Desert Mountain Energy: Let's Play Helium Tetris (DMEHF)

For months I have been intending to write on Desert Mountain Energy (OTCQX:DMEHF). My goal when writing is always to provide actionable business intelligence which incorporates two things: A) Vast investments in time researching the company; and B) Finding an angle the market has missed or not connected the dots on. Frankly, Desert Mountain has a simplistic story on the surface that adds nothing if I simply tell the public they are a potential helium producer. Yet, I saw something Mr. Market missed last week. I connected the dots and everything clicked into place. Let's take a look.

I've often been intrigued when investors overlook discrete details as they research a company. The smallest sentence can reveal a plethora of information and intent. In this case, Desert Mountain Energy announced to the world that it is moving closer to production phase via the press release from July AND the U.S. government is going to buy the helium directly from them. This is massive news as it guarantees a buyer of Desert Mountain's helium that has near infinite deep pockets.

"Desert Mountain Energy Corp. is pleased to announce that it has encountered significant showings of helium across four formations in its fourth wildcat well. A decision was made to set production casing and we are in the process of cementing it into place. In keeping with the original plan, indications suggest there was very limited background levels of gases other than nitrogen and helium present during drilling.

The Company will be scheduling completion equipment and will not make further announcements with regards to this well until those completion procedures and testing are completed.

The Company is also pleased to announce that it has been assigned a direct payee number by the US government, to enable immediate same day payment for gases shipped."

That last paragraph is crucial. The 800-pound gorilla with near infinitely deep pockets (aka the United States government) just announced they are going to buy directly from Desert Mountain. This means that every molecule of helium that comes out of the well has a guarantee to be paid via the United States government and they intend to pay that very day. Once the company starts producing, this should enable it to drill additional wells at an increased pace. From that point, it is simply a matter of how fast you can drill and build out the support structure to move the helium to government facilities.

In this section, we will review how helium supply is constrained while demand rises. The United States has a national helium supply which is managed by the Bureau of Land Management (BLM). Per the BLM: "The BLM operates and maintains a helium storage reservoir, enrichment plant, and pipeline system near Amarillo, Texas, that supplies over 40 percent of domestic demand for helium."

Yet, this federal asset is due to be fully closed.

"The Bureau of Land Management today announced the process and timeline by which remaining helium and helium assets will be disposed of in order to meet the requirements of the Helium Stewardship Act of 2013. In accordance with that law, the BLM will no longer manage the Federal Helium System (including the Federal Helium Reserve) as of Sept. 30, 2021.

Any excess helium and helium assets remaining on that date will be transferred to the General Services Administration (GSA), which will follow its statutory disposal process. Federal In-Kind users will continue to have access to helium until September 30, 2022, while the GSA completes their disposal process. This will also allow the BLM to continue operations until such time as all privately owned helium is produced from the field (about 2023)."

The GSA is the government arm that disposes of federal assets via auctions. Hence, once the helium goes under GSA control it should be fully disposed in short order. This will put pricing pressure on helium as the source that provides 40% of US output will go private. Combine that with a global reduction in helium and this bodes well for Desert Mountain Energy.

(Source: Desert Mountain Energy via the U.S. Geological Survey)

Helium is hard to contain as it consists of such a small molecule. Moving it long distances can result is some of the load escaping (during transportation or during offloading it into containers). I've yet to find out the exact percentage of helium lost per 100 miles, but basically the loss is a factor of heat of the day and distance traveled. Thus, if you can produce helium located near the buyer you will have an obvious appeal.

This brings us to Taiwan Semiconductor aka TSMC (TSM). Helium is used in the semiconductor manufacturing process and TSMC is currently building a massive semiconductor plant in Arizona in a response to the global semi-conductor shortage and threats to Taiwan where TSMC is based.

(Source: US Geological Survey, Cormark Securities Inc.)

The national helium reserve is located in Amarillo, TX approximately 741 miles (10 hours 34 min) from the TSMC north Phoenix location. Given the distances to potential customers on the west coast this represents helium lost during transportation and transfer.

(Source: Google Maps)

Desert Mountain has an advantage being located very close at TSMC at Winslow, AZ 176 miles (A mere 2 hour 50 min drive) to Phoenix. The loss is lower hence any customer receives more percentage of helium purchases if they buy local.

(Source: Google Maps)

Besides TSMC Desert Mountain Energy has potential customers with various spaceports (be it government or civilian) from Texas to California. SpaceX, the Space Force, and various government departments represent clients not to mention hospitals that need helium for MRI machines.

During a recent video interview with CEO Robert Rohlfing of Desert Mountain Energy, he mentions Helium 3. Before we address Helium 3 though, let's break down the entire video. Fast forwarding to 8:05 in the video, Rohlfing talks about how the project is now de-risked by the successful drilling of well #4 and thus going forward he will drill more "offset" wells around this one.

