Article Summary:
1. The helium shortage continues. Russia restricts helium exports adding fuel to the fire.
2. Desert Mountain moves closer to production of its helium processing plant and with that profits.
3. The company has taken steps to vertically integrate by acquiring a drilling rig and a heavy haul moving fleet. (Both of which will generate revenue & save money).
4. Additional wildcat and offset wells are planned.
Intro
Some months back I penned an article on the helium shortage and since then the shortage has only exacerbated with Russia limiting helium and neon exports. In this article we are going to cover the shortage and then move into how Desert Mountain Energy (TSX.V: DME, U.S. OTC: DMEHF) is structured for success via two vertical integration moves (acquiring a drilling rig & a heavy haul fleet).
Helium Shortage
Just how bad could a helium shortage actually be? Helium is a non-renewable resource. Once it hits the atmosphere it is literally so light it floats out into outer space. Uses of helium include: cooling of MRI machines, hard drives, science & party balloons, purging rocket engines, and even homeland defense.
How bad is the shortage? Inspired by an article on Zerohedge.com, I poked around and found comments from the management at Party City (PRTY) via the 10-Q from May 9th concerning low end balloon grade helium:
"The gross profit margin on net sales at Retail during the first quarter of 2022 was 33.2 % or 380 basis points lower than during the corresponding quarter of 2021. The change was primarily driven by higher helium and freight costs for the quarter."
Party City is not the only retail outlet suffering from higher helium prices due to a shortage; we have Dollar Tree (DLTR) commenting on the helium shortage:
"We have many stores across the country, so it’s possible another store in your area has helium. Plus, we know how to get crafty and creative on a budget and we want to share with you some seriously fun alternative ideas to helium-filled balloons."
Walking into a Dollar Tree (DLTR) I was told the helium tank behind the counter had not been refilled in months due to the national shortage.
All of the above is for balloon grade. Once you get to super pure helium (99.99995), the shortage gets even worse which is good for Desert Mountain as this propels helium prices north. Yet, how did we get into this situation of such constrained helium supply?
Feds Shutting Down the National Helium Reserve
Helium is going through an abrupt and intense shortage thus prices are skyrocketing. The CGA (Compressed Gas Association) does a splendid job of bringing the situation to light via:
"U.S. helium supply has recently tightened due to ongoing failures at the country's primary production facility in Amarillo, Texas. This shortage has been worsened by foreign supply woes. An explosion at a new Russian helium production facility - one of the world's largest - will delay production at that site well into 2022, and its future ability to ease global supply concerns has been further complicated by Russia's incursion into Ukraine."
As a result, key businesses in the United States that rely on helium - including semiconductor manufacturers and operators of magnetic resonance imaging (MRI) machines - are beginning to feel the impact of the shortage." - CGA
Do note that the Federal Helium Reserve (according to the CGA link) has been shut down for over six months as of February 24, 2022. Just how important is the National Helium Reserve? According to an October 2020 Gasworld.com article:
"The BLM's crude helium plant supplies approximately 27% of the US helium demand, and approximately 16% of the world's helium demand."
Those are some rather large figures for one facility that has been shut down for some time and continues to be shut down with closure slated for September.
Russian Helium
Realize that Russia is not a major player in helium at this moment, but they do have a presence and helium is currently in short supply. Do note they have a rather large helium project in the works that has suffered a series of explosions and fires. Once repaired (and barring further mysterious explosions), Russia could become a major player in the helium market. Yet, with various sanctions in place, acquiring parts and support could be quite a challenge for an unknown amount of time.
The above shortages & sanctions on Russia bode well for a continued rise in helium prices. Additionally, Russia just made the decision to reduce exports of helium and neon. Per The Economic Times:
"The deliveries will now be carried out only by the decision of the Government of the Russian Federation, according to a resolution of the Cabinet of Ministers. The restrictions were a response to the ban on supplying Russia with semiconductors necessary for the production of microchips. "
DME's production facility is estimated operational this fall; rising helium prices could have quite the positive impact on the company.
Desert Mountain Energy & The Road To Production
Right now people are having a knee jerk reaction to news that printing up stupendous amount of money creates inflation. Hence, stocks that have been trading on hopes and dreams have been decimated. Desert Mountain Energy however has held up quite well. Once the production plant comes online this fall, the company will shift from an exploration-drilling outfit to a company that produces profits. Granted, this will take a little time to ramp up: I would venture one or two quarters before the production facility is operating at optimal levels.
