The Helium Report – May 2020

HELIOS – Helium comes from the Greek word for sun, Helios

One of the most valuable pieces of research one can do is in identifying mispriced scarce elements, metals, or supplies. The world is busy with the high flashy technology, and rightfully so. We live in a day of marvel. The scope of research, development and ingenuity is inspiring. We also live in a time of great uncertainty and upheaval. This volatility in culture, politics and ideology means discerning information is critical and having supply or reach to key/critical building blocks of technology is essential.

Up until this major pandemic helium was in a major shortage. The demand had been growing and the price had been accelerating drastically. The radically faster, more powerful processing capabilities of microchips for computers, mobile phones and batteries that power them has placed exceptional amounts of heat upon transistors and expensive electronics. The demand to make faster, stronger, lighter, smaller products has meant a significant demand on processing which on a hardware level translates into extreme heat. To manage increased temperatures, to stop the literal melting of circuity, high tech coolants are required. These coolants are from helium. It is not just for party balloons and blimps at football games. In fact, helium is critical, and it is considered the critical and ‘rare gas’ because it is essential as a coolant for high tech. The reset that has taken place, and the recession we are in has meant that the opportunity has corrected for now. That is, as of today the world stopped!

Helium is the second most abundant element, accounting for 24% of the total mass of the universe. Now as interesting as that sounds it is an entirely different story when it comes to harnessing helium for use. The question lies in extracting it, storing it and the associated costs.

MOORE’S LAW

In 1965 Gordon Moore extrapolated that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace.  This has become the Golden Rule of the technology sector or what we today refer to as: strong. Harder, better, faster. In fact when you visit the Intel site they have a wonderful two minute video that highlights this important concept. This integration of blockchain, technology, health, work, and everyday functionality is growing towards visions of electric powered 5G cities of the future. This enormous push and growth require exceptional ability to cool components. Helium is the solution to work along Moore’s Law and keep pace with the dreams of some of our most brilliant minds.

AT A GLANCE

There was a serious supply/demand crunch for helium up until the pandemic. There are several reasons for this with technology being the obvious driving force heating up components in critical hardware, from pushing memory processing power onto smaller and smaller chips and motherboards.

The stage is set for an exceptional opportunity with helium. One of the drivers for asymmetric growth is finding scarcity, high demand, and opportunity. The key opportunity in markets is finding a critical component that is in incredible demand but not yet respected or recognized. These can be whole sectors of markets like the mining sector or other cyclical plays from growth, value stocks or from defensive to speculative. The key is that whether in up or down markets there is always an opportunity. There is always an opportunity.

Right now, the generalist and retail investor has begun paying attention to precious metals. This is encouraging and long awaited but mirroring the fundamentals of that shift is the scarcity and storage of helium. We are in the beginning of a bull market for mining while so much around us will be volatile, uncertain, and troubling. This will truly be a test for companies, and individuals. If you speak with your advisor, or listen to Ray Dalio, Steven Drukenmiller, Warren Buffet, or any other legend they will remind you of how critical the metals and elements are to our future. The mining sector has been in a bear market for 9 years. These professionals are tried and tested, and their resilience has been encouraging as it shows that people in other sectors will now face challenges. It can be done.

People are becoming more grounded and realizing that we need to focus on our planet, our people, and fundamentals for investing. A strong foundation is the only thing to build upon and we are starting to see a shifting of smart money into this sector.

It has taken time to garner the attention of the investor from the absurd valuations of social media, marketing, and data collection companies. It seems so counter-intuitive that people would want to not only support initiatives to harvest their own data for free but continue to invest moving forward. Of course, they will. This ‘market’ is largely full of agnostic investors that need to place large sums of money into massive scale projects. That is not something I have the same level of interest in. I prefer asymmetric risk in which a smaller amount of money placed into undervalued and ignored markets can produce remarkable returns for you and me… for individual investors. I want to reward companies that not only show innovation and initiative, but ones that help supply the desperately needed resources to meet our ever-evolving technological advancements.

