrew O’Donnell: That's one of the things that stood out at first was the infrastructure. It's drilling like any other drilling. It's a bit more specific but they've been drilling it as a secondary byproduct for years, but you're now doing it as a primary play. Before we get into the details, please let’s take a big step back and remind everyone about helium. Why do I care? What's the big deal with helium?
Andrew Davidson: The answer isn't balloons. It's everything else. Most of us aren't aware of it and I certainly wasn't before I got involved in this back in 2016, but most people use helium every day. It's in everything. The fiber optic cables we're communicating through right now -- helium is required in the manufacturing of those cables. The high-tech manufacturing space is very interesting to us and, to me, it positions the helium exploration and production game more as a high-tech product rather than a resource project. We operate similar to a resource project in the way we explore for it, define it, and produce it in the same way, but the industries that use it are not in decline. In fact, they’re in a rapid growth phase. From healthcare to high-tech manufacturing, rocketry, quantum computing, you name it -- if it's in high-tech publications right now then you need helium to create it. That's the terrifically interesting part about helium from my perspective; the diversification of demand. We're not limited to a single industry that requires helium -- it's healthcare, high-tech, rocketry, military, quantum computing, cloud farms, welding, lifting -- it's all over the map. All those industries give a safeguard against a downturn in demand. We're not producing something that's used exclusively in energy. In fact, it's not using energy at all!
Andrew Davidson: And on the supply side, we've been dealing with decreases in helium production, especially in North America over the past number of years. I'm sure your listeners are familiar with that, but they warrant discussion again. North America is actively searching for replacement supply for the sales that are drawing down the BLM storage cavern in Texas and there's only a few projects going right now that have the ability to realistically replace some of that supply. Desert Mountain is on that list. We are on that list. There's a couple of private companies also on that list. But in terms of how do investors play this shortage, the options right now are two: Desert Mountain and us.
Andrew O’Donnell: To be a niche player in such a key resource is so exciting. This is the stuff I love. People ask why I care about helium, but they get it when they realize where it's used. That's kind of the foundation I look at for in any kind of investment. I would rather own those component pieces and the people that are kind of working in that realm because they're not serviced as well. You have a natural supply and demand curve that's been developing over the past eight or nine years as privatization has moved the USA away from the public government support. These curves have been shifting with demand up and supply down. And since helium was a secondary byproduct of natural gas, it wasn't as taken seriously from a supply perspective. This opened up an amazing opportunity for someone to make this a primary focus.
Andrew Davidson: There’s a great point in here about where do we look for it? Helium is not available everywhere and you must have very specific geological components in place for helium to be created. That's why locations like Saskatchewan, Arizona, Wyoming, and Utah with elevated levels of uranium concentration are important; it is a prerequisite for helium production. Natural gas production in Pennsylvania, for instance, is going to have zero impact on the helium supply. In fact, it's a negative because there's no helium produced in shale gas. As people have moved towards shale gas plays and away from conventional, that's been a pretty big hindrance on the supply of helium. Up until now, it's been exclusively produced as a byproduct of natural gas.
Andrew O’Donnell: And if people know anything about Saskatchewan, then it’s uranium! The Athabasca Basin up north is globally significant. It makes sense for Saskatchewan to have this helium potential because some of the highest uranium concentrations in the world are found here in Saskatchewan.
Andrew Davidson: Some of the largest mines are here. It is a natural jurisdiction and the same is true in certain states in the US as well. If you follow uranium production then you can end up finding a helium deposit, if you look hard enough and if the geology is correct in the subsurface.
Andrew O’Donnell: Your stock has a fan base and following, as well. There are lots of investors and the stock has performed very well. It's pulled back a little bit as one would expect because nothing ever just goes up permanently. If you've got investors that came into this story at 5, 10, 15, 20 cents and the stock hits 80 or 90 or in three or four dollars, then they have every right to sell. They'll keep a position but that's how this works. If the trend is intact then that is important, but you need to make space for new people to come in with different models and expectations. Some people don't want to grow a business, some people just want to do a placement and they don't care what it's in. I always help to educate people that the model that you're using to invest is critical. Knowing that other people have a different one is also critical too. It doesn't mean that management's not doing their job; if they're hitting the milestone and doing what they say they're going to do then you reward them and reinvest. If it's down then that’s great because you're getting more.
