Investment Memo:
Grand Gulf Energy
(ASX:GGE)
-
LIVE
Opened: 30-Nov-2022
Shares Held at Open: 32,510,000
What does GGE do?
Located in a part of the world dubbed the "Saudi Arabia of helium", Grand Gulf Energy (ASX: GGE) is looking to develop its helium project and discovery in Utah, USA into production.
What is the macro theme?
Helium is a critical component in the manufacture of semiconductors.
Semiconductors have become a critical part of the supply-chain across almost all industries from computer chips that power cars, smartphones to military equipment.
The USA is looking to encourage the building of a local semiconductor manufacturing industry which will require more US based helium supply. Most of the world's semiconductors are currently produced in Taiwan.
Our Big Bet for GGE
GGE makes a commercial helium discovery, ties it into the existing local processing infrastructure, and becomes a USA helium producer - or gets taken over.
Why did we invest in GGE?
Existing helium discovery
GGE now has a helium discovery with grades of up to 1%. We are holding GGE to see it commercialise its discovery by delivering a commercially viable flow rate.
Offtake and strategic agreement in place
GGE already has an offtake agreement for its helium and a strategic partnership to process and sell high purity helium with Paradox Resources, who owns the Lisbon Helium Plant less than 20 miles away from GGE’s ground.
Surrounded by processing infrastructure
GGE’s helium project sits adjacent to an existing idle pipeline infrastructure that supports a quick pathway to production. The pipeline infrastructure runs directly from GGE’s ground to Paradox Resources’ Lisbon Helium Plant.
US looking to secure local supply of semiconductors
Both the USA and China are looking to secure key supply chain materials for semiconductors to advance their industrial modernisation ambitions. Helium is critical in the manufacturing process for semiconductors and we expect demand to increase exponentially as the world’s commodity supply chains are decentralised.
Two major drilling events in 2023
GGE’s acquisition terms are structured so that it will earn-in their final 85% ownership after drilling 3 wells. This will mean GGE needs to drill at least another two wells before October 2023 to reach this milestone.
What do we expect GGE to deliver?
Objective #1: Drilling of Jesse #2 well
With the learnings from the first well, we want to see GGE complete a second well at its Jesse discovery and get a commercially viable flow rate. Our bull/base/bear case expectations for the flow rate are as follows:
- Bullish case (exceptional result) = Raw gas flow rate at or above 10mmcf per day with helium grades >0.4%.
- Base case (good result) = Raw gas flow rate of between 5-10mmcf per day with helium grades >0.4%.
- Bearish case (poor result) = GGE fails to produce a flow test.
Milestones
Drilling location confirmed
Drilling commencement
Flow rate results
Objective #2: Drilling of at least one other well
We want to see GGE drill another well either at its Jesse helium discovery or at one of its other drill ready prospects.
Milestones
Drill permitting
Drill location confirmed
Drilling commencement
Drilling results
Objective #3: Pipeline access agreement
GGE has an offtake agreement and strategic partnership signed with Paradox Resources who own the Lisbon Helium Plant next to GGE’s project. We want to see GGE secure a deal to access nearby pipeline infrastructure to tie its project into Paradox’s helium plant.
Exploration Risk
GGE’s project is still at the prospective stage. There is a risk that drilling returns no helium and the project has little value.
Commercialisation risk
There is also a risk that even if helium is discovered, the flow rates are not sufficient for the project to be economically viable, or that the well flows high gas/water content. This will reduce the probability of economically recovering helium.
Financing risk
GGE is an early stage explorer, there is a risk that market conditions change & funding dries up for high-risk exploration like GGE’s.
Market risk
If the broader market sells off there is a chance that investors shy away from high risk investment opportunities such as early stage junior explorers. During market downturns, investors will generally look to pull capital away from the highest risk investments.
What is our investment plan?
Given GGE’s successful execution of its business plan, within the timeframes announced to investors, we may look to increase our position again in GGE at some stage in the coming 12 months.
We will likely hold our full GGE position into the next drill campaign, Jesse-2, and if GGE secures a commercial flow rate we expect the share price to re-rate again upwards.
