NHE about to drill the world’s largest prospective helium resource

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,980,926 NHE shares and 2,437,037 options, and the Company’s staff own 54,339 NHE shares and 2,000 NHE options at the time of publishing this article. The Company has been engaged by NHE to share our commentary on the progress of our Investment in NHE over time.

After seven years...

It’s about to start.

Then we should know the result in a few weeks...

Fortunes could be made... or lost.

Seven years of preparation work has come down to the results of this imminent, frontier drilling campaign...

Our Investment Noble Helium (ASX:NHE) is just about to drill what could become the world’s largest helium reserve.

Helium is a critical ingredient used in rapidly growing high tech industries, including:

• Semi conductor manufacturing
• Artificial Intelligence microchip manufacturing
• Nuclear reactor cooling
• Space travel
• Cryogenics

NHE is drilling for helium in the Rukwa basin, Tanzania - part of the giant East African Rift System.

NHE’s first drill target is one of 10 similar targets along the “basin margin”, all sharing similar geological and structural properties.

What this means is that IF this drill target delivers a helium discovery (and we’ll soon find out), that implies that the other 9 targets have a similar chance of success.

This is known in the industry as a “string of pearls” concept and NHE is just about to start drilling the first “pearl”:

Basin margin “strings of pearls” plays are rare.

Especially undrilled.

Our last Investment that drilled a string of pearls was over 10 years ago when Africa Oil Corp went from $1.50 to $12.50 after successfully declaring a discovery on its first target in their “string of pearls” in Kenya.

Remember, just because Africa Oil Corp was successful doesn’t mean NHE will do the same, early stage exploration is high risk and many things can and do go wrong.

Both Africa Oil Corp and NHE are in the East African Rift System - a giant, ancient geological structure that spans multiple East African countries and has hosted many resource discoveries over the last 30 years.

NHE founder and Managing Director Justyn Wood is no stranger to success on East African basin margin targets.

He was the exploration geophysicist at Hardman Resources that successfully drilled a “string of pearls” target in Uganda back in 2006 and went from 2c to over $2.

(Unfortunately for us we weren’t invested in Hardman Resources, we just jealously watched this one from the sidelines.)

Remember, just because Hardman Resources was successful doesn’t mean NHE will do the same, early stage exploration is high risk and many things can and do go wrong.

This 2006 Hardman Resources discovery was also along a basin margin in the East African Rift System.

Same as the one as Africa Oil Corp successfully drilled in 2012.

Same as the one NHE is about to start drilling...

Some of Africa’s biggest oil and gas discoveries have been made across basins in the East African Rift System (EARS).

Nearly 40 exploration wells proved more than 4 billion barrels of oil and gas in two EARS basins - the Albertine Graben in Uganda and South Lokichar Basin in Kenya.

Of the 40 wells drilled ~14 were drilled across Basin Margin Fault Closure targets with a 100% discovery rate - the 14 wells were part of a “string of pearls” system which resulted in a string of discoveries.

NHE’s first two wells (Mbelele-1 and Mbelele-2) are both basin margin targets.

So from a geological perspective the chances are in NHE’s favour.

With drilling about to commence, we have thought about what success would look like for NHE and come up with the following expectations for the drill program:

• Bull case (outstanding result) = NHE finds helium and is able to declare an official discovery.
• Base case (Good result) = NHE finds helium but isn't able to confirm an official discovery yet due to technical reasons.
• Bear case (bad result) = NHE finds no working helium system.

We are backing NHE’s management team to deliver on our Bull case for this drilling programme.

(But we also have identified and accepted the risks associated with high risk frontier oil & gas drilling like this, listed at the end of this note.)

NHE founder and Managing Director Justyn Wood has been working on NHE for 7 years now, and holds over 70M NHE shares, or ~19.5% of NHE.

During the last 7 years NHE snapped up all the best land along the Rukwa basin margin for helium exploration.

Justyn knows how to make basin margin discoveries and has a LOT of skin in the game.

NHE’s first drill target (Mbelele) contains a prospective resource of 15.7 billion cubic feet (Bcf) of helium.

NHE’s investor presentation shows a worked example that if 12Bcf of that is ultimately recoverable, then at helium price of US $450/mcf we calculate that’s US$5.4Bn worth of helium (assuming of course a discovery is made).