Andrew Davidson: That's right and it's important to note from that Royal has basically done two raises as a public company. One was July of last year and one was December of last year; they were at five cents and 22 cents respectively. The stock price of the company has been in the money for all of those investors the entire time that they've been outstanding. It is normal to expect some selling, even if it's just selling to exercise warrants as we saw with the private placement of last year; those warrants are essentially fully exercised at this point. We expect to see some coming in on the December placement where we raised six million dollars. It's normal and the hold comes off tomorrow, so we would expect a little bit of a pullback leading into that.
Andrew O’Donnell: I can speak specifically for Desert Mountain; it rocketed up to $4.40 and pulled back to the $3.69 or something, but they had their warrants. If they kept it above 350 for 10 consecutive days then they're forced to exercise. I just told everyone that it's going to climb and then come back down because 350 is a trigger price. Someone who's outside doesn't know that's happening and they just see crazy volatility on this thing.
Andrew Davidson: Stocks are going to trade themselves into a natural floor. The economics of the projects don't change. If you liked it at 70 cents then you must love it at 50 cents. We've traded a few million shares in this 50 cent range, which seems to be making a new level for us. And this is a fine base to build off when the stock we put out there has been at less than half of that.
Austin O’Donnell: Please can I ask about the cash flow? I was wondering about the cash flow specifics and how you operate the business.
Andrew Davidson: Sure. That cash flow model you’re referring to is based off the production scenario from these three wells we just finished drilling. The payback period on those wells is about six months to return the capital. The wells have a useful life of a little over 10 years, historically. We only model out five years because anything beyond that just gets into the realm of silly. I haven't read the article you’re referring to, but I'll do that shortly after we're done here. For these wells that we are drilling, we're anticipating producing about three million dollars of gross revenue per year per well. The economics on them and the ability to drill out fields grows very quickly off of the cash flow from these initial producers.
Andrew O’Donnell: Do you have the evaluations done?
Andrew Davidson: No, they are still underway. And this is an important point as well. It has taken us a long time to get through this and it’s a Hollywood problem. When we went into drilling these wells, we expected to be testing basically one zone; that being the Deadwood formation where helium has been produced in Saskatchewan in the past. What we found is as many as 5 to 13 zones containing elevated levels of helium in our drilling program. We've had to test five or six times the amount of zones that we intended to determine which zone we're going to end up producing from. While that's a great problem to have, it takes time and money. Every time you test something, it's a matter of four to five days per zone per well. And we've got three wells where we're doing it! We do have two rigs on site working on these three wells, but they're big zones and they take some time. For example, in the zone we're testing over at our CLIMAX 3 well, our third well, the zone is 30 metres. That’s 30 meters of prospective zone that has returned quite economic grades of helium. The scale of the resource there is huge, but it takes time to test it.
Andrew O’Donnell: I purposefully wanted to not do too much research before this conversation so I can hear it from you and get pumped about it. How do these grades look? Is this high-grade helium?
Andrew Davidson: Globally speaking, yes absolutely.
Andrew O’Donnell: We're not talking two percent, we're talking high-grade helium, which is what people want to hear. Primary producer in the near-term -- when's the hopeful production time frame?
Andrew Davidson: We're targeting 2021 for initial production.
Dean Nawata: To clarify a couple things, Andrew. We're seeing indications of economic grades of helium. One of the points that Andrew was trying to make is that one of the big differences for us in Saskatchewan versus Alberta, Manitoba, Arizona or elsewhere is that the size is very large. The pay thickness he was talking about in one well with three sets of zones is actually 30 meters or 100 feet of thickness. The lateral extent or footprint we see off of seismic and geophysics is in excess of several sections, which means several square miles.
Dean Nawata: It's not unlike a higher grade versus a lower grade gold mine, but there is a big difference. With a gold mine that has little lower grade but larger size, you have to move a lot of rock. With helium or natural gas or whatever the composition may be, the gas comes out of the the hole on its own power. That's a huge economic difference with what we're doing. Andy and I sometimes say we're elephant hunting relative to some of our neighbors or other helium stocks.
Andrew Davidson: And certainly you're in the right area.
Dean Nawata: That’s the other thing. Relative to almost all other players in the world, the area we're drilling into is basically “in the kitchen” where helium is made. Almost everybody else in the world is capturing helium higher up-hole as it has migrated up-hole into natural gas or oil traps above. Andy mentioned that that helium is formed as a byproduct of the natural decay of uranium in the Precambrian basement, well below where oil and gas is located. For example, one of the very thick areas that we're testing right now is in excess of 30 meters or 100 feet of thickness. That is is actually right in the kitchen where the helium is formed.
Andrew O’Donnell: Excellent. Then, what's the plan for selling the gas?
