What will the next round of drilling at Rukwa show?
That’s the big question that shareholders of Helium One Global Ltd (AIM:HE1, OTCQB:HLOGF) are getting to grips with in the first quarter of 2023, when the next well is set to spud.
By the end of the quarter, the die will have been cast. And it won’t be long thereafter before the results start coming in.
The target is a series of huge helium reservoirs lying around 1,300 metres beneath the ground in Tanzania, about which much is already known.
Helium One has plumbed these depths before, and although the drilling process hasn’t always been easy, much more is known about the potential of Rukwa now than was known when the company listed back in December of 2020.
Indeed, broker Liberum, which recently helped the company raise £9.9mln, reckons that if a discovery is made at Rukwa, it could end up delivering 350,000 mcf of helium per year and annual EBITDA of US$94mln.
And in case you thought this was a high cost business, Liberum puts the EBITDA margin on that scenario at over 89%.
So what are the chances of success?
Helium One’s chief executive David Minchin is quietly confident.
“We know more about the subsurface now,” he says.
“We know where the traps are. We’re stronger from an operations point of view than we’ve ever been, as we’ve expanded our management team over the last twelve months by adding experienced gas finders. We’ve got the right drill rig and we’ve got the right services. It’s all coming together.”
Then there’s the helium market.
Helium is essential for use in high tech applications like fibre optics or micro-chip manufacturing. Demand is only set to grow, but because the major producers only produce helium as a by-product, supply is inelastic.
Russia’s invasion of Ukraine has added further pressure to the market, and the price has moved significantly higher.
So, while Liberum assumes a stable price of US$300 per mcf of helium in its EBITDA calculations, the current situation is somewhat different – supply is currently going into China at US$400 per mcf, the spot price is over US$1,000, and NASA recently signed a long-term contract at US$920.
So this is a market that’s alive and kicking, and it’s hardly surprising that when Liberum went into the market to raise the money for the upcoming round of work, the offering was oversubscribed. Indeed, initially Helium One went out for £7mln. That it eventually came back with £9.9mln is testament not only to the buoyant helium market, but also to optimism about the Tai well at Rukwa.
After spudding, this well will take about a month to get to target depth, at which point wireline tests will be undertaken with a probe that will go directly into the reservoirs.
“We’re expecting to see stacked reservoirs – sand reservoirs with claystones between them,” says Minchin.
Once the well has reached the target depth, each reservoir will be sampled and its pressure gauged.
It will then be completed as an appraisal well, with flow tests following in the second quarter.
Minchin doesn’t have too many concerns about flow, though – if it’s gas, it will flow. The high value of helium allows a discovery to be successful at a range of grades, pressures, flow rates, and gas / fluid compositions.
If the well proves successful, the plan is to get into production in the second half of 2024, following the granting of a mining licence from the resources industry-friendly Tanzanian government.
“We’re approaching 2023 with optimism and confidence,” concludes Minchin.
“We know we’ve got a system. Now we’ve got to get on and drill it.”