SOLO’S STAR RISES WITH LATEST HELIUM
INVESTMENT
SIGNIFICANT STAKE TAKEN IN HELIUM ONE LTD
& TECHNICALLY ADVANCED CRUDE HELIUM DISCOVERY IN TANZANIA.
Exciting news out today by Solo Oil (AIM:SOLO)
with their venture into the specialty gas market, by taking up to a 20% stake
into Tanzania focused Helium One Limited www.helium-one.com.
The deal will see Solo take an initial
investment of £2.55 million for a 10% interest by way of £1.2 million in cash
and £1.35 million through issuing new ordinary Solo shares. This is followed by
a call option to increase interest in Helium One to 20% through a further
investment of £4 million by way of £2 million in cash and £2 million through
issuing new ordinary shares.
The transaction values Helium One at $40
million and provides the company led by proven dividend payer and ex Polo
Resources Chairman Neil Herbert (over
his 4 years as Managing Director Polo paid $185m in special dividends) with the
funds to develop the impressive Rukwa project, complete a drill target
assessment program and position Helium One to set off on a further fundraising
round to drill Rukwa in 2018.
So far Helium One
has stacked up an impressive level of external professional independent
oversight of what is a frontier helium discovery in Tanzania, which includes,
the University of Oxford and Netherland Sewell Associates. Indeed the
University of Oxford and Durham University have both been engaged in an
extensive research project investigating this new helium province.
For Solo, the deal
today provides their shareholders with investment exposure to a premium priced
speciality gas that is not priced or generally impacted by the hydrocarbon
pricing index market.
For example, the
price of helium gas is traditionally benchmarked to the bi-annual auction of helium
from the United States Strategic Helium Reserve, by the US Bureau of Land
Management (BLM).
Back in 2005, the auction price for helium
was set at just under $70 mcf, by 2015 the auction price had seen bids of $100
to $106 per mcf. Contrast this to
natural gas prices that are currently circa just under $3.00 mcf, you can see
why Solo has taken such a shine to this sector of the market. I would expect extraction costs to be under
$30 mcf…….meaning Solo have secured access to a potentially highly profitable
commodity.
Indeed opportunities for investors to get
into the speciality helium gas market are practically impossible, unless you
invest directly into the listed speciality gas majors such as Praxair
(NYSE:PX), Air Liquide (EURONEXT AL) Air Products (NYSE:APD) or Linde (FWB:LIN)
So for AIM investors and indeed general
investors in the London market, they now have in Solo / Helium One the opportunity
to secure investment exposure to a commodity that is set for a massive supply
deficit and pricing event by 2020, when the strategic helium reserve in the USA
is anticipated to be depleted.
In terms of new supply, helium, by way of
extraction from natural gas (concentrations have to be over 3% for this to be
economical), the USA and Qatar currently dominate the supply of helium (57% and
25% respectively) – Algeria, Australia, Canada, Poland and Russia are also
producing nations…….So you can see just how big a supply deficit a depletion of
US supply could have on the market……..it would be massive and certain to drive
the price of helium through the sky……..to coin a pun.
In essence, this is the opportunity for
investors…….and it’s a unique opportunity on AIM, for Solo shareholders to
secure Alpha if Helium One strike it rich.
The market behind the demand for helium,
such as medical devices, MRI Scanners, welding equipment, nuclear industry and
balloon market is huge, the actual global sales of helium in revenue terms are
under $6 billion annually.
Contrast this to the huge natural gas
market, means for Tanzania’s economic development, the helium sector will be
dwarfed, but where Tanzania does win on this deal is more to do with the
positive research and development message this sends out about the country,
specifically given the presence of Oxford and Durham Universities, who are
researching the discovery, great academics to have in town.
The
Geology
The helium discovery at Rukwa, was
initially made through the identification of helium-rich hot springs that sit
on the periphery of rift basins that provided the initial evidence of an active
helium charge along faults and likely into subsurface traps. The hot spring gas
analyses report Helium One has on Rukwa sees concentrations as high as 18% with
numerous instances of between 8 and 10% by volume.
Helium is sourced from pre-Cambrian
basement rocks via fault migration
into a younger stratigraphy and is then contained in Red Sandstones and Karoo
Supergroup rock formations, and where the helium is trapped by impermeable lake-bed
rocks.
Drilling
Tanzania’s Ministry of Energy and Minerals
correctly classify helium as an industrial gas mineral, however, it is
anticipated that drilling would have to follow the same protocols as for
hydrocarbon exploration, given the wells would be gas producing.
Investment
Upside
As mentioned, for AIM investors and indeed
any investor, the opportunity to secure early stage access to the significant
supply, demand and pricing market a pure helium play like Helium One provides
is really exciting, unique and where I will certainly be investing.
The
other factor is the win-win for Solo and Helium One.
For Solo they have joined forces with a
proven tier one dealmaker in Neil Herbert, who is supported by a world-class
corporate and geological team with significant in-country experience (Board
members are ex Ophir Energy and you should all know that story)…….So I would
expect significant transaction interest into Helium One by one of the major
first tier speciality gas companies when the project has been drilled and
re-risked.
I can not for one minute think why a major
speciality gas company would want to see their rival take control of a
strategically placed helium asset that can easily be transported with 45 days
of both the US and Asia markets and importantly unlike the forced daily
stripping of helium that is required through a natural gas associated play, Helium
One’s pure crude supply means production flows can be turned on or off as
market conditions allow………..this is a huge factor.
For Helium One, Solo is a perfect
shareholder to have on their register, particularly given Neil Ritson’s proven
track record in bringing Tanzania gas from exploration and into production in
the case of Kiliwani and also in the development of the huge Ruvuma gas
project, which has recently been taken up a steep value curve. Further to that,
significant increases in investment support for Solo are now being driven by
finance chief Dan Maling, another proven dealmaker.