This is just for NHE’s first target - NHE’s nine other targets contain a further prospective ~160Bcf of helium.

NHE is currently capped at ~$50M undiluted - it is currently trading at around 20c.

We currently hold 3,980,926 NHE shares and 2,437,037 NHE options.

So it’s going to be an exciting time for us as NHE Investors as the drilling commences.

Probably more exciting for NHE’s Managing Director Justyn and his 70M NHE shares...

We also note that NHE board member Shaun Scott stumped up a cool $1M in the June cap raise at 18c.

An MST access research note published in August places a 79c per share valuation on NHE, and if they get into production $3.60 per share on an unrisked basis:

(Source - Read the full August 2023 MST NHE research report here)

While that price target does look interesting, we should be clear that analyst price targets are based on a number of assumptions that may be incorrect - they (or us) don't have a crystal ball. It’s definitely possible NHE does not reach these share prices. This is high risk exploration. Never invest on a price target alone, and always do your own research

NHE’s drill rig has already arrived on the drill site in Tanzania, and on October 10th NHE announced that final repairs have been completed on remaining equipment which can now be assembled and commissioned prior to spud (commencement of drilling).

(Source)

Our “Big Bet” for NHE and how it might happen:

NHE discovers the world’s largest helium reserve held by a single company and is strategically acquired by a major company OR a state owned enterprise to secure supply (USA, China, Qatar).

(NOTE: This is what we hope the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done by the company to get to this outcome and obvious risks to which need to be considered, some of which we list in our NHE Investment memo).

In terms of how our Big Bet could become a reality, here are some current major helium suppliers that might be interested in securing a significant resource:

• Exxon Mobil
• Air Liquide
• Qatargas
• Gazprom
• Linde Plc

We also think a large proven helium resource would be of strategic importance to nations like the US and China - to secure national helium supply as it is a key ingredient in semiconductor production.

Or it could also be of interest to Qatar - a nation that is already a major helium supplier and might want to add to its resources.

But there is a lot of work still to be done by NHE in making a discovery, and proving a resource before our Big Bet might come to fruition.

In today’s note we are going to cover:

• Quick summary on helium and what it is used for
• NHE’s two well helium drilling program - testing one targets out of 10
• Strings of Pearls - found in the East African Rift System
• String of Pearls History: Our first 10 bagger back in 2012- What a previous successful drill campaign looks like
• String of Pearls History: Success at Hardman Resources - 2c to over $2
• East African Rift Basin Land Grab - NHE snapped up all the best ground
• NHE: Getting the Hardman Resources band back together
• So what is next for NHE?
• What are the risks?

Quick summary on helium and what it is used for

Computer chips, and other emerging high-tech industries are reliant on helium.

We’re particularly interested in helium’s use as a key ingredient in the production of microchips and semiconductors.

Helium is a unique type of gas because it is ‘inert’ - meaning it doesn't react with other chemical elements.

The helium price has been rising over the last 10 years, with demand forecast to grow:

(Source)

Use of helium is expected to increase in rapidly expanding high tech industries like semiconductors, aerospace, fibre optics and cryogenics:

And there is tension over helium supply with a big portion of the helium market coming as a by-product of Russian natural gas.

Here is our breakdown of some of the key demand drivers for the helium market:

Semiconductor manufacture

Semiconductors are used in phones, electric cars, and advanced weapons systems.

Helium is used in the manufacture of these chips because it is an “inert” gas (it doesn’t react with other chemicals used in the chipmaking process), and it is great at cooling things down (chip production creates a lot of heat).

The semiconductor market is dominated by TSMC (based in Taiwan).

The US has made a concerted effort to on-shore semiconductor manufacturing through the CHIPS Act, increasing demand for materials critical in the manufacturing process - like helium.

Artificial intelligence

The demand for semiconductors (microchips) is set to grow in an era of artificial intelligence, where the limitations of AI are set by processing power.

Space travel

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

NASA, released details of a contract that it had signed with US based Air Products and Chemicals (capped at US$63BN).

(Source)

That contract was to supply 33 million litres of liquid helium to NASA's Kennedy Space Center for an initial 23 month period, and potentially through to 2027.

The contract could be worth up to US$1.07BN.

Nuclear power

Helium coolant has been used for fission reactors and conceptual fusion power plant designs.

This is due to helium’s cooling properties as an inert gas.

