Helix Exploration: two bites of the apple

Good morning FTSE AIM investors and welcome to your Stock of the Week. 

Today we’re going to take a look at Helix Exploration, which in my view could be the best helium play on the AIM market from a risk-reward perspective right now. 

While others including Zephyr or Mosman are also potentially attractive, the former already sports a circa £100 million market capitalisation while the latter is ‘worth’ less than £3 million. 

This makes these two different kinds of helium plays — but the good news is that there’s space in the market for all the dreams of every helium company on AIM (and those to come, including Georgina) to come true.

Helix launched its IPO in early April, raising £7.5 million through a placing of shares at 10p apiece, leaving the company with a market cap of £12.2 million. However, the book demand stood at £22 million, leaving demand for shares heavily outpacing supply. 

It’s probably not hard to predict what happened next — the stock shot up to 20.8p on 7 May, though has since been on a slight downtrend to circa 17-18p today. For those wondering why the re-rate to a higher settled value took a month, the answer is that when an IPO is oversubscribed, you often have a prisoner’s dilemma.

I’ll explain.

Those lucky enough to get shares in the IPO are either individuals who want to hold them long term or sell them quickly for a profit. The fact that the share price remained stable for weeks after the IPO suggests the stock is in ‘sticky’ hands, BUT investors who did not get shares in the IPO would not be able to know whether this was the case until a few weeks after the IPO. 

The risk (if you didn’t get IPO shares) is that when you buy shares post-IPO, you become the exit liquidity for someone who did. This risk is minimised if you wait to buy, as long as the stock remains relatively stable, because it implies the IPO investors are holders.

Ordinarily I like to start with the asset, but in this instance, I think that the calibre of the management is perhaps more important. 

It’s no secret that a great asset with a weak team behind it can fail — and investors back people. 

This is especially true in the mining sector because (a) the same teams tend to find great deposits over and over again despite the element of chance involved, and (b) unless you are a specialist, you have to take a management team at their word when it comes to assessing an asset in the early stages of exploration.

For context, I have spent the past month or so researching everything I can about helium — and yet all of this knowledge is probably less than 10% of what the team at Helix could recite from memory.

And this management team, in the words of a certain chess legend, is disgustingly good. Once you’ve been around the block a few times, there are certain teams that always deliver the goods; look at those behind Amaroq, Sovereign, or Greatland for example — Helix’s team has similarly quality pedigree.

CEO is Bo Sears, who literally wrote the book on helium, entitled’ The Disappearing Element.’ I’ve now read this book, and for anyone interested, it’s available online through any decent educational establishment.

Bo has 25 years of experience in helium exploration and production, and most importantly both discovered and DEVELOPED the Mankota project, which was the first Canadian project capable of producing Grade A helium. He’s also testified before the US House of Representatives on the US’s helium supply — which could be very helpful if any grant funding applications go in — and in any event the political connections are priceless.

Chair is David Minchin, formerly of Helium One, which he grew from a £5 million market cap. David also worked as director of geology for AMED funds, directing $450 million of investment into African nations.

Ryan Neates is the CFO, with Kieth Spickelmier and Gregg Peters rounding off the team as non-executive directors. The former was founder of Westside Energy which sold back in 2008 money for $200 million, while the latter spent a decade working as director of helium for Linde and Praxair. Linde is not a household name but is the largest industrial gas company in the world. 

Helix Exploration’s flagship is Ingomar Dome — which itself is a large-scale asset within the Montana Helium Freeway — where historic drilling has already identified gas in all of the company’s target reservoir horizons. 

The freeway system extends from Saskatchewan to Wyoming, and there have already been several large scale discoveries within it — including production from North American Helium and Weil Group. Importantly, all helium found in the area is associated with nitrogen. And this is America, the land of the free and the home of the drill bit. The jurisdiction is great.

Helix argues that Ingomar Dome has all the characteristics of a potentially massive Flathead-style helium discovery, including:

• Historic drilling and testing identified gas in all target reservoir horizons. Assayed at circa 81% Nitrogen, but the gas was never tested for helium.
• Reservoir sandstones with proven sealing units in multiple horizons.
• Large closure of 16,512 acres mapped at surface, in seismic and in drilling.
• Located on the upthrown side of the deep-seated Sumatra Thrust, which acts as a conduit for helium migration.
• Radiometric studies have identified high uranium and thorium anomalies in basement, signifying a high geothermal gradient necessary to release helium.

The asset is a stacked reservoir, which effectively means you can hit multiple targets (with gas already identified) with a single appraisal well. 

There’s no further geological work to be done — a 2,500 depth appraisal well is planned for Q3 2024 (a few weeks away), using a rig and contractor which is already available in Montana. Assuming all goes well — a decent size, grade, flow rate and low contaminants — sales will be targeted to Tier 2 Distributors and end-users, bypassing industrial majors to ensure best price to Helix Exploration. 

The company also notes there is also an option to lease the plant from the manufacturer, which would further reduce capital requirements. Based on my research, a small operation could get underway for circa $12.5 million, so Helix could potentially even generate this cash in an equity raise.

On 15 April, Helix announced a strategic partnership with Petroleum Consultants LLC, a consultancy which has significant operational expertise in Montana and has over 50 clients of various sizes on the books.

