Why We’ve Invested in Noble Helium

Disclosure: S3 Consortium Pty Ltd (The Company) and Associated Entities own 3,925,926 NHE shares and 1,851,852 options, The Company’s staff own 40,000 NHE shares 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.

Today we are adding a new company to our long term investment portfolio.

We run due diligence on hundreds of companies a year, but only a select few make the cut and are added to our portfolio.

Our latest portfolio addition, Noble Helium (ASX:NHE), is aiming to discover a globally significant helium resource.

Helium is a critical gas in the production of semiconductors used in almost every technology product.

Helium demand is surging as countries move to produce semiconductors locally to reduce reliance on supply from geo-politically unstable countries.

As helium is a gas, helium exploration is like exploring for traditional oil & gas, in that NHE has some prep work to do to identify drilling targets, secure a rig and then drill a high impact well.

We think the investment journey with NHE will be similar to other gas explorers we have invested in like Elixir Energy, Invictus Energy and 88 Energy (and Africa Oil Corp from 2012) - where we invest well before the key drilling event and expect a price rise in the lead up to drilling and results.

And then hopefully a sustained re-rate on a successful discovery.

With our gas exploration investments, we look for companies operating in frontier basins or systems that are yet to be proven. Here, if success is achieved, shareholders are well rewarded, as the implication is that more drilling in the new system will also be successful...

...but obviously there is significant risk of not making that coveted initial discovery and the share price will react downwards accordingly - frontier gas exploration is high risk and investors should only invest what they are comfortable to lose.

Today NHE starts trading on the ASX. In this note we will share a summary of why we invested in NHE, and cover our 2022 NHE Investment Memo including:

• What NHE does
• The macro theme
• Why we invested in NHE
• The key objectives we want to see NHE achieve in 2022
• Key investment risks
• Our investment plan

We are long term holders in NHE (including escrows and trading blackouts on our stock) and will be following the NHE story over time and sharing our commentary as they execute on the objectives we set out in our investment memo.

The key event we are waiting for is NHE’s maiden drilling event scheduled for 2023.

The rest of this year is all about the successful preparation of drilling targets.

We will launch our more detailed “deep dive” note on NHE in the coming weeks.

The NHE story and why we like it

If NHE’s Helium resource can be proven, it has the potential to be the world’s third largest helium reserve behind the USA and Qatar, and the largest ever reserve held by a single company.

In just one of NHE’s four prospects, there could be enough helium to supply ~30 years’ annual global demand.

A large and growing portion of that global helium demand comes from semiconductors due to its helium’s special properties. Helium also cannot be replaced in most of its other industrial uses.

This is the short version of the macro picture, but the NHE story is also about geology and a heavily invested founder/CEO who knows that geology really well.

For seventy years, the East African Rift System basins that NHE is operating in were considered too high risk for oil and gas exploration. That was until the first oil discovery in 2006 proved otherwise.

Some of our readers will remember Hardman Resources, which moved from 2c to $2.50.

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

Since then, the East African Rift System has become home to some of the largest, most consistently successful onshore African oil and gas discoveries - a very impressive 80% success rate from 30 wells between 2006 and 2018.

After years building towards this IPO, NHE now believes their East African Rift System basins could possess the same geological elements for success, but for helium - an emerging critical gas.

As of today’s IPO, Justyn Wood currently owns well over a third of NHE.

That means NHE is a founder owned and operated company, which we like. AND it means NHE is driven by someone who is deeply familiar with East African Rift System geology.

Our other gas exploration investments Elixir Energy and Invictus Energy are both founder owned and operated too, where the founders have deep technical knowledge - a big tick for us when assessing an investment.

Having a veteran frontier exploration expert at the helm bodes well for a discovery - and it couldn’t come at a better time.

The helium market is currently buckling under the pressure of supply issues, growing demand and geopolitical tension.

According to Edelgas, a helium consultancy, US helium prices are up five fold in the last two months - meaning that helium is now a bona fide strategic resource.

While prices will fluctuate and new supply must come online to meet demand, the underlying narrative behind NHE becomes even more powerful when you consider the following...

Surface gas sampling in and around the NHE’s tenements indicates that helium trapped underground may be “Green Helium” (associated with nitrogen rather than hydrocarbon gas).

We note that 95% of the world’s current helium supply is associated with fossil fuel energy production - any critical materials with sustainability credentials are highly desirable.

Again, this is a prospective resource that could eclipse entire countries’ production - all in a single company.

NHE raised $10M in today’s IPO which will leave it with an Enterprise Value (EV) of $36M.

Importantly, by a measure of EV/prospective resource NHE compares favourably with other ASX-listed helium stocks, companies like Renergen and Blue Star Helium, for example.