Uplisting Aspirations - Nasdaq
Once revenue and profits arrive, it is simply a matter of time before we see the company uplist to the Nasdaq or another large venue. With an uplisting to a major market, some of the index funds that service that venue could be forced to purchase the stock. Typically this results in price appreciation. A good example would be when Standard Lithium (SLI) uplisted.
Additional Assets - Hydrogen & Neon
Besides helium, Desert Mountain has assets of hydrogen & Neon. The CEO Robert Rohlfing had this to say concerning hydrogen:
We’re looking at dealing with two different companies to implement that between three-to-five years down the road."
"We’ve also identified a few other potential areas for exploration that may have a similar hydrogen-helium component with nitrogen,” he continues. “That could fall between 2023 and 2025, and we intend to work with the state to execute that at an increased density, above one well per square-mile. Neon is another resource we’re looking to exploit. In all, our goal is to become a leading independent company in the industry for the satisfaction of our future energy needs.”
Given that Mr. Rohlfling is a very forward thinking CEO, I would bump those timelines up some potentially.
Ukraine & Desert Mountains Neon Continued
Expanding upon the neon, I think we have an opportunity here as some DME wells do have neon in them. According to Protocol.com, Ukraine produces 25% of the world's neon and 45% to 54% of the ultra pure neon that is used in semiconductor production. Protocol writes as of last March:
The two Ukrainian companies, Ingas and Cryoin, produce 45% to 54% of the neon used in chip manufacturing around the world, according to Reuters. Neon is used as part of the lithography stage of chip manufacturing, the step that involves using lasers to draw features onto the silicon wafers. Chipmakers account for 75% of global demand for neon, with the remainder going to industrial lasers and Lasik eye surgery, according to Bernstein analyst Stacy Rasgon.
Rasgon estimated that the industry wouldn’t experience disruptions for the next “several months.” But if the war drags on longer, there will be problems, he wrote in a research note distributed Monday.
“Many large semi companies are on long-term contracts though so gas companies will absorb at first, but large semi players may have an advantage over small ones,” Rasgon wrote. “Beyond this, the industry is capable of paying up and shouldering high prices to secure supply as neon is tiny part of the cost structure; industrial lasers / lasik etc. may ultimately get starved first"
Given that the protocol article was written in March (and we are now in June), one might venture that the neon shortage is getting worse. Factor in the news of Russia restricting neon exports and one might guess where neon prices are going. Given Desert has neon assets, this might be a potential source of revenue. Granted it would take additional equipment to filter the neon out of the wells but all in good time.
Private Placement & Warrants = Strong Financial Position
We can see Desert Mountain sporting a strong financial position of just over $19.2 milllion CDN as of last March (additionally they will be producing revenue by Q4 give or take.) It is also interesting to note the warrants outstanding are decreasing which provides the company with additional capital.
A pending private placement of $5.25 million Canadian will put that treasurey at $24.45 million minus some burn rate and drilling. One might guess they will end up with $22.25 million going forward once the PP is concluded.
Ellis Martin Report - 06/02/2022 Video Summary
A new interview with Don Mosher of Desert Mountain Energy was presented by the Ellis Martin Report. Let's break down what was covered and save the reader some time.
Powering the Helium Separation Facility
Per the interview we learn from DME's Don Mosher:
"DME is 18 miles from the nearest power grid." "With over 320 days a year of high radiation exposure out in the desert".
Hence, DME is looking at solar options to back up the facility's power. DME will be "Taking delivery of solar power components in June." per Mr. Mosher. The interview then moves on to the helium facility.
Helium Process Facility Notes
The helium production plant is currently being assembled and DME will be "taking delivery of units in July." Additionally, Don Mosher adds some color via "We're in progress here of starting to get this facility up and running and being optimized through the third quarter and we hope to have full optimized production either at the end of Q3 or early Q4". Furthermore, we will see some news hit soon that might move the stock as investors gain confidence:
Construction on the McCauley Helium Processing Facility continues and DME will be adding selected pictures of the assembly to the website as it approaches completion. The Company expects to drill the next wildcat in the early part of July after the rig is released from the project it is currently on. DME will announce the permits when they have been received."
Helium Pricing & Fixed Costs
Process and handling costs should be about $18 to $20 per mcf and remain fairly fixed due to them making all their own power. By comparison, natural gas facilities run $140 to $180 per mcf according to Don Mosher. Talking about helium prices,
"90 to 95% pure helium prices have gone from $300 to over $1000 dollars (per mcf). Obviously, the companies doing off takes and signing five-year contracts have missed that lift in helium price. So we feel that by the time we produce the helium, finishing it to 99.99995% we will be getting north of 2500 in mcf. Our margins should be north of 90%. They have identified 40 end users within three hours of the facility and all are “desperate” for helium."
Furthermore DME is free from any offtake agreements per:
"Management has decided to sell helium at spot price and not sign any long-term contracts. The recent deficit in the global helium market has resulted in strong demand and unprecedented helium prices. Desert Mountain Energy Corp. does not project any short-term solutions for the helium market and prices are expected to be at historically high levels for the foreseeable future."
Hydrogen Exposed
DME discovered a hydrogen field in Arizona and Don Meyers had this to say:
"Over the next two to three years you'll see more and more hydrogen usage, more fuel cells used on long-haul vehicles and I think we'll be able to capitalize on it. Right now it's sitting in the ground in a natural storage unit if you want to look at it that way and we have time to decide how we can take advantage of that."
Helium Wells Explained
At this point the interview shifts back to Helium. Don noted that they can make money on wells at a 0.3% helium concentration and the wells coming on line first are at over 10 times that concentration (north of 3% helium) so they will be very profitable. It should also be noted Wildcat well #8 and an offtake well have been permitted and drill should start in July.
(Source:
DME IR Presenation- Note red check marks and box are the authors)
Vertical Integration (Drill Rig & Truck Fleet)
This was one of the more interesting parts of the interview in my opinion. Exploring for helium, discovering it, separating it, and selling it is very nice but you still have high costs associated with moving rigs for drill holes and of course hiring a drill rig. Hence, we see DME engaging in vertical integration as they purchased a used trucking fleet. Don goes on to discuss the insane rise in trucking costs to move rigs by giving the example that it:
"Cost $25,400 to move the rig onto Well #1 and then 18 months later it cost $173,000 to down rig off Well #7." - Don Mosher
Hence, buying a used fleet makes sense. Furthermore, they company has announced this fleet will be generating revenue this June:
"We are contracting them (the trucks) out currently and we are generating a profit off our trucking fleet. We've got a second stream of revenue that we never anticipated were gonna have. These trucks are contracted out for the next 24 months." - Don Mosher
Additionally we see buried in a PR accountment:
"Desert Mountain Energy’s trucking company has sufficient work committed to keeping the equipment busy on average six days per week for the next 24+ months. This business segment will be adding cash flow immediately and those numbers will be reflected in the financials. Forecasts suggest the Company will get a full return on investment by the end of June."
Concerning the drill rig from the same PR:
"The Company’s extension into the pre-payment of a drill rig with 16,000’ capabilities is starting to bear fruit. DME receives a predetermined amount on a daily basis for every day it is utilized. The rig has been contracted on an extended basis for all times other than when the Company will be utilizing it."
To summarize: DME now has a heavy haul fleet AND a drill rig that are both revenue producing. It is interesting to note the 16,000' feet drill capability of the rig. It makes you wonder if they are going to use it in Kansas or Colorado to drill deeper than is currently needed in Arizona.
Potential Kansas & Colorado Helium Expansion
Don wraps up the interview by saying they will be drilling additional wildcat and offset wells, finishing construction of the gas separation facility, and "You can look forward to us bringing more processing facilities online on different fields around Arizona and potentially looking at some opportunities outside the state of Arizona. There's a lot of opportunities in places like Kanas and Colorado."
Cutting The Middle Man Out
"At the end of the day they (the gas suppliers) depend on the off takes from the natural gas producers to get their hands on 90 to 95% pure helium and upgrade it and sell it to the end users. We're cutting everybody out. We are going from start to finish and we will be the only company of its, like I am aware of in the world right now" - Don Mosher
Conclusion
Nothing is certain in this bi-polar market. Fuel prices are running north. Inflation is rampant. The Fed seems powerless. Frankly, this is one of the most dangerous markets I've seen since the big ones of the 1999 tech implosion or the 2007-2008 housing implosion. I went through both of those and neither were fun. Granted, they did present some interesting opportunities to pick up cheap shares. The difference this time is inflation. Cash might be king, but how long that king will live while inflation eats at him? Hence I think adding Desert Mountain Energy to your holdings offers you exposure to a commodity that is rapidly inflating in price. I'm not the alone in my assessment. DME insiders are actively purchasing stock in the open market as of last April.
We assess Desert Mountain will transform over the course of the next year --- going from exploration to production and expansion in new geographic areas. As always though, my caveat is to keep some powder dry for rough times.
Disclosure
I have a beneficial long position in the shares of one or more of the companies discussed in this article, either through stock ownership, options, or other derivatives. I wrote this article without external assistance and it expresses my personal opinions. I was not compensated for this article; I have no business relationship with any company whose stock is mentioned in this article.