Sears noted:

‘This collaboration entails comprehensive drilling engineering services encompassing well design, completion design, flow-testing procedures, and overall wellsite supervision. Leveraging their extensive experience in the State of Montana and across the broader Rocky Mountain regions, Petroleum Consultants will play a vital role in optimising our drilling and testing processes.’

A week later, the company executed a binding contract with Treasure State Drilling LLC to provide its Cardwell KB-150 D1D drilling rig — a rig which has previously drilled wells for Sears on two occasions. The rig is managed by a team with three decades of operational knowledge, including 20 years of working with Cardwell. 

Sears noted he could ‘attest to its performance in terms of load capacity, operational efficiency, and the proficiency of its operators.’ Interestingly, he also named rig manager Wil Stenger in his quote — there is clearly a high degree of confidence and strong interpersonal relationship, given that the pair have previously worked together in the area using the same rig.

For those who enjoy the technical details, the Cardwell rig:

• is rated to drill to 8,000ft 
• is powered by a 500hp Cummins QSX 15 engine
• features a 76 ft high mast
• has a mud system with two Bomco F1000 triplex mud pumps
• features a 3,000psi Blow Out Preventer 
• comes with enough spare parts and consumables to ensure uninterrupted operation 
• a low-load count compared to comparable rigs, reducing the cost and complexity of mobilisation and demobilisation

Beyond that on the helium home page, I think it’s a good idea to cover some more core concepts. The helium price has been rising at a CAGR of 20% over the past 10 years, the US Defence Logistics Agency has bulk helium pricing at $1,080/Mcf, and back in November 2022, NASA signed a five year contract for the supply of 1.16Bcf helium at $918/Mcf.

Where I had previously pointed out that helium is irreplaceable in certain critical applications, it’s also important to note that it also cannot be artificially manufactured. Graphite investors know that the rise of a synthetic alternative has largely been behind a price collapse of the mineral (even if ex-China natural sources remain attractive investments).

The CHIPS act of 2022 should hugely increase US demand — which was already increasing, with demand growth expected to be at a CAGR of 6% from 2023 to 8.7bcf/y by 2030. Further supply is declining at around 2-3% per year (compounded by the sanctions on Russian supply)— and there is future supply risk because historically there is usually delays and ramp-up issues at new projects.

AIM investors will not be surprised. And no wonder it’s called ‘the disappearing element.’

However, there should be no delays with Helix. 

I think it’s also worth considering a few salient points on helium production grades. The grading 

system is fairly intuitive; the first number in the grade (what comes before the decimal point) is equal to the number of 9’s in the purity.

For example, 5.0 grade helium is 99.999% purity. The second number (after the decimal point) is the number that comes after the last 9 in the purity. So 5.5 grade helium is 99.9995% purity.

You know what? This all sounds needlessly complicated to me — but it’s really important to understand this for when drill results come back. While field size, flow rate and contaminants are in my view comparatively easy for a retail investor to understand, you need a bit more detail on grading.

Here’s the different grades and their uses:

• Grade 6 (99.9999% purity) —used in semiconductor manufacturing, scientific research, laser cutting, MRI machines, and gas chromatography.
• Grade 5.5 (99.9995% purity) — used in research applications, chromatography, semiconductor processing, MRIs, welding, and cooling fiber optics.
• Grade 5 (99.999% purity) —used in gas chromatography, mass spectrometry, laboratory research, weather balloons, and blimps.
• Grade 4.8 (99.998% purity) — highest industrial grade, used by the military and in classified applications.
• Grade 4.7 (99.997% purity) —used in cryogenics, pressurising, purging, control atmospheres, welding, diving breathing mixtures, and leak detection.
• Grade 4.6 (99.996% purity) — used for weather balloons, blimps, leak detection, rocket cooling, medical applications, and residue analysis.
• Grade 4.5 (99.995% purity) — used in the balloon industry and as a push gas in MRI applications.
• Grade 4 (99.99% purity and lower) — ‘balloon grade helium,’ used mainly for balloons, leak detection, airbags, and heat transfer applications.

Now here’s the really cool thing. Maybe not cool, but a reason among many why understanding the value of helium asset is difficult (and why you need a management team you can trust).

Lower grade helium often fetches more money on the market than higher grade helium. Oh yeah, I know. This sounds insane, but it’s true.

Most helium supplied to major helium customers is at grade 5 — if you look above, you will see that this grade is higher than what’s actually needed for many applications, for example if you are going to use the gas to pump up balloons.

And it can cost more to produce lower grade helium than higher grade as well — it all comes down to transportation efficiency. As you will know from the required reading, most helium produced is transported as a compressed liquid rather than a gas for efficiency reasons (helium gas cannot be compressed into a small space the same way).

And liquid helium is innately very high grade, usually well above grade 5. This means that if you want to supply a lower grade on purpose, then you need to add new modules to a plant — which is generally not financially worthwhile when you add in the additional capex and opex involved.

But in some end-use applications, you need a lower grade — so in the right circumstances and with the right asset, a lower initial grade creating a naturally lower grade end product, which may be transported as a gas by Helix as a smaller-scale operation — could command a price premium over higher graded helium processed as a liquid.

This sort of thing, along with dozens of other complicating factors, is why the only helium plays you should back are the ones where the management can do the thinking for you.