Andrew Davidson: I'm viewing this on a modular basis, which means we're dealing with these first three wells before we look to the future potential. On these first three wells, we're in discussions with a few different groups on offtake agreements where they will handle all the transportation risk and we essentially sell them the gas at the well. That removes processing, transportation, marketing risk from our plate and puts it firmly on theirs. We're a small team here at Royal and we're that way on purpose. We understand exploration risk. We understand how to do it and derisk things. We don't have a team that understands enough about the marketing of helium to take that on yet. We'll learn from our partners and build towards doing it ourselves as we get bigger, but initially we want to get these wells on stream and start cash flow.
Andrew O’Donnell: And then it’s a case of constantly expanding that resource. The amount of land you have now is a staggering number.
Dean Nawata: As an example, the three wells we drilled here are into a seismic-closure area covering 30 square miles of a seismic trap with zones that we've tested so far that have 15 feet to 100 feet. It’s potentially enormous. We've tested helium and all these wells now and it's returned economic grades. We found it now and we have to decide where we're going to produce it from.
Dean Nawata: Andrew, to further answer the question about downstream activities we are planning something similar to what Desert Mountain or anybody else would do in the beginning when we will be basically selling the gas right from the wellhead -- the valve at the top of the ground. As you get half a dozen wells, then you start thinking about your own separation units and distribution. But it's important to note that helium doesn't go into a pipeline system like natural gas. This goes for everybody else, as well. It's taken from the wellhead, separated out, and put into tanks or cigar tubes that are trucked away as a gas. From there, if you want to truck or ship further, like Japan for example, then it has to be liquefied. You have to go take the gas in tanks to a liquefaction facility of some sort. Downstream there's a tremendous amount of further business ahead of us well into the future that goes into those two or three or four steps downstream.
Andrew O’Donnell: Yes, you can see the enormous workload and team you'd need to bring on if you ever wanted to consider transporting it in some way.
Andrew Davidson: We're taking these logical, smaller steps to take small bites of a very large cookie. We'll get to that point, but we're going to grow into that.
Dean Nawata: For Desert Mountain, ourselves, and anybody else that gets into the space, the beauty of it is that we can all sell helium from the wellhead. All of the five main wholesalers of helium would be willing to come right to your site and buy it from the wellhead. Not Desert Mountain, not us, nobody is having to store it or wait to think about the downstream workings. We can sell it right away.
Andrew O’Donnell: That’s exactly what you want!
Andrew Davidson: And all these groups are looking for secure long-term supply, right? Sales agreements here work on long-term sales contracts, generally three to five years, and they build those out into the future looking at how you're going to develop it. They need to be able to offer it to their customers because all these major industrial gas companies are not users of helium, they're resellers. They need to know that they have a stockpile so that if SpaceX comes to say they need to buy $500 million with of helium over the next two years then they can safely have it available in their pipeline. That's how it works and that it is great for the producers because you have a predictability of cash flows and you can effectively model and plan your activities. If you've got a set price in your contract with various escalators for inflation, then it's easier to build-out your development path.
Andrew O’Donnell: CryptoStar is a company doing bitcoin mining in Alberta and you see a lot more companies moving into Canada because they need to be in cooler places. Similar with data storage -- those are natural customers.
Andrew O’Donnell: Andrew Davidson: Exactly. It’s a valid point. We've had talks as far back as 2018 with potential bitcoin miners moving into Saskatchewan exactly for those reasons. They are natural customers for helium but aside from those, there are others that are of interest to us specifically in Saskatchewan like the universities, the hospitals, the Canadian light source synchrotron that's here in Saskatoon; it's a heavy consumer of helium. As North America continues to shift towards greener power sources and starts to look towards small-scale nuclear, that's a big market opportunity for helium producers. That's a push that Saskatchewan is going to be making and Alberta will do the same, as well most of the rest of Canada if they haven't done so already. That's another segment that's going to be opened up to us in the next number of years.
