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SMALL CAP IDEA: Royal Helium destined for the stars?

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

It’s not often that a resource company comes to market nearly ready for the oven.

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

Although he cannot 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 heading to AIM next month in hopes of raising C$10-15 million in new capital.

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

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

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

“We come to AIM to increase our shareholder base – of course the size and depth of the London institutional and retail market is considerably greater – and change the perception of what a helium business is,” he explains.

“London seems to understand history in a way that I don’t think Canada doesn’t at the moment.”

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

The trigger for this decline in Royal’s valuation is unclear given that helium prices have never been stronger as the company delivered both operationally and commercially.

There may have been concerns about the funding, but they need to dissipate following the recent funding (Canadians call it an underwriting deal) which brought in 8 million “gross” Canadian dollars.

This will fund the initial engineering and design costs of its plant in Steveville, Alberta, and allow it to deliver its first helium to the anonymous space company next April.

Any lingering funding concerns should be allayed once it has negotiated a debt financing package, and of course there will be proceeds from the London IPO.

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

First, it is one of the largest helium dealers in Canada with over a million acres. It consolidated this position with the acquisition of its competitor Imperial Helium in July.

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

The first houses three wells, two of which will be put into production at an initial rate of 15 million cubic feet of gas per day.

Drilling at Climax, meanwhile, uncovered two conventional games.

The surprise came when the team tapped into the Nazare formation below conventional horizons to find a zone 114 meters thick and 14 square miles estimated to harbor nearly 1.3 billion cubic feet of helium.

In this investment story, Nazare represents blue skies, which will be progressively de-risked beginning with its first multi-stage, multi-stage horizontal well to be drilled in early 2023.

In the meantime, the company will work to bring Steveville and Climax into production at a combined capacity of 20 mmcf as well as test three previously drilled wells at Val Marie and Ogema.

The latter is expected to have its first well in production in the third quarter of next year, almost at the same time as the commissioning of the conventional Climax operation.

The agreement with the space launch company set a price of US$450 per mcf. To put this into context, the group began their budgeting process for production assuming they would only get US$250 per mcf.

The current helium spot price is supported by growing demand (the gas is used by the semiconductor industry, fiber optics, space exploration and in MRI scanners) coupled with a growing shortage of helium. ‘offer.

The US Bureau of Land Management removed 2.1 billion cubic feet of supply from the system. It’s quite a piece.

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

The isolation of Russia from the rest of the world following the invasion of Ukraine has aggravated a difficult situation.

Add to that the fact that Qatar’s growing supplies are funneled through the Strait of Hormuz, the most dangerous shipping lanes in the world, and you see there’s a problem – or for a company like Royal Helium, a major gap in the market.

Equity research firm Hannam & Partners has doubled its “risky” price target for the stock to C$1.20 per share (C$2.61 risk-free) based on the recent Competent Persons report. of the society.

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

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

Climax’s conventional acreage, meanwhile, is estimated to host a potential resource of 369 million cubic feet across 18 drill sites, while H&P estimates Nazare’s resources to be 2 billion cubic feet instead of the 1.3 billion estimated by the company.

Apart from this, there are also potential “credits” from production by-products such as lithium, methane, natural hydrogen and CO2.

H&P estimates that Royal will generate C$12.8 million in revenue in 2023, rising to C$19.1 million the following year.

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

With Royal Helium less than six months away from first production, by which time operations will be greatly reduced, you have to wonder what calamities the current 25 cent share price takes into account.

If CEO Davidson is worried about the valuation of the bargain, he betrays no trace of anxiety.

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

“Demand continues to soar, while supply continues to fall,” he adds.

“There aren’t many projects in the world that have the capacity to make up the shortfall. Ours are part of it.

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