The opportunity with helium is in the application as a coolant for high end technology, for nuclear reactors, the Large Hadron collider and for MRI machines. NMR spectrometers and magnets for MRI or MEG cannot easily be turned off or left without regular helium refills. It is in its ability to cool microchips and processors in computers and gaming systems that find the issue of heat a significant factor in the smaller, faster, stronger memory technology race. Because of the incredible growth in power and decrease in size of microchips it means more and more can be packed close together. This means a significant increase in heat and often motherboards of computers will literally melt. The chip degrades and melts from the extreme heat.

This is going to be an ongoing issue. Coolants are more important today than ever before as our technology keeps increasing at such a rate.

“(As a result of shortages)….we have had to adapt how/when we order helium,” says Pedro Aguiar, NMR Facility Manager at the Université de Montréal, “Owing to the difficulties in obtaining liquid helium we took the decision in January 2019 to move up the decommissioning of an older magnet, which would not move to the new science complex. The loss of the instrument has resulted in maximum loading of remaining instruments, causing frustration for our users, however, the elevated risk of a spontaneous quench of the magnet due to insufficient cryogens was too great.”

INDUSTRY

Other than hot air balloons or party balloons most people do not consider helium other than inhaling some to make one’s voice high pitched. It seems like a novelty business. This could not be further from the truth. The focus is the ability of helium to act as a high-tech coolant for technology notably microchips, gaming systems, data farms, crypto mining farms, solar cells and coolants for nuclear reactors.

PRIMARY AND SECONDARY

We need to look at how we harness this critical gas called helium, and how we extract it from the earth. By and large the most prevalent way is through the LNG energy sector: it is a by-product of liquid natural gas extraction accounting for 90-95% of all helium. This is of crucial consideration today as we see the shutdown in the gas sector and the crisis in the markets. Anecdotally we can see the ships parked from English Bay as well as that our friends in Hong Kong and other harbours of China are sitting full. There is nowhere to store LNG. Last week accentuated this crisis when the forward contract went to -$37. The exchange was paying people to take physical delivery but there was nowhere to store it.

Nearly ¾ of helium is produced in three locations: Texas, Wyoming, and Qatar.

The other incredibly important aspect is the supply of helium. The issue we will explore in depth is that helium is largely derived as a secondary business or as a by product of liquid natural gas. It is captured in this process and then stored often in canisters. There are few stand alone primary helium producers, which poses an incredible opportunity.

The primary reason for use of liquid helium is that it is cold. Super cold. At normal atmospheric pressure, liquid helium boils at temperature of just 4.2 Kelvins (-452.11 Fahrenheit).  What needs something that cold? Super conducting magnets. For some materials, when you get them cold enough the resistance of the material goes to zero ohms. This means that you can run some current through it and the material will act like a magnet. Not just any magnet, but a super strong magnet.

Primary and Secondary Helium

The primary market for helium is small: roughly 5% of the total space. There are so few players in the space that focus on helium as the driver or core of the business. The biggest players are in the secondary market. These are the energy giants like Exxon and Kinder Morgan that extract helium as a by-product and a secondary step from their focus of LNG. It is a by-product of any other type of drilling. The sole focus is exploring, developing a target, and storing high grade helium.

The secondary Market

The 3 most important natural gas processing operations from which helium is extracted:

  • Processing of natural gas to separate liquids such as propane, ethane, butane and benzene for fuels and other petrochemical applications. This is notably distinguished in Texas, Kansas, and Oklahoma.
  • The extraction of natural gas from C02 for enhanced oil recovery (EOR) and the methane is the natural gas that is piped. This is the Exxon Wyoming project.
  • Processing of LNG for shipment to the world’s energy markets. This is most notable in Algeria and Qatar.

But are we at the mercy of secondary markets? It is roughly 90-95% of the market, but no.