MRI machines

Hospitals are the largest (current) end users of helium, accounting for 22% of the global helium market in 2022.

An MRI unit requires approximately 2,000 litres of liquid helium to keep the magnet cool enough to operate.

Additional refills may be required over the lifetime of the unit to replace helium that boils off and escapes into the atmosphere.

NHE’s two well helium drilling program - testing one target out of 10

NHE is planning to drill two wells in this campaign.

And it is close to commencing drilling of the first well.

The wells are called Mbelele-1 and Mbelele-2 and will be drilled on the Mbelele target:

Together these are two independent play types that have a combined unrisked mean recoverable helium volume of 15.7 billion cubic feet (Bcf) - which is less than 10% of the overall project's 176Bcf unrisked mean helium resource.

NHE provided a 3D image of what these two targets look like, with both the soil gas survey samples at surface and the below ground mapping of subsurface structures:

We take it as a good sign that there is a clustering of anomalous helium soil samples around the two proposed helium wells. This is what we were referring to when we previously said there was helium literally leaking out of the ground on NHE’s project.

NHE will be drilling shallow, vertical wells - less difficult

The two wells will be “near-vertical” onshore wells, which means no strong deviation and decreases the risk the drilling operation could go awry.

It makes sense to drill lower risk wells in NHE’s first drill campaign to get the ball rolling - the first goal here is to show there is a working subsurface helium system.

NHE Managing Director Justyn Wood is trying to emulate his 2006 success with Hardman Resources (~2c to over $2) targeting Basin Margin Fault Closures (BMCFs).

NHE’s two drill prospects are largely similar to those used in the Ugandan oil discoveries.

NHE’s Mbelele-1 well will reach a depth of around 800m and Mbelele-2 will go to around 1,200m.

These are not particularly deep wells, which we hope reduces operational risk and lowers the eventual drilling costs.

It also means we will find out the results just weeks from commencement of drilling... not months.

Location of the NHE’s wells designed to replicate past basin margin success

NHE has flagged that Mbelele-1 in particular has the potential to hit multiple stacked reservoirs - something which could increase the total helium recoverable from this prospect.

Mbelele-1 will be drilled close to the Basin Margin Fault while Mbelele-2 is a follow up well to test the same target along strike and target deeper reservoirs that are not reachable with the vertical Mbelele-1 well.

Mbelele-1 is about to start drilling. Mbelele-2 is next.

We think this is the right approach - lowest risk well first, slightly higher risk well second.

As mentioned earlier, the key differentiator between the two wells is the fact that Mbelele-1 sits right over the basin margin fault closure.

This means it is the same play type that opened the East African Rift System (EARS) and led to discoveries in Uganda and Kenya.

For some context, this type of target has had a 100% success rate for oil and gas across Uganda and Kenya with 14 discoveries to date from 14 wells.

Ultimately we hope this success rate translates to NHE’s Mbelele-1 that the company says it is about to start drilling.

(Source)

A discovery, or even better, two discoveries is the ideal outcome for us here (bearing in mind the risks we discuss further on in this note).

The size of the helium prize NHE currently drilling for: USD $5.4 Billion?

NHE’s Investor presentation shows a worked example assuming that 12Bcf of that is ultimately recoverable, then at helium price of US $450/mcf we calculate that’s US $5.4Bn worth of helium (assuming of course a discovery is made).

This is just for NHE’s first target - NHE’s 9 other targets contain a further prospective ~160Bcf of helium.

(Source)

🎓 To learn more about oil and gas resources and how they are converted from prospective resource into reserves check our our educational article here: How to read oil & gas resources

Then it gets bigger... a “string of pearls” - if the NHE’s first target is successful, the next nine will probably successful too

A key reason we Invested in NHE and why we are backing the company to make a discovery has to do with its project’s location.

NHE’s helium targets has an unrisked prospective resource of ~176 bcf from targets sitting along a basin margin fault closure INSIDE the East African Rift System (EARS).

The “string of pearls” analogy is a concept in oil and gas exploration where one discovery on a target (a “pearl”) in the “string” implies a high chance of success on all other targets (pearls) in the “string”.

This is because each target sits on the same geological structure and is drilled using the same geological thesis - if one works they should ALL work.

Long time readers of the Next Investors blog will know of the East Africa Rift System (EARS) & ‘String Of Pearls’ story.