We’ll share more on this comparison in a subsequent deep dive, but for now the focus will be on our brand new NHE 2022 Investment Memo, which we will use to assess the performance of our investment in NHE this year.

NHE has spent the last five years getting all the necessary pieces in place for its bid to become the largest pure-play helium company in the world.

Aiding NHE, will be two of the foremost helium experts in the world, who literally wrote the book on helium.

That book/database is called Atlas of Helium Occurrence and Exploration Fairway Analysis.

NHE has an exclusive licence to this database for three years with the option for two more - something which it may use to acquire further helium assets down the track and become an even bigger helium company.

Aiming to drill in late 2023, in between then and now are a range of catalysts each contributing to its maiden drill program in Tanzania - right in the middle of the East African Rift System.

We’ve created a quick high-level summary of NHE, key objectives, risks and our investment plan which can be accessed in our NHE Investment Memo:

Our NHE Investment Memo contains the reasons we invested in NHE, while below is the complete list of our reasons for making this investment:

Reasons we invested in NHE

1. East African Rift System - Top helium experts highly rate NHE’s geology - Two prominent helium experts think the East African Rift is the best geology in the world for helium and it could house a globally significant resource. (NHE’s Mean unrisked prospective volume of 175.5 billion cubic feet (bcf) across nine structures).
2. String of Pearls: NHE is aiming to identify drill targets from a series of leads across similar geology in the East African Rift system - known as a “String of Pearls”. If NHE drills the first “pearl” and it turns out successful, it implies all the other leads (pearls) could be successful too. This is similar to what happened to Africa Oil Corp’s “String of Pearls” back in 2012 when it surged 1,200% on a successful result from its first lead in a string of leads on the East African Rift System.
3. Our past success with basin opening exploration - Some of our best investing success has come from major drilling events in frontier areas - companies like Elixir Energy, Invictus Energy, 88 Energy and our first ever top pick from many years ago, Africa Oil Corp in the East African Rift. We hope to replicate that success with NHE.
4. Founder owned and operated - CEO Justyn Wood built the company over many years and holds well over a third of the company’s shares, so is heavily incentivised to deliver value for shareholders. Justyn brings significant East African Rift experience. He played a key role in opening up the region’s geology with breakthrough exploration success in 2006 with Hardman Resources (~2c to $2.50). He knows the ground NHE is working with.
5. Exclusive rights to global “Helium Atlas” - Years ago, NHE commissioned and licensed the world’s first “helium atlas” from two of the foremost helium experts. Basically it’s many years of research into a detailed database of all the helium prospects in the world and is how NHE first settled on Tanzania. We think access to these experts and their “Helium Atlas” will also help NHE in selecting future helium project acquisitions.
6. Bonus: “Green Helium” could attract ESG capital - Large pools of ESG capital could find a home in Green Helium projects like NHE’s. NHE has seen early signs that it’s helium is associated with nitrogen rather than hydrocarbons. ~95% of current helium supply is tied to fossil fuel production and this “Green Helium” might draw ESG investors to NHE, much like ESG initiatives in the EV battery supply chain.
7. Bonus: Prospective resource compares favourably with other helium companies - Of the now four ASX-listed helium companies, we think NHE’s prospective resource compares very favourably on an EV/Resource basis.
8. Bonus: Anchor investor knows industrial gases well - a core early investor in NHE is J Kent Masters - the CEO of one of the largest lithium companies in the world (Albemarle). Masters owns ~7% of NHE. Masters is also a former member of the executive board of Linde, the world's largest industrial gas company by market share and revenue (capped at ~US$160B). We think Masters would be very familiar with the helium market and may be able to make introductions to potential offtake partners down the track.

We’ll look to provide a deep dive of these reasons in the coming weeks.

You can also watch Justyn run through the NHE story to investors from a few weeks ago here. We found watching the video extremely helpful in understanding the company and its potential.

We’re particularly interested in the geology NHE is operating within, so we’re looking forward to sharing the story behind the East African Rift System and the trend line of discoveries in this part of the world which refer to in the industry as a ‘string of pearls.’

Our view is that this ‘string of pearls’ lends itself to a major helium discovery for NHE in Tanzania.

In the image below we have crudely highlighted the “string of pearls” concept of drilling leads.

On the left is Africa Oil Corp that successfully hit on the first “pearl” and subsequently went on to successfully drill the other “pearls”.

On the right is NHE’s drill leads with the same “string of pearls” concept overlaid on their prospects:

If NHE successfully deliver a result on the first “pearl” we think there is a high likelihood the other geologically similar pearls will deliver too, which is why the first drill is so important.

We want to see NHE firm up these leads into drill targets this year, and drill the first “pearl” in 2023.

Macro theme: more on the helium market

We’ve had a keen interest in the helium market for well over a year now.