Around the 9:00 mark, Rohlfing discusses the results of the well as "The vast majority of what was coming out of the ground was nitrogen with helium. So looking at those results, we won't know until we actually complete the well and do the testing that you can see for sure if it was helium 3 or helium 4, and I'll just have to let it go at that. I think the indicators are something really significant on that and again I'm happy to, if that's it, it's not a problem to deal with it. It gives us an additional specific customer to sell to, if it is the helium 3. Obviously I'm limited to what I can say about this, but it should be not overly cryptic, but it should be pretty obvious that if you get a payee, now a direct payee number from United State government that, that is probably for direct payment of same day of deliveries, I think that should be obvious where that is going." At the 12:34 mark Mr. Rohlfing adds "Because we have de-risked, and we're moving forward and the goal is to be on NASDAQ. That is my goal, sooner than later."

Realize that most helium is a byproduct of natural gas mining and comes in the form of Helium 4. Helium 3 however is the holy grail of helium extraction and extremely rare and expensive. This is what Mr. Market overlooked and where the dots Tetris into place.

The takeaway here is Desert Mountain Energy might have hit upon helium 3 which is very expensive and the company has plans to uplist to the NASDAQ.

One interesting side note is when one jumps to a large exchange like the NASDAQ all the various index funds and ETF's that attempt to mimic the NASDAQ, must purchase the stock. This can have a very positive impact on the stock as what was noticed when Standard Lithium (SLI) uplisted.

For junior miners I do not get bogged down on the financials, as most are not producing revenue or profits and all of them need cash to function, drill, and explore. Desert Mountain has adequate cash to continue drilling and bringing online the 1st four wells they have drilled. As of last April, per the company they had $29.2 million Canadian in cash. We can assume some costs have been incurred since that time via drilling well #4 and daily operations. Thus, given time, burn rate, and drilling well number #4, a swag cash level guess would be $26-27 million. This cash position is more than adequate to keep drilling additional wells near well #4.

Concerning additional funding of the company for expansion / drilling, the company can take several routes: 1. Fund future operations from revenue from the first 4 mines. This would result in slower wells completed, but at no stock dilution. 2. Sell stock to expand wells faster. 3. Enter into stock / warrant deals with the capital markets. Typically, this is the least favorable as the financing companies dump the stock and just keep the warrants. We have seen this play out in Lithium Americas (LAC) and Cypress Development (OTCQX:CYDVF), with short term negative results to shareholders. Long term outcome is another matter, as both should pan out well (but I digress).

From a financial perspective, the project has low risk. Sure, the helium market could fluctuate, but by closing down of the national helium reserve with increasing industrial demand, the price of helium should be stable to increasing. Thus, the only minor point to note concerning risk is the city of Flagstaff is suing to block the company from having access to well #3. As typical for the southwest, the city is concerned about water rights. However, according to the company, the water should not be impacted as they are not fracking and they are going to cement the well. This evidence is apparent is you look on Azogcc.az.gov then click GIS and looking east of the city of Winslow we can see well #3 below. As a side note well #3 is "well" within driving distance of Arizona tourist attraction Meteor Crater.

(Source: Arizona Oil and Gas Conservation Commission)

Then looking at the approval document and navigating to page 3 we can see the company plans to cementing the well in place via:

" Followed with drilling an 8.75" hole to approximately 510’, setting 500’ of 7" 23# casing using approximately 150 sax of cement. Then drill a 6.25" hole to approximately 2,000’. If a decision to set pipe is made, run 1,990’, 4.5", 11.6# J55 casing and cemented to surface with approximately 180 sax of premium lite."

Since the well is below the water table and will be cemented in place (thus keeping it from breaching helium into the surrounding soil at the water table level) it will be interesting to see how the city of Flagstaff tries to prove local water will be polluted.

The total number of production wells projected to be drilled is 60 to 70 over the course of 6 years. Currently 4 have been drilled. Per Desert Mountain additional financial details of the project are:

• Gross revenue per well based on crude helium @ $275mcf is projected

at $8,942,000

• Total projected capital expenditure including all drilling and infrastructure

over 6 years $45,000,000

• Production starting Fourth Quarter 2021 with 5 wells will cost $26,000,000

• Payback based on only 5 wells after tax, G&A and royalties would be 18

months at current crude prices

• Upgraded helium prices dramatically lower payback period

The company has plans to produce grade A helium at 99.995 percent purity. Grade A commands a price premium over lower grades.

Helium supply tightening along with simultaneous increasing demand should put positive pressure on helium prices. Given the proximity to potential customers, Desert Mountain should naturally attract customers due to less bleed off of helium in transport. Long term, the company has expressed plans to mine other gasses besides helium.

We are accumulating additional stock at $3.47 for a long term buy and hold. At a market cap of a mere $309 million (USD) we view the company as having plenty of room to grow once they start producing.

This article was written by

Analyst's Disclosure: I/we have a beneficial long position in the shares of TSM, DMEHF, CYDVF, LAC, SLI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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