Helium’s a great market
There’s nothing wrong, at all, with going exploring for helium. It’s a vital part of the economic ecosystem. The market has, for decades, been dominated by the US national reserve. Which is being closed down and therefore becoming exhausted. This should – or at least could – provide opportunities for new sources of helium. So, why not? Why not a helium explorer?
And to really emphasise this, we really do want to have helium. There are uses for it (in medicine, for example) where we’ll all pay whatever is necessary to get it. Which is great, if there’s a proper shortage of supply and therefore those who are producing get to charge whatever for it. That’s the upside to this particular mining game.
On the other hand, like any natural resource, if there’s a lot of it around then it’s producers who get to feel the pain. And my worry here is based on that second scenario.
Primary helium mining
Pulsar Helium (OTCPK:PSRHF) (TSXV:PLSR:CA) is specifically looking for deposits where helium is the primary output. There are deposits of gas – varied gases, there are hydrogen and all sorts of reservoirs out there – where helium and others are mixed in with other gases. Say, with methane (natural gas, by and large) and there are those where the only viable economic extraction is that helium itself. OK, the world is wild and wonderful and many things happen in it.
Pulsar is specifically and deliberately looking for those reservoirs which would only – that’s largely what primary means – be exploited for the helium content. From their slide deck:
We focus only on projects where helium is the primary economic driver
And the line just before that is:
~95% of the world’s helium is produced as a byproduct of hydrocarbon production.
And that’s the thing that worries me.
They have found helium
Their drilling at Topaz seems to indicate a reservoir at 10 to 13% He (helium). That’s really pretty good. If you go get your helium the old fashioned way, from the Hugoton Field (the one that fed that Federal reserve) then you might have only 0.7% He. True, with that you’ve also got low grade methane (natural gas) and the two together make it economic. As we saw when we discussed Total Helium.
We’ve also got Helium One drilling in Tanzania for high quality – 10% and above – helium. What they’re doing makes sense in terms of trying to find a resource. What both are doing makes sense. Low grade, known to exist, with a co-product. Or high grade, no co-product, but a little riskier.
Well, you know, shrug? Either can or might well work, one is riskier than the other but then so too are the possible – and note possible – returns higher.
But
Here’s what my worry is. If you’re the primary producer in a market dominated by secondary, or byproduct, producers then when the price falls you’re going to get shafted. Because that’s just how these markets work.
It’s happened to Jervois, as one example. A perfectly sensible cobalt mine inside the US. Which isn’t even going to open. Because the cobalt price is below production costs. Jervois had – has – a primary cobalt mine. But the majority of world production is as a byproduct of copper (and nickel) production. No one closes their copper or nickel mine because the cobalt price is low. Therefore the Co price can go below production cost – and stay there a long time.
I’ve also made this point about scandium production. If everyone else is a byproduct producer then you can – as a primary producer – end up facing interminable losses on production costs. Because those other guys aren’t going to stop. They’re still making a contribution to operating costs, even as they’re not covering capital costs, by still producing the scandium/cobalt. And, indeed, the /whatever is the byproduct.
LNG and helium
As I’ve said before, well, better to quote at length:
The other development in the natural gas world is the liquefied version of it. This is how transportation is done over distances too long for pipelines. The basic detail here is the liquefied part. That means cooling and pressure. Or, as we can also call it, distillation – it’s very much the same process by a different name.
This is important for distillation is how we separate things with different liquefaction temperatures. We know it best when we separate ethanol and methanol in a still – the bits that make whoopee from those that make you blind – but it applies to the technique as a whole.
So, we’ve natural gas containing helium. How do we separate them? We cool that natural gas. First we get “distillates” then propane, butane and so on. CH4, the methane and the majority, comes out at some temperature. OK. But this also means that our helium (and any nitrogen, oxygen etc) remains in the atmospheric part as those others become liquids that we can pipe off. Keep cooling and eventually the only thing left gaseous is our helium content (well, sorta, at this stage it’s usually called “crude helium” that might be 50 to 90% He which then goes off for refining further). That’s a pencil sketch but a reasonable one.
But what happens when we make LNG? Well, pretty much the same actually. We’re cooling the gas, it liquefies at the same temperatures, we end up with whatever helium there was originally still gaseous.
The thing is, we’ve now got our helium, concentrated from the original content, into that remaining atmosphere, at no cost. All the costs of this process so far are being carried by the creation of the LNG. We have, as it were, manufactured a high helium gas rather than having to go prospecting for it. This rather damages the prospects of those, umm, prospecting for a high helium gas.
There is actually a reason why Qatar is both the big new entrant into the global LNG business and also into the global helium business.
This is the reason I’m unimpressed by Pulsar
In their pre-IPO publicity they say:
Pulsar is a dedicated explorer and developer of primary helium projects. The word ‘primary’ is important, as Pulsar focuses on assets where the primary economic driver is helium, it is not a by-product, and not associated with significant hydrocarbons.
Further:
Supply is now heavily dependent on sources where helium is a by-product of natural gas production with no flexibility to increase output.
Well, yes, that’s all true. But the other side of it is also true. No one’s going to shut down an LNG train because the helium price is low. They’re also not going to shut down the helium extraction circuit of that LNG train unless the operating costs are greater than revenue. All of the capital costs – because they’re sunk costs – are going to be ignored in the shut or stay open decision.
Which is a real problem if you’re a primary producer, not a byproduct one.
My view
Being a primary producer of a mined commodity in a market dominated by secondary, or byproduct, producers is a very risky place to be. Entirely true that profits are marvellous as the price rises. But it’s also true that other producers – those byproduct ones – will keep producing at prices that make you go bust.
Thus I’m not in favour of investing in would-be primary producers in a market dominated by secondary producers.
Why I’m wrong
It is, entirely, possible that helium is going to go into such supply deficit for so long that this worry just isn’t relevant. But that’s what the bet is here. That Pulsar has found helium seems to me to be true. But whether the price will hold up? Well, it might – and that’s where I will be wrong.
The investor view
My suggestion as a result of this is that Pulsar isn’t something to be invested in. I also tend to think that the price currently is excessively boosted by the results from their initial drilling. But that’s very much a passing opinion, not something I’d want to try to explain as above.
My – possibly simplistic – view is that being a primary producer of a mineral product in a market dominated by secondary and byproduct producers is a really bad, or at least excessively risky, place to be.
Pulsar is offering exactly this point as the reason to invest in them – the ability to alter supply to meet demand. I think this works the other way. Well, only one of us can be right and I really do think it’s me.
Doing something else rather than this is my advice.
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