Strings of pearls - found in the East African Rift System

The East African Rift System (EARS) is an active continental rift zone in East Africa.

Some of Africa’s biggest oil and gas discoveries have been made across basins in the East African Rift System (EARS).

Nearly 40 exploration wells proved more than 4 billion barrels of oil and gas in two EARS basins - the Albertine Graben in Uganda and South Lokichar Basin in Kenya.

Of the 40 wells drilled ~14 were drilled across Basin Margin Fault Closure targets with a 100% discovery rate - the 14 wells were part of a “string of pearls” system which resulted in a string of discoveries.

NHE’s first two wells (Mbelele-1 and Mbelele-2) are both basin margin targets.

So from a geological perspective the chances are in NHE’s favour.

(Source)

String of Pearls History: Our first 10 bagger back in 2012- What a previous successful drill campaign looks like

As mentioned earlier, an analogue for exploration success on basin margin targets inside the East African Rift System is Africa Oil Corp between 2011 and 2013.

At the time, Africa Oil Corp also had a basin margin string of pearls in the East African Rift System, where one target drilled successfully would imply that the rest of the targets would likely be successful too.

Africa Oil Corp’s share price went from $1.50 to $12.50 over a few months in the lead up to and then into the company’s first discovery.

Note: an obvious difference between NHE and Africa Oil is that NHE is going for helium while Africa Oil was going for oil & gas, which is a much bigger market and a lot better understood by investors. This is just a case study of an explorer with a similar exploration target that had exploration success.

Here is what the Africa Oil Corp share price looked like from 2011 to 2013, which includes:

• Pre-drill work leading up to the first well
• A multi zone discovery on the first well that drove up the share price
• And then subsequent drilling and other key announcements

Remember, just because Africa Oil Corp performed this way doesn’t mean NHE will do the same, early stage exploration is high risk and many things can and do go wrong.

Like NHE, Africa Oil’s share price traded sideways/down leading up to the drill program as the company increased its resource estimates and got ready to drill its first well.

Then as Africa Oil started drilling the share price started moving higher and the big moves started after the well hit Total Depth (TD).

The three big moves (totaling ~1,000%) happened over a period of ~3 months where Africa Oil announced discoveries across multiple different reservoir units.

So it wasn’t a single announcement, it wasn’t a drilling update but it was the updates the company put out as results from the well started to come in that really got the share price moving.

We will be watching out for similar announcements from NHE after the well reaches TD.

Keep in mind both of NHE’s initial wells are much shallower than Africa Oil Corps wells, and should take just weeks to drill, not months.

After that first Africa Oil Corp well and a ~1,000% move in its share price Africa Oil drilled five wells back to back.

Three of those wells (on the basin margin) lead to new discoveries and Africa Oil raised ~US$675M off the back of the drill programs.

NHE could technically do the same thing given its first well is only drilling less than 10% of the company’s total prospective resource.

And NHE has nine other similar targets along the basin margin fault where it has secured all its land.

For context - NHE has four different projects and a total unrisked prospective resource of 176 Bcf.

The first and second well (Mbelele-1 and Mbelele-2) are both drilling into a 15.7 bcf prospective resource.

Similarly to Africa Oil Corp, NHE will have many more similar exploration targets to follow up with if it can make a discovery on its first Mbelele target.

The bonus is that NHE also owns 100% of the ground along its basin margin so the company will also have the keys to the projects if any potential partners start sniffing around.

(Africa Oil Corp had farmed out much of its ownership prior to its drilling)

We had referenced this before in an old IVZ note, but here it is again...

How did the Africa Oil Corp share price respond as each announcement came out during its drilling of its own “string of pearls”

All of the announcements for Africa Oil that happened between 2011 and 2013 including the three announcements after the first well was spudded which led to that ~1,000% move for us in its share price (we had invested well before drilling at sub $1).

First spud was on the 16th of January 2022 and it took almost ~4 months until the discovery was first announced.

The oil discovery announcement came on the 26th of March 2012 and then the two following announcements almost two months later in May.

