TSM - Desert Mountain Energy: Profit From The Helium Crisis

2023-03-23 09:25:07 ET

Summary

• Desert Mountain Energy is accelerating plans to bring additional helium production plants online. Why? Opportunity knocks.
• TSMC is opening two fabs in Arizona that require helium. Some say it will require more helium than currently consumed in the U. S.
• The global helium shortage continues. This is good for helium prices but hinders the global industry.
• As hinted at before, DME is pondering expanding into helium-rich states outside of Arizona and even to countries outside the USA. A Utah expansion could be on the drawing board.
• Besides SpaceX, other space contenders might be interested in acquiring helium from Desert Mountain Energy.

In this article we are going to cover a lot of ground to include potential Desert Mountain Energy (DMEHF) expansion plans in Arizona and Utah. One should recall what CEO Robert Rohlfing said in his video interview in February:

We're constantly looking and evaluating things, not to say that if there's some, unique opportunities, that were hypothetically dropped into my lap, I would probably pull a trigger on doing something really, really fast."

Realize that Desert Mountain Energy is a helium producer with aspirations to enter the hydrogen market as well in the short term. A little further out at 1.5+ years we should also see them enter the argon market, neon market, and possibly harvest ultra-rare Helium 3. However, first let us concentrate on the short term.

Looking at expansion intent, potential buyers, along with the prospectus will enable one to make educated guesses as to the direction of the company and confirm if we should invest in them over the long haul. Realize that this article covers a lot of ground. It would behoove you to read the entire assessment.

Desert Mountain Energy Plans for 2023

Now the first thing that people will ask is if helium plant #1 is coming online soon why raise? Fair question. We can make general guesses and these guesses point back to opportunity knocks for Desert Mountain Energy.

While some revenue will trickle in from the trucking segment of the company, combined with limited helium sales during testing, it would not be enough to rapidly advance the company's expansion plans.

Without a raise, the future follow on Rohlfing Helium facility (aka helium production plant #2) or planned helium plant #3 would be hindered timeline wise. This is not to say it would not happen, but without a raise it would require some time for profits to build (or the company might finance it via debt). However, given high interest rates this would not be optimal. Thus looking to the market makes sense if you want your projects to advance faster. Yet, why advance faster? Again, opportunity which is covered shortly.

Strike While The Helium Market Is Hot

The purpose of the stock market is to raise capital. It may not be pleasant for investors over the short term. I often hear the dreaded word "dilution"; yet creating a company takes capital. This capital raise via dilution does not come without compensation. The company raises capital and uses it to build up revenue-producing assets. Traders and penny flippers may not enjoy this, but for investors it is less of a concern if you have superior management in place. From the big-picture standpoint now is the time for rapid expansion. No time to be timid.

Realize that a world-wide helium shortage is in play. This is not a shortage easy to correct. Russia had been set to bring forth a very large helium-production plant but keeps having issues ranging from mysterious explosions to what is now I suspect a foreign brain drain along with sanctions. Do not expect that plant up anytime soon. Second, the U.S. National Helium Reserve is done. Stick a fork in it. Lastly, realize that helium production typically comes from natural gas. With prices down, production and exploration are also down. This does not bode well for massive amounts of helium coming online soon to meet global demand.

With these factors the price of helium has rocketed skyward. Prices are hard to come by: The industry keeps that data close. General talk is prices have risen from several hundred an MCF to $1,500 to $2,000 an MCF. Quite the rise. Quite lucrative if you can harvest and process raw helium into high-grade helium. This brings us to demand.

Taiwan Semiconductor And Helium Demand

In conjunction with the Biden administration offering massive financial support for U.S. semiconductor fabrication and with the growing threat of China towards Taiwan, Chip producer Taiwan Semiconductor ( TSM ) has decided to locate multiple semiconductor fabrication plants in Arizona.

TSMC is going to invest $40 billion dollars to build out two semiconductor factories that build chips that frankly go into everything from desktop computers to car parts. The first TSMC fab in the United States is set to come online in 2024; fab two is projected for 2026. However, the foundation slab has enough room to expand six fabs given time. Per Azcentral.com :

The TSMC factory, or fab, is massive and will feature state-of-the-art technology when it begins commercial operation in 2024. It sits on more than 1,000 acres in north Phoenix just west of Interstate 17 along West Dove Valley Road — the huge cranes and new buildings are visible from the freeway. The campus measures nearly two miles by one mile and has enough space to fit six fabs, though only one is currently under construction, with the second slated to go up and start operations around 2026."

Why Locate in the United States?