However if the share price significantly re-rates either in the lead up to drilling or in anticipation of a result, we may look to Take Profit by selling around 15% of our holdings, OR, depending on the next drill campaign plan, hold our position in the lead up to the 2023 drill campaign selling 15% of our holdings in the lead up to that 2023 drill.
Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 32,510,000 GGE shares at the time of publishing this memo. The Company has been engaged by GGE to share our commentary on the progress of our Investment in GGE over time.
Investment Memo:
Grand Gulf Energy
(ASX:GGE)
-
CLOSED
Opened: 08-Dec-2021
Closed:
29-Nov-2022
Shares Held at Open:
49,940,826
Shares Held at Close:
32,510,000
Reason Memo Closed:
It has been roughly 12 months since our last GGE Investment Memo and we want to refresh our expectations for GGE’s next 12 months.
What does GGE do?
Grand Gulf Energy (ASX: GGE) is a Helium exploration company aiming to make a commercial Helium discovery in Utah, USA. A region dubbed the "Saudi Arabia of Helium".
What is the macro theme?
Semiconductors have become a critical part of the supply-chain across almost all industries from computer chips that power the modern world to cars, washing machines, smartphones & military equipment. Helium is a critical component in the manufacture of semiconductors & as the world modernises we expect demand for helium to increase exponentially.
[Memo Assessment - 29-Nov-2022]:
Grade = A
Domestic helium prices in the US have increased ~1,000% since we first Invested in GGE (from US$200/mcf to ~US$2,000+). In July 2022 the US passed the “CHIPS for America Act” to strengthen domestic semiconductor manufacturing as the US government looks to mitigate the geopolitical risk associated with the concentrated semiconductor manufacturing in Taiwan.
Our Big Bet for GGE
GGE makes a commercial helium discovery, ties it into the existing local processing infrastructure, and becomes a USA helium producer - or gets taken over.
Why did we invest in GGE?
Near term drilling event
GGE plans to drill its first helium well in March 2022. As with most drilling, We expect a share price run up in the lead up to drill results as investors speculate on a positive result.
[Memo Assessment - 29-Nov-2022]:
Grade = A
GGE managed to drill and then complete a workover program at its first well within a month of its anticipated timeline. This came only six months after we Initiated Coverage, which we think is a fast turnaround considering labour shortages, supply chain delays and competition for exploration drill rigs.
Location of project
GGE’s helium project is located amongst a number of large producing helium companies and helium production plants. The project is located 8 miles from the Doe Canyon Helium Plant owned and has existing pipeline infrastructure around its project providing for a quick pathway to production.
[Memo Assessment - 29-Nov-2022]:
Grade = A
Shortly after we Initiated Coverage, semiconductor giants Intel and TSMC started work on two separate semiconductor plants in Arizona (in close proximity to GGE’s project).
We think this was the key reason why GGE was able to sign an offtake agreement before it commenced drilling. We think that chip manufacturers in the area might look to secure reliable, local helium supply, as forecast demand is set to increase in the coming years.
Helium a critical raw-material for Semiconductors
Both America and China are looking to secure key supply chain materials for semiconductors to advance their industrial modernisation ambitions. Helium is a critical raw-material in the manufacturing process for semi-conductors and we expect demand to increase exponentially as the world modernises.
[Memo Assessment - 29-Nov-2022]:
Grade = A
We have seen over US$52BN in commitments from the US government and ~US$260BN from private companies to develop the US domestic semiconductor industry. This was accelerated by the geopolitical risks highlighted by the Russia/Ukraine war and fast tracked through the bi-partisan “CHIPS for America Act” passed in June this year.
Performance milestones incentivising drilling & analog fields
GGE’s acquisition terms are structured so that they earn-in there final 75% ownership only after drilling 3-wells, the 1st before 30/09/22 & the remaining 2 before 30/09/23. Coupled with GGE’s project having similarities with the nearby Doe Canyon project which is producing 18 million cubic feet per day (mmcfd), at an average grade of 0.5% helium we think the drilling programs will act as major catalysts for the company.
[Memo Assessment - 29-Nov-2022]:
Grade = A
GGE drilled its first helium exploration well, Jesse-1, well before the October 2022 deadline for the performance incentive rights to vest. GGE has already started planning its second well which is expected to be spudded this month (December 2022).