Arizona’s Holbrook Basin is considered by many to be “the World’s best address for Helium”, with historic grades ranging from 8% to 10%. There is a company focused on primary high-grade Helium for the coming crunch. That company is Desert Mountain Energy and it is set to make a move to secure this critical gas for the West. It will not be at the mercy of another nation, nor as an afterthought from a major oil and gas producer. It will not be dependent on a US government-controlled sell side but will be entering the new greener tomorrow with the potential for a massive source of helium.

Now is the critical time to take as leveraged a position as possible in this space. That would be by picking up a helium primary producer that is undervalued and ignored or better yet a helium explorer that can bring an incredible multiple to your position.

HELIUM HISTORY

The story of helium is in part that of folly and to some extent disappointment. The gas had been identified by its spectrum of light in 1868, and although it is abundant in the universe, second only to hydrogen, it is also one of the lightest. In 1903, when the town of Dexter, Kansas hit a gusher of what they had expected to be natural gas they decided to celebrate as per custom: light the gas on fire and watch the ‘great pillar of flame from the burning well’.

“After the mayor’s speech, promising prosperity for all, they tossed a burning bale of hay onto the gas gusher. It went out. They lit up another bale, and it went out. Jokes about ‘wind gas’ and ‘hot air’ passed through the disappointed crowd who went home just as poor as they started out.”

What they had not realized is that they had found a significant helium deposit. This is an interesting fact in exploration and discovery of either energy, oil and gas or metals/minerals. We can often come across other opportunities that are exciting not unlike the company First Vanadium that found a gold intersect while drilling and compiling their vanadium PEA. These are exceptionally fortunate occurrences but is possible in the world of wildcatting. Currently, the world’s largest supply of helium is near Amarillo, Texas. It is the U.S. Federal Helium Reserve.

Back in 1996 US Congress moved to privatize the helium business by 2015. The US will exit the helium business by September 2021 as established by the Helium Stewardship Act of 2013. Going further back, the US Federal government under the Helium Conservation Act of 1925 provided a significant role in production, refining and storage of helium. The Act of 2013 looked to keep the program revenue positive through sales. The Government became a major seller at low prices and the industry continued to grow. This is directly because of the growth of technology and energy. The Bureau of Land Management had its last auction in 2018 which put a burden on demand. Chemists, nuclear scientists, and enterprises battled for access to this high-tech coolant from overseas. This mismatch had grown wide until recent events. Then in 2019, Saudi Arabia imposed an economic embargo on Qatar which took 30% of global supply off the market. Prices jumped 135%.

“It is a serious problem”, said Roman Dembinski, an organic chemistry prof at Oakland University. A shortage and disruption would quench our magnets, leaving us without instruments.

US party supply store Park City saw its’ share price shrink 30% in the last 6 months of 2019, but it is more than just balloons.  The Growth in the nuclear industry is astounding and rarely mentioned in the news. China has 45 new nuclear reactors and 12 under construction according to the World Nuclear Association.

It is used in a surprisingly large number of critical components, high capacity hard drives, computer chips, semiconductors, and fiber-optic cables along with coolant for nuclear reactors, MRI machines and space vehicles.

SUPPLY AND DEMAND

Helium resources of the world, exclusive of the United States, were estimated to be about 31.3 billion cubic meters (1.13 trillion cubic feet). The locations and volumes of the major deposits, in billion cubic meters, are Qatar, 10.1; Algeria, 8.2; Russia, 6.8; Canada, 2.0; and China, 1.1.

Preceding the Covid event, demand for helium from high tech and new economy users continues to grow, with the demand side of the industry projected to increase 6-7% annually in the face of declining supply.

National Science Foundation’s Division of Materials Research (DMR). In the mid-2000s, low-temperature researchers supported by DMR typically spent about $15,000 or 10 percent of their annual grants on helium.

The supply curve is met. There is a tie-in with energy, with LNG.