If Taiwan ever goes hot (in a war with China) you can write off any semiconductor plants in Taiwan. Global chip production would be severely impacted and the U.S. military's ability to get necessary semiconductor chips for a wide breadth of necessary items would be negatively impacted. After all, what does not have a microprocessor in it?

Ergo the U.S. military needs semiconductor manufacturing located in the United States. This is not to say we do not have any: Intel ( INTC ) has fabs located in Arizona (granted they need to improve nodes to smaller sizes to catch up).

The point being we need more semiconductor production capability and with this comes increased demand for helium . Intel currently has Fab 12, Fab 22, and Fab 42 operational in Chandler, Arizona which borders the Phoenix area.

Intel Fabs 52 and 62 are set to become operational in 2024 and guess what they all need? Bingo, you nailed it! Helium. Lots of helium and Desert Mountain will be able to address a fraction of demand if all goes well. I say a fraction since the demand is so high locally and even nationwide.

Note that currently DME is testing its ability to produce helium in gas form. However, if DME helium plant #2 (now in the planning stage) develops the ability to liquify helium then they can ship the helium long distances with no excessive loss. This is what may interest companies involved in space, such as SpaceX or other Arizona space ventures requiring helium.

SpaceX, Helium, and Nuclear Reactors

It is my understanding that rockets for space (be they from SpaceX, the Department of Defense, or NASA) all utilize helium. Per the BLM :

"NASA uses helium to keep hot gases and ultra-cold liquid fuel separated during lift-off of rockets."

Also, as an interesting side point helium is used to cool nuclear reactors per the BLM.

"Since helium doesn’t become radioactive, it is used as a cooling medium for nuclear reactors."

I'll most likely cover SpaceX in more depth next article but it is something that readers can mentally simmer over.

Pondering The Future of Desert Mountain Energy

Obviously, short term the company strategy is to test and optimize the recently constructed McCauley Helium Processing Facility in Arizona. This will bring in revenues to expand, but what is the short term strategy for 2023? First, we can look at older land holdings while noting recent southwest land acquisitions at the O'Haco prospect.

Compare the below August 2023 land holdings to the second picture from February 2023. You will note DME has expanded land assets. One might assume that each of these prospective areas will eventually have its own helium production facility or that the helium will be trucked into DME helium processing facilities at the McCauley helium processing facility. Long term I suspect you will see several helium production facilities in this basin, potentially eight, unless of course they keep drilling and hitting pay dirt in new areas. Do note the company does intend to drill more wild cat wells.

And Feb. 2023.

DME Expands

Continuing upon our journey, let us pull up the March short form prospectus. In it we see the intent of where raised capital will go. Note these are only estimates. The company also has a paragraph that pretty much states it will change plans if and when necessary.

Hence, this should be viewed as intent and we should see the Rohlfing helium processing facility have the ability to liquify noble gases. This will expand the distance DME can ship helium and noble gases without losing as much in shipping.

PetroSun and 250,000 Acres

I like land expansion but I really like it when I see a company expanding and it costing them little to nothing. In a bid to expand access to additional helium rich lands, DME recently signed a deal with PetroSun (PSUD) whereby DME will have:

Access to take a look at all the technical data on another 250,000 acres in Northeast Arizona and Utah . And we are looking to go to work with PetroSun. We have the processing facility so if they drill holes or successfully drill wells we will be processing the raw helium for them. Paying them a percentage on the raw helium, we'll be processing it up to whatever grades we sell to end users, and making our margins there." - Don Mosher of DME

Let's look at the PetroSun property location below in context of what DME holds. On this map I very roughly laid down an approximation of DME holdings noted in blue squares. The red dots are the exact location of PetroSun properties in the Holbrook Basin (map per PetroSun). In the short term, the MHPF (Plant #1) can handle most of the western area while plant #2 will handle the southeastern areas. Where plant #3 goes is a good guess. Utah maybe?

Utah And Desert Mountain Energy

In a recent video, Mr. Mosher spoke of Utah. It should be remembered that in the past DME has talked about overseas expansion or expansion in other states. From one of my past articles :

Now I do not think that the PetroSun deal was in existence (or even in talks) when Mr. Rohlfing said this, but it does show his thought process of looking at diverse geographic areas. Hence, we might want to pull up land holdings of PetroSun in Utah. Per the PetroSun website :

We can see that PetroSun has 26,000 acres of helium / natural gas in Utah via the Golden Eagle property. It is equally interesting to see they have 41,000+ acres in the Four Corners. I've often theorized that Desert Mountain Energy might expand into that geographic region though that remains to be seen. Even raising money to bring helium plant #2 online and advance progress on plant #3, it is still not fast enough. They need more financial firepower. They need...