We think these performance conditions have provided focus to GGE’s management on drilling and drilling quickly.
What do we expect GGE to deliver?
Objective #1: Drilling First Well
✅ Pre-drilling work complete
- ✅ Identify the highest priority drill targets
- ✅ Drill rigs secured
- ✅ Drilling permits granted
✅ First well drilled by the end of Q1-2022
- Our base case target is for GGE to prove there is a helium system present at the project.
- An exceptional result for us would be if they return >0.4% helium concentration in the raw gas stream at a flow rate of 10mmcfpd (million cubic feet per day) of raw gas (we will find out grade and flow rate two weeks after the well is complete).
[Memo Assessment - 29-Nov-2022]:
Grade = A
GGE completed its drilling program on time, and announced the discovery of a working helium system with grades of up to 1% helium.
Objective #2: Expand the resource through leasing
GGE’s leases cover a gross 28,046 acres. The goal for the Joint-Venture is to secure 35,000 acres of leased land.
Milestones
Resource on Current Leases [before Christmas]
Additional Leasing
[Memo Assessment - 29-Nov-2022]:
Grade = D
GGE increased its landholding and prospective resource shortly before our Investment Memo was launched. Since then, GGE didn't manage to increase its lease holding beyond the existing 28,056 acres. This is likely because the company was focused on drilling its first helium well.
Objective #3: Progress commercialisation of the gas resource
GGE are currently negotiating off-take agreements. We expect some news regarding these over the next 12 months. We also expect a pipeline access deal to accompany any offtake agreements.
Milestones
Offtake Agreement [6 months]
[Memo Assessment - 29-Nov-2022]:
Grade = B
Whilst GGE didn't manage to sign a pipeline access deal, the company did get both a strategic partnership and offtake agreement signed with Paradox Resources - the owner of a helium processing plant only ~8km away from GGE’s project
Exploration Risk
GGE’s project is still at the prospective stage. There is a risk that drilling returns no helium and the project has no value.
[Memo Assessment - 29-Nov-2022]:
Grade = A
GGE announced the discovery of a working helium system with grades of up to 1% helium.
Flow rate risk
There is also a risk that even if helium is discovered, the flow rates are not sufficient for the project to be economically viable, or, that the well flows high water/oil content. This will reduces the probability of economically recovering helium.
[Memo Assessment - 29-Nov-2022]:
Grade = F
Although GGE found a working helium system, it was unable to produce a commercial flow rate from two wells drilled. This risk unfortunately materialised and it will be the key focus for GGE’s next drilling campaign.
Funding Risk
GGE is an early stage explorer, there is a risk that market conditions change & funding dry’s up for high-risk exploration like GGE’s.
[Memo Assessment - 29-Nov-2022]:
Grade = A
GGE managed to address this risk by raising $11M at 4.4c per share earlier in the year. This is well above GGE’s current share price of 2.1c and well timed by management in anticipation of GGE’s drilling campaign.
GGE now has $7.1M (at 30 September 2022) and should be able to finance at least its next drilling program without having to raise new funds.
What is our investment plan?
Our plan is to hold a position in GGE through the three well program.
We will aim to sell ~20% of our holding during the share price run up to the March 2022 drilling results to partially de-risk our position. After those drill results are analysed - expected to happen in the middle of 2022, we will reassess our investment plan based on the new information.
[Memo Assessment - 29-Nov-2022]:
Grade = A
In line with our investment strategy we Top Sliced and nearly Free Carried our investment between February and April 2022 in the lead up to the drilling results (our average sell price was 3.82c).
We sold around ~34% of our Initial Investment, which was a little more than we initially anticipated - however, as GGE’s share price had increased more than 300% from our Initial Entry Price (unlocking one of our “Break Conditions”) we wanted to free up the capital given the market uncertainty at the time.
We haven’t sold any shares in GGE since April 2022 and are holding onto our position in anticipation of GGE’s follow up drilling campaign, more details for our future investment plan in our new GGE memo.
Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 49,940,826 GGE shares at the time of publishing this article. The Company has been engaged by GGE to share our commentary on the progress of our Investment in GGE over time.