Dean Nawata: That is one of the factors to consider. I know you guys have talked about Desert Mountain a lot and one of the reasons that we can coexist together is that it’s such a big opportunity. Andy and I are always cheering Desert Mountain out when they put news out. Maybe some of your listeners have read stuff I've put on twitter. We're big fans, but I want to point out one of the reasons that it works this way. Yes, the United States would probably be our largest buyer, initially, of our helium in Saskatchewan. All our land is at the US border, so that helps. Desert Mountain and others will do well by servicing the US demand, but one of the things that Canada is looking forward to further in the future is the ability to export to places like Japan and Taiwan, which are big semiconductor manufacturing places. It’s difficult to export to them from almost any other jurisdiction. They currently buy from Qatar and Russia. They would be very happy to be buying from Canada. Any helium that's produced in the United States is likely to stay in the United States, but there's a huge market in the high-tech sector globally. There is huge demand for helium out of Japan and Taiwan. Andrew and I have already been in talks with a couple of groups out of Japan. Again, this is way further down the line but it's one of the reasons that we and Desert Mountain and others can coexist quite nicely in what you would call perhaps the Western World as opposed to Russia or the Middle East.
Andrew O’Donnell: What can you leave us with? It sounds like there's gonna be a ton of news over the summer with production coming on in at the end of the year or fall. There's gonna be a lot of buildups as you get that ready and that's why I love getting on calls like this to remind people that this is a big market with lots of room for people like yourself. What are we looking for like short term? I usually think short-term is a couple of years, but let's say six months to a year out?
Andrew Davidson: Our path over the next year is fairly well-defined and the next 6 months is very well-defined. We have to finish off this testing and we'll report those results on the flow rates, etc. That should be in the next +40 days. At the same time, we will be actively in discussions with off-take partners and we'll have news on that as well. Once we have the flow rate numbers, we'll have an initial resource report coming out from Sproule, who is one of the highest regarded reserve engineers in the world. Now, all that's going to be happening in advance of production here, hopefully, for the end of 2021. At the same time, we're not going to stop drilling. We intend to continue on and prove up more in this CLIMAX field. And then move on to develop some of our lands over in the southeastern portion of Saskatchewan. With a million acres of developable acreage, we've got a lot of drilling to do and a lot of discoveries to make. We're doing it on a very rational timeline where we're going to go in and drill three exploration wells at each one of our blocks, but all those can be turned into producers, provided that they're successfully drilled. The runway is long here. We've got, theoretically, hundreds of targets. We have to refine that down, but it's gonna be busy. All good things coming our way, I think.
Dean Nawata: I would suggest to you, Andrew, that the shorter time frame window and news flow, which always interests investors, is important. If you compare us to Desert Mountain, they did theirs slightly differently it seems. They got their permits, they drilled their wells, and it drills fairly quickly, then they published flow rates first and then did their engineering and testing. A few months later, they came up with actual composition percentages and, almost at the same time, they published the reserve report, which is what Sproule would do for us. So far we've put out some initial composition numbers and we're still working on that, followed by our extended flow test. Then, we go into the actual reserve report that Sproule will do. Investors can look forward to some information because we're right in the middle of testing yeah right now. We're talking about news and updates here again similar to Desert Mountain, but probably within a month or so.
Andrew O’Donnell: I'm glad we had Austin here as well because he is pretty active on the Reddit community, Clubhouse, and WallStreetBets. I wanted him to hear from you guys on a different perspective about helium and how to take that message into these rooms to get people excited. It's amazing to see these whole new groups of investors coming into the market. It reminds me of 2001 when the big internet explosion brought young people who were excited about investing in the market with all this innovation. But we can't have any of this cool stuff in the future without helium.
Austin O’Donnell: What first attracted me to helium was those conversations months ago, like “Do you know why you need it?” Well, no, why do I need it? Getting that message out to other people is key. Then getting people online to study their financials who say that their management team looks awesome. Let's get the ball rolling in the right direction on this! Awesome getting to hear from both of you. I went from knowing nothing about helium to being absolutely addicted to it now.
Andrew O’Donnell: I love these stories where you find a niche market that's absolutely critical and essential. With innovation, things are smaller, more powerful, faster and we need to cool that actual hardware down and this is where helium fits. If we can get that message out to people and let them know that if you want those really fast video games and fast fiber optic cables then we're gonna have to get it for you. I love translating this message and getting it out to people so they get excited and see it in a small company. It’s not Kathy Wood from ARK Investments or Tesla. There's more than two players in the world. I really appreciate you guys. Thanks for coming on and educating us about Royal Helium. There's gonna be lots of news here so everyone keep an eye out for it. I always say that stock price is the price; sometimes it's a good reflection of reality, something it has no reflection. But if management is doing what they said they're going to do, hitting targets, and they're working the deal then it's a company worth looking. I appreciate you guys coming on.
Andrew Davidson: Thanks for the opportunity. It’s always fun to talk about.
Dean Nawata: Austin, let's meet up in the clubhouse app! We'll talk helium in the clubhouse.