Inflation Reduction Act and Desert Mountain Energy

Part of being an analyst is paying attention to details. It is the little details that quite literally would kill you in a former occupation of mine. The same is true in the markets, but in this case it is the little details that act as puzzle parts or indicators. Realize that management does not idly put hints in press releases without a reason. No, they are giving you hints and no matter how small, these hints have value. One such detail came about on 2/21/23 when the company dropped one line at the bottom of a PR .

Now we know Desert Mountain Energy is going to go after IRA loans.

According to Jonathan Evans CEO of Lithium Americas ( LAC ), the government typically funds loans at 55% to 75% of project costs. It is an interesting thing to ponder because frankly you would not go after small loans for such an endeavor. I suspect they will go after large loans to construct something huge. That, after all, is the purpose of these loans.

The Push For Hydrogen

Currently Arizona has laws in place that limit drilling a well to every 640 acres. If you want to drill closer you need an exemption and the Arizona Oil and Gas Commission [AOGC] has granted DME an exemption at the McCulley helium field.

Why does this matter? Having watched the above proposal, I have the impression that this exemption is focused on the hydrogen aspect of Desert Mountain Energy, but we will cover this in a moment.

Below we can see a 640-acre "section" represented in red. Normally a company would only be able to put one well in a section. Under the exemption they can place 16 potential wells in a section. Each star below represents one well that would be placed within a 40 acre sub-section. Note you might see a few boxes below that do not have a star. This might be related to an area that has a house or structure. That was our take having watched the AOGC meeting.

Assuming no homes or other hinderances are in each of the subsections, Desert Mountain Energy company can put a total of 144x wells in the 9x sections as opposed to just 9x wells. Placing many wells in a tighter area tightens logistics, laying of flowlines, and just generally enables pulling more gas faster (be it helium or hydrogen though I think the focus is hydrogen). On an interesting side note, the AOGC queried when the wells would be drilled. The answer provided by DME was:

The intention based on our, with our, with the hydrogen company would be to start drilling a minimum of three additional wells by June of this year so we intend to permit at least three and then kind of continue on relatively quickly from there but we have three wells of interest to begin this development plan."

Projected Successful Raise

Watching the conference on 3/16/23, we can see DME is projecting to raise the full amount of the short form prospectus. The full amount would be near $23 million Canadian. While the raise has not officially closed, it is interesting to see that the company is hinting they raised more than projected per the below highlight. This bodes well.

Desert Mountain Energy - Risk

Know that DME is an OTC stock. DME does not produce revenue in large amounts at the moment. Let's review the financials next to see how much capital is on hand. Pulling up the February 28th filing on SEDAR, we see the following:

5.7 million in cash and some associated minor amounts that total 7.1 million. Liabilities meanwhile are 2.3 million. Simply subtract them and you get 4.8 million.

If our projections are accurate and DME completes the $23 million raise, they will have close to $28 million in the treasury. While DME will have a respectable cash position, the bulk of it will be spent getting the second production facility online as well as prepping the third. While I had had concerns about the cash in the treasury, that concern has been reduced due to the pending raise of capital along with plant #1 coming online.

Realize that DME is a penny stock and comes with high risk. No guarantees exist that anything is going to work. With high risk comes high reward (or high loss). Black Swan events can and will happen at the worst of times to the best of stocks.

Current politics are not conductive to a healthy stock market. Better days will come but this might take some time.

Keep powder dry and understand what you are investing in. If you are new to penny stocks or have no clue what you are doing, it might be best to invest in blue chips (instead of practicing educated gambling) or consult a licensed financial advisor.

Short Seller Attack

Also realize we are in a short seller attack. Typically companies go into a financing phase and they are unable to put out press releases. This reduces the risk for short sellers and typically during a financing they pile on to push the share price down. Pulling up one year of short seller data for the Canadian Symbol DME we can see the shorts pushing. Realize these are figures from March 14 and do not include the US symbol.

It does make you wonder what happens when the capital raise closes soon and the company emerges from the blackout period. I would not be surprised if we do not see a short squeeze.

Conclusion

DME is starting to produce limited revenue and with a drastically reduced share price due to the capital raise and a short seller attack, I view DME as a buy. In 2023 we should see helium plant #1 ram up to produce revenue. Longer term out (2024) we could see helium plant #2 come into being and the foundations for plant #3 laid down. These could expand revenues with time. Hydrogen is also a wild card that might come into play. While I am bearish on the overall stock market at the moment I am bullish on DME and will continue to buy shares for the long term -- buy and hold.

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