• 2012 Jan 16 [share price $1.49] - First well in string of pearls spudded
• 2012 Mar 26 [share price $3.35] - Oil discovery 20m oil column at 1040m drilling to continue
• 2012 May 07 [share price $7.82] - More oil discovered at 1500m, oil column in excess of 100m
• 2012 May 25 [share price $9.94] - Another 140m of oil from 1800m to 1940m

We renamed the announcements in the following format:

[YYYY MM DD] [share price at end of day] [Announcement Summary]

You can access the announcements here.

One thing that we remember very clearly is just how choppy the newsflow was during that first drill program.

Things went wrong, hole conditions deteriorated, there were delays in getting drilling and testing completed, and things took a lot longer than expected.

At the end it was all fine (when the share price was ~10x from its earlier pre-discovery levels)

BUT there were a few nervous moments along the way.

Technical issues are the norm in frontier oil & gas drilling, so we won't be surprised if NHE experiences some sort of technical delays, especially considering the company is drilling a pure play helium well, something that is less common in the oil & gas industry.

We expect NHE’s much shallower wells to take a few weeks each to reach their target depths.

Like with Africa Oil’s first well in its “string of pearls” we are hoping NHE’s drill program acts as the play opener for NHE’s own string of helium pearls.

If NHE is successful, we think the company becomes a takeover target from a major oil and gas producer OR state owned company looking for exposure to helium.

String of Pearls History: Success at Hardman Resources - 2c to over $2

We are hoping that NHE’s exploration can follow on from some of the most successful exploration in Africa, including Hardman Resources.

Back in 2006, the CEO of NHE, Justyn Wood, was working as an exploration geophysicist at Hardman Resources.

Most small cap investors over the age of 30 will remember Hardman as one of the great small cap success stories of the 2000’s.

Justyn was the technical geophysicist at the time, designing the first seismic survey and exploration program over Hardman’s East African Rift System project area in Uganda.

Hardman went from 2 cents to over $2, pushed along by the first oil discovery in the East African Rift System (EARS) and eventually bought out by 50% JV partner Tullow Oil in 2007 for ~AU$1.5 billion.

14 years later, Justyn is looking to repeat this success with NHE through a helium discovery in the East African Rift System in Tanzania.

After 7 years of preparation, months of seismic and target generation work, NHE’s first drill is about to commence.

We have been Invested in NHE for over two years (at pre-IPO) and followed NHE as it listed on the ASX in 2022 and has progressed towards its first drill campaign.

Justyn’s Hardman discovery in 2006 was in the East African Rift System and made famous the “string of pearls” concept.

Again, string of pearls analogy is a concept in oil and gas exploration where one discovery on a target (a “pearl”) in the “string” implies a high chance of success on all other targets in the “string”.

Justyn was the exploration geophysicist and Key Project Proponent at Hardman Resources.

Justyn designed and interpreted the first ever seismic survey over Lake Albert in Uganda, designed a two well drill program and led the Hardman team to the company’s first two wells in the basin back in 2006.

In 2006 one of Hardman’s wells flowed ~12,000 barrels of oil per day from 3 zones and was effectively the play opener across the entire East African Rift System (EARS).

But the EARS story started a long time before that...

Hardman held ground in Uganda back in 1997 but eventually relinquished its ground in 1999 due to low oil prices.

On the 8th of October 2001 Hardman signed a Production Sharing Agreement ("PSA") with the Government of Uganda for a ~4,700sqkm block in the northern part of Lake Albert in north-western Uganda.

Hardman had a 50-50 joint venture over the block with Energy Africa.

Energy Africa had already moved into the basin ahead of Hardman and was the 50% partner with another company (Heritage Oil and Gas) in the southern part of the Lake Albert area.

At the time only one well had been drilled across the Lake Albert area - a well by Shell in 1938 which returned oil shows.

Hardman’s work in Uganda started with 2D seismic surveys and as the merits of the project became clearer (well before any drilling was done) Tullow swooped in and bought Energy Africa for $500M.

Just like that after spending a few billion dollars Tullow became the main player in the EARS system in Uganda.

In 2006 Hardman drilled its first two wells and made its discovery.

Six months after Hardman’s play opening discovery Tullow acquired the junior for ~$1.47Bn.

Fast forward to now, more than 6 billion barrels (2C) have been discovered to date in the East African Rift System.

The exploration success rate across the EARS was ~80%.

Nearly 40 exploration wells proved more than 4 billion barrels of oil and gas in two EARS basins - the Albertine Graben, Uganda (Hardman Resources) and South Lokichar Basin, Kenya (Africa Oil Corp).

