Solo Oil PLC (LON:SOLO) has got exposure to an in-demand, under-supplied resource with its new investment in Tanzania.
The company has agreed a deal to acquire a stake in a group called Helium One in a cash and shares transaction.
Initially, Solo Oil is spending £2.55mln for a 10% interest in Helium One and it has an option to double its stake for a further payment of £4mln.
Helium One’s major asset is the Rukwa project in the east-African country, which is independently estimated to host to an unrisked 100bn cubic feet of the inert gas.
Speaking with Proactive Investors Solo Oil chief executive Neil Ritson highlights that helium is a resource that’s scarce and that the market needs new supplies of the gas in the coming years.
“It has very strong demand growth from emerging industries, it is hard to substitute given its special properties, as a result of that we’ve seen price escalation [in the commodity] and that is something we want to get on the back of,” Ritson says.
Helium is used as a cooling medium, most commonly in MRI scanners, although it is a key component in the Large Hadron Collider, based in Switzerland, which is looking for the God particle.
The market is estimated to be worth US$6bn a year and it is one in which supplies are starting to tighten.
Ritson also highlighted that the company brings technical expertise to the new venture as well as capital.
“This is a sweet spot for the generation of subsurface helium and once you’ve identified that then the techniques and methods you use to both explore for it and then exploit it in the subsurface are the same skills that we bring to all our projects in oil and gas,” he said.
“That’s what we’ll add to the team here as we move the project towards drilling.”
Shore Capital analyst Craig Howie, in a note, said: “Given the very favourable helium market fundamentals, we believe that acquisition of this interest in Helium One is a highly complementary transaction for Solo, expanding the company’s existing strong presence in Tanzania.”
Elsewhere, another broker VSA Capital earlier this month put the helium market under the microscope and also highlighted the opportunity presented by Helium One.
“After decades of stability, a supply shortfall is now looming which will dramatically increase volatility of