Below is a quick explanation of the macro theme behind NHE:

In the short-term we’re seeing a perfect storm for helium prices.

Consider that Russia was on track to becoming one of the world's top three helium producers until its Armur facility (capable of producing ~11% of global supply) caught fire and was put out of action indefinitely.

And now one of the biggest producers in the US, the Cliffside Helium Plant, is out of action after a leak caused an unplanned shutdown in January...

All of these helium supply ruptures are being baked into the helium spot price and as result, helium spot prices are now trading between US$2,000-US$3,000Mcf.

While this is just US prices and NHE is due to drill in late 2023, we expect these supply ruptures to improve investors sentiment for new helium resources and the semiconductor demand side of the equation to ramp up in the coming years.

What do we expect NHE to deliver in 2022?

The main reason we are invested is to see NHE drill a successful opening well, and prove the “string of pearls” theory (success on drilling the first “pearl” implies success on the other pearls”)

But before the big 2023 drilling event, this year is all about preparing to drill - converting leads into firm drill “targets”.

We have three key objectives for NHE this year that will be used as benchmarks against which we will track the company's performance over the course of 2022.

Key Objective #1: Target generation leading up to drilling

Finding the world’s largest single company helium resource is no easy task, which is why NHE will employ a range of modern exploration techniques to get the drill targets they need for the Q3 2023 drilling event. Here’s what we expect NHE’s exploration program to look like:

🔲 Airborne gravity gradiometry (Q2-Q3 2022)

Gravity gradiometry is the study and measurement of anomalies in the Earth's gravitational field.

NHE will fly a sensor over their projects in Tanzania and produce the “colourful blobs” that map out these anomalies.

It’s an important part of the work NHE will be doing in 2022 and will inform their interpretation of the various data points they are working with.

🔲 3D seismic (Q2-Q4 2022)

NHE will complete a 3D seismic survey of 100km2 at their helium project for which they have allocated a large portion of their IPO funds ($4.5M).

Given this large allocation, we think this is the core focus of NHE’s 2022 exploration works and a key part of the exploration puzzle.

3D seismic surveys are done by artificially inducing shock waves in the earth which is then followed by recording, processing, and interpretation.

🔲 Geochemistry survey (Q2-Q3 2022)

Similar to rock chips with mineral explorers, NHE’s geochemistry surveys will test for helium content at surface to aid the generation of drill targets.

As it is much cheaper to complete than 3D seismic, we expect these surveys will help with target generation.

🔲 Bonus: Resource re-quantification (Q4?)

NHE currently has a mean unrisked prospective volume of 175.5 billion cubic feet (bcf) across nine structures - based on work carried out by well respected oil and gas resource consultants, Netherland Sewell and Associates.

Towards the end of the year, we think NHE may look to update their prospective resource based on completed exploration work.

🔲 Bonus: Finalise drill targets (Q4?)

While this may be a stretch goal for NHE, we think they may settle on the final drill targets by the end of 2022. This would allow NHE to get into the field and prepare for drilling at the end of the Tanzanian wet season, in 2023.

Key Objective #2: Acquire more permits, strengthen in country presence

NHE needs to do the following things to cement its position in Tanzania:

🔲 Finalise licence areas (9 Prospecting Licences) (Q2 2022)

NHE is aiming to get 9 more licences to add to their current 14 licences to effectively double their project area size to ~4000km2 in total. $663k will be allocated from the IPO funds to accomplish this.

🔲 Stakeholder engagement (Ongoing)

Tanzania is an emerging resource jurisdiction and building strong relationships with stakeholders in the country will be important for NHE. This includes the relationships with government ministries, state and local governments as well as residents in the project area.

🔲 Tanzanian team additions (Ongoing)

NHE may look to add local employees to strengthen their in-country team. These employees would help NHE with stakeholder engagement, administrative duties and legal support.

Key Objective #3: Explore new opportunities

🔲 Acquire a new asset

NHE has a treasure trove of information about prospective helium resources around the world via a book/database called Atlas of Helium Occurrence and Exploration Fairway Analysis.

The professors behind this work are two of the foremost experts on helium and we believe having an exclusive licence over this work will help NHE make smart acquisitions down the track.

This could include other East African Rift System projects or somewhere else entirely. We think that NHE is not limited in scope at its Tanzanian project and NHE has the potential to grow into a helium resource behemoth in the coming years because of this intellectual property.

What could go wrong?

We’ve summarised what we see as the main risks for NHE below:

NHE is a high-risk exploration investment for us and this risk summary is not exhaustive.

What is our investment plan?

Read our trading blackout policy here.

Our 2022 NHE Investment Memo:

Below is our 2022 investment memo for NHE including:

• Key objectives for NHE in 2022 (shown above)
• Why we invested in NHE
• What the key risks to our investment thesis are
• Our investment plan