Of the 40 wells drilled ~14 were drilled across Basin Margin targets with a 100% discovery rate - the 14 wells were part of a “string of pearls” system which resulted in a string of discoveries.

NHE’s helium project sits inside the EARS but is also sitting on the Basin Margin.

Essentially, NHE has its own “string of pearls” which hosts ~138Bcf of its project's total 175.5Bcf unrisked prospective resource.

Both of NHE’s first two wells (Mbelele-1 and Mbelele-2) are basin margin targets.

Ultimately we are hoping NHE’s drill program acts as the play opener for NHE’s own string of helium pearls.

If NHE is successful, just like Hardman became a takeover target from a major producer, we hope to see NHE become the prime takeover exposure for any of the majors around the world looking for helium exposure.

East African Rift Basin Land Grab - NHE snapped up all the best ground

Hardman Resources only had a small land holding in the EARS when they made their first “string of pearls” discovery...

Hardman’s first discovery triggered a land grab on all EARS oil exploration permits with similar structural characteristics.

Hardman had left potentially billions of $ on the table by NOT securing all the best, similar land BEFORE testing (and proving) their EARS “string of pearls” hypothesis.

The companies that swooped in and took all the other EARS permits included Tullow Oil, Heritage Oil and Africa Oil Corp.

We invested in Africa Oil Corp around the time they started scooping up all the other “string of pearls” plays in the northern part of the East African Rift System (sorry Hardman, you snooze you lose).

Africa Oil Corp ended up being our best investment of that particular decade after they made a discovery on their first drill (share price rose from ~$1.50 to touch $12.50) - so naturally we are very keen on the “string of pearls” concept in the East African Rift System.

Fast forward to 2023, NHE isn’t making the same mistake with their East African Rift system “string of pearls” hypothesis on helium.

NHE has made sure that this time it holds all of the prospective land across Tanzania’s North Rukwa Basin in anticipation that its hypothesis is correct.

Prior to testing its hypothesis that the EARS contains helium in a “string of pearls”, NHE has secured all the most prospective land just in case they make a discovery and prove the hypothesis.

This is to get ahead of a similar land grab that happened over 10 years ago post the Hardman discovery

Like Africa Oil did back in the 2000’s, NHE has the permits to ALL the best land in the system:

Now all we have to do is wait for the first drill to start, and hopefully NHE delivers a commercial helium discovery and proves its EARS helium hypothesis.

If NHE can deliver this first discovery, all the other prospective land they have secured should suddenly become way more valuable under the “string of pearls” model where a successful drill result implies a higher chance of success on all other similar rift basin margin fault targets.

Now we wait for the first drill...

NHE: Getting the Hardman Resources band back together

When Hardman Resources made the first East African Rift basin discovery in Uganda, NHE founder/CEO Justyn Wood was the Exploration Geophysicist for that discovery.

As a result, we think Justyn is the ideal leader for NHE and expect him to be deeply involved in the interpretation of the 3D seismic, and the accompanying gradiometry and soil sampling.

He is certainly aligned with shareholders, maintaining a stake of 19.5% in NHE on an undiluted basis.

But despite all of this, we must stress that oil & gas exploration is risky and NHE has no guarantees of making a helium discovery. Exploration risk forms a key part of our risks section.

Back in November 2022, Hardman Resources Drilling manager Dermot O’Keeffe joined NHE

The fact that NHE has a highly experienced drill manager onboard is a significant win.

Not only that, but O’Keeffe has a long history with Managing Director Justyn Wood that stretches all the way back to when the two opened up the Albertine Rift Basin in western Uganda, making the first two oil discoveries for Hardman Resources in 2006.

Yes, basin margin targets on “string of pearls” discoveries in the East African Rift System.

Hardman Resources was subsequently bought out by its Ugandan JV partner Tullow Oil in 2007 for A$1.5B.

As long-term Investors in NHE, it’s good to know that the Wood and O’Keeffe team has delivered significant value before.

Perhaps more importantly, NHE’s management team are intimately familiar with the “play type” that the company is working with - a Basin Margin Fault Closure (BMFC).

After Tullow acquired Hardman, Tullow drilled 32 more exploration wells in Uganda and Kenya, with a remarkable success rate of 80%.

