SMALL CAP IDEA: Royal Helium destined for the stars?

It’s not often that a resources company comes to the market almost oven-ready.

But that’s what you have with Royal Helium, which has successfully discovered large accumulations of the inert gas, defined a production strategy and found a customer for its output.

While it can’t name the end user, it is a well-known North American space launch company.

The group, which is currently listed on the TSX-Venture exchange, is headed for AIM next month hoping to secure C$10-$15million in new capital.

Chief executive Andrew Davidson believes UK investors better understand the dynamics of the helium market than their Canadian counterparts.

Background: Royal Helium is one of the largest helium leaseholders in Canada. It cemented this position with the acquisition of its rival Imperial Helium in July

‘We are coming to AIM to increase our shareholder base – of course, London’s institutional and retail market size and depth are substantially larger – and change the perception of what a helium company is,’ he explains.

‘London seems to get the story in a way I don’t think Canada does not at this moment in time.’

If this is true, then there may be an arbitrage opportunity for UK stock pickers with an eye for value given the recent downward trajectory of the TSX-V quoted shares.

The precipitant for this decline in Royal’s valuation is unclear given helium prices have never been more buoyant, while the company has delivered both operationally and commercially.

There may have been some concerns around financing, though they must be dissipating following the recent financing (the Canadians call it a bought deal) that brought in C$8million ‘gross.’

This will be used to fund the upfront engineering and design costs for its plant at Steveville, Alberta, and leaves it on track to deliver its first helium to the unnamed space company next April.

Any lingering concerns over funding should be put to bed once it has negotiated a debt finance package, and, of course, there will be the proceeds from the London IPO.

At this point, already knee-deep in the weeds, it is probably best to take a step back and assess just what Royal Helium does and is.

First, it is one of the largest helium leaseholders in Canada with over 1million acres. It cemented this position with the acquisition of its rival Imperial Helium in July.

Its two key assets are the aforementioned Steveville and Climax, in Saskatchewan.

The former is host to three wells, two of which will be put into production at an initial 15million cubic feet of gas per day.

Drilling at Climax, meanwhile, has discovered two conventional plays.

The surprise came when the team tapped into the Nazare formation below the conventional horizons to find a 114-metre-thick, 14-square-mile area estimated to be host to almost 1.3bn cubic feet of helium.

In this investment story, Nazare represents the blue sky, that will be incrementally de-risked beginning with its first multi-leg, multi-stage horizontal well to be drilled early in 2023.

In the meantime, the company will work on getting Steveville and Climax into production at a combined 20mmcf as well as testing three, already drilled wells at Val Marie and Ogema.

The latter is likely to have its first producing well in the third quarter of next year, almost at the same time as the Climax conventional operation comes on-stream.

The deal with the space launch company locked in a price of US$450 per mcf. To put that into context, the group began its budgeting process for production assuming it would get just US$250 per mcf.

Underpinning the current strong helium spot price is surging demand (the gas is used by the semiconductor industry, fibre optics, space exploration and in MRI scanners) coupled with a growing supply shortfall.

America’s Bureau of Land Management has taken 2.1billion cubic feet of supply out of the system. That’s quite a chunk.

Domestic private supply has remained largely static, leaving Russia, Qatar and, to a lesser extent, Algeria, to pick up the shortfall.

Russia’s isolation from the rest of the world in the aftermath of the invasion of Ukraine has made a tough situation worse.

Add to that the fact that Qatar’s growing supplies are routed through the Straits of Hormuz, the most treacherous shipping lanes in the world, and you see there’s a problem – or for a business such as Royal Helium a major gap in the market.

Equity research house Hannam & Partners doubled its ‘risked’ price target for the stock to C$1.20 per share (C$2.61 un-risked) based on the company’s recent competent persons report.

A CPR is an independent estimate of reserves and resources that’s commonplace in oil and gas exploration.

H&P arrived at the number based on a proven and probable (2P) reserve of 169mmcf for Steveville.

The Climax conventional acreage, meanwhile, is estimated to host a prospective resource of 369mmcf over 18 drilling locations, while H&P reckons the Nazare resource is 2bcf rather than the 1.3billion estimated by the company.

Aside from this, there are also potential ‘credits’ from production by-products such as lithium, methane, natural hydrogen and CO2.

H&P reckons Royal will generate C$12.8million of revenues in 2023, rising to C$19.1million the year after.

The operating costs are so low that 2024 underlying earnings (EBITDA) would be just over C$17million, according to the research house, or C$9.1million at the pre-tax level.

With Royal Helium less than six months away from first production, at which point business will be largely de-risked, you have to wonder what calamities the current 25-cent share price is factoring in.

If CEO Davidson is worried by the bargain-bin valuation, he doesn’t betray any hint of anxiety.

At some point, the penny will drop with investors, and perhaps the AIM float will kick start that process, he says. In the meantime, as Davidson reminds us, these are almost perfect conditions for those developing new sources of helium.

‘Demand continues to sky-rocket, while supply continues to fall off,’ he adds.

‘There aren’t many projects in the world that have the ability to make up the shortfall. Ours are among them.’

This post first appeared on Dailymail.co.uk