The virus has curbed growth and the reserves are not required and have filled the gap. The demand however is not slowing down and when we get back to work the gap will grow. Our need for high tech coolant is only expanding. If we want to meet the expectations of blockchain, smart cities, big data, and the integration of the IOT (internet of things) then we need control over the supply of helium. If there is a massive push to come off of oil and gas, then the only solution left is nuclear which would put a massive strain on uranium as well as the coolant for the nuclear reactors. The second scenario is not likely to happen, but we have seen exceptional growth on nuclear power in China.

However, moving forward business will get back to normal, or the new normal which will have greater precautions. The shipping goods will and should become more onerous. We must stop this reliance on foreign goods and energy. The magnificent thing is that helium is in Arizona and the US should have as stockpile.

superconducting magnet is an electromagnet made from coils of superconducting wire. They must be cooled to cryogenic temperatures during operation. In its superconducting state the wire has no electrical resistance and therefore can conduct much larger electric currents than ordinary wire, creating intense magnetic fields. Superconducting magnets can produce greater magnetic fields and are used in MRI machines in hospitals, and in scientific equipment such as NMR spectrometers, mass spectrometersfusion reactors and particle accelerators. They are also used for levitation, guidance and propulsion in a magnetic levitation (maglev) railway system being constructed in Japan.

In 2019, estimated domestic consumption of Grade-A helium was 40 million cubic meters (1.4 billion cubic feet), and it was used for magnetic resonance imaging, 30%; lifting gas, 17%; analytical and laboratory applications, 14%; welding, 9%; engineering and scientific applications, 6%; leak detection and semiconductor manufacturing, 5% each; and various other minor applications, 14%.

Equities in the Helium space

Exxon is the largest liquid helium producer with its crude streaming as a by-product of LNG in Wyoming. Well known giants like Kinder Morgan are heavy in the space but like Exxon are extracting Helium as a secondary source. Energy Fuels also has helium deposits and is the leading US producer of uranium – the fuel for carbon-free, emission-free nuclear energy. They also look at key/critical elements and minerals like vanadium.

In Canada there is North American Helium, a Calgary-based private helium exploration and production company founded in 2013. We have acquired rights to explore for and produce helium on an expanding property base of over 3,600,000 acres in the province of Saskatchewan and in the State of Utah. So where does someone look for a pure play helium story?

Desert Mountain Energy

Desert Mountain Energy is a helium exploration company focused on the Holbrook Basin in Arizona. DME is one of few primary extracting helium plays taking advantage of the growing need for helium in the high-tech sector. The Holbrook Basin is considered by many to be “the World’s best address for Helium”, with historic grades ranging from 8% to 10%, and known as “the Saudi Arabia of Helium”.

Of vital importance to a strong company is the management and this opportunity arose from the expertise and vision of a leader in the legal and business space. Irwin Olian has an impressive resume, career, and long list of achievements in not only the market but also as a lawyer. This is one of the rare people who can see market inefficiency and have the nerve to act. He was founder and served as CEO and Chairman of Pan African Mining Corp., positioned in Madagascar. Pan African successfully developed three mining projects which led to its acquisition by Asia Thai Mining Co. Vice President of Bear Stearns & Co. Inc. Senior Attorney for Warner Bros. at the Burbank Studios, a position as business affairs executive with talent agency International Creative Management, a critical element held by a critical partner.

We can see from above that the market is responding strongly with DME.V. People are acknowledging critical resource developers as being paramount to the future of our countries. The company received two permits on Tuesday, May 19 and is patiently ready for the green light to drill in June.

This is an exciting time for Desert Mountain Energy, and it has opportunities with well structured, financed, and methodical plans to address compelling problems that can make dramatic impact. These opportunities of missed or forgotten pockets of markets happen from time to time and in different sectors. Giant funds like BlackRock overlook them because they cannot take the capital deployment a major fund needs to allocate. The capital market structure is flawed and has left a fractured chasm of opportunity for people to fund exceptional opportunities which are the backbone of high tech. We cannot create these high-performance technologies without specialized high end gas coolants. Helium is critical. Are you evaluating the markets for critical components that are driving us forward towards the future technology offers?

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