That success rate was even higher (100%), when Tullow was drilling a Basin Margin Fault Closure.

This is what a Basin Margin Fault Closure looks like:

As we understand it, the reason this type of play is so successful is that the geology helps form the perfect seal for gas underneath the earth’s surface.

Helium naturally wants to escape the earth's surface into the atmosphere so the better the seal, the higher the chance of success.

Now for a stroll down memory lane...

We dug up the 3D seismic image that Justyn and Dermot were working with at Hardman was for its breakthrough Mputa-1 discovery - which clearly shows the contours of the basement:

Now with both Dermot and Justyn at NHE, it is exactly the same type of East African Rift System, basin margin targets they are both so familiar with.

Hardman Resource’s Mputa-1 discovery was located just on the the edge of Lake Albert in Uganda as seen below:

This looks remarkably similar to the targets that NHE is acquiring/has acquired seismic for on the edge of Lake Rukwa in Tanzania:

Again... the NHE team knows the East African Rift System extremely well, and have extensive prior experience with Basin Margin Fault Closure plays.

But while this all sounds highly promising for NHE’s drill program, it is important to note that various risks can still materialise, especially exploration risk.

You can have the right drill manager, the right exploration geophysicist as Managing Director, and the perfect location selected by the foremost helium experts in the world, but this is frontier oil & gas exploration and things can still go wrong.

We list some of these risks in our NHE Investment Memo.

NHE Management - skin in the game

Back in June NHE raised $13.5M at 18c, with NHE directors investing over $1M of their own cash.

We like it when company management and board put their money where their mouths are, and be major holders of company shares, as they are aligned with all other shareholders.

This is the case with NHE’s Managing Director Justyn Wood being a top shareholder of NHE - Justyn holds 19.50% of the company’s shares as per the last NHE annual report.

Here’s NHE chairman Shaun Scott’s latest purchase of NHE shares:

After completing the recent capital raise and securing a rig through respected drilling company Marriott in July, NHE is now approaching a pivotal moment in its 7 year history.

So what is next for NHE?

⚠️The Big One: Drilling ⚠️

NHE’s drill rig has arrived on site in Tanzania, and on October 10th NHE announced that final repairs have been completed on remaining equipment which can now be assembled and commissioned prior to spud (commencement of well).

This is a shallow well so we expect drilling to target depth will take a few weeks.

With drilling about to commence, we have thought about what success would look like for NHE and come up with the following expectations for the drill program:

• Bull case (outstanding result) = NHE finds helium and is able to declare an official discovery.
• Base case (Good result) = NHE finds helium but isn't able to confirm an official discovery yet due to technical reasons.
• Bear case (bad result) = NHE finds no working helium system.

What are the risks?

The key risk now for NHE is “Exploration Risk”.

There is always a chance NHE makes no discovery and in that scenario we think NHE’s share price could re-rate lower significantly.

Exploration risk

NHE may fail to find commercial quantities of helium despite having promising geology on its side.

Funding Risk

NHE has managed to secure funding over the last 6-9 months from two capital raises BUT the company had ~$16M in the bank ($4M at June 30th plus another $12M raised in August).

We are two weeks away from the cash reporting season, so we will have a better idea of NHE’s cash balance at the end of October.

Although NHE has ~$16M for the drilling campaign, there is always a chance the company looks to raise additional capital during or immediately after the drill program to fund its second well and so “funding risk” is also something to consider in the short term.

Underlying commodity risk

Helium prices may fall as additional supply comes on line, forcing down prices and reducing investor appetite for new helium resources.

Country risk

Tanzania is an emerging resource jurisdiction and although a change in government has improved the ability to invest in Tanzania, local politics, changes to mining regulations and royalty systems may be a factor in NHE’s future prospects.

Operational risk

If NHE doesn’t achieve operational milestones before the start of the Tanzanian wet season, it could miss the start of the drilling window in 2023, leading to a material month delay in drilling.

Weather is a factor in NHE’s prospects.

To see all of the risks that we listed in our NHE Investment Memo check out the following:

Our NHE Investment Memo

Click here for our NHE Investment Memo, where you can find a short, high level summary of our reasons for Investing.

In our NHE Investment Memo, you’ll find:

• Key objectives for NHE
• Why we are Invested in NHE
• What the key risks to our investment thesis are
• Our investment plan