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.
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).
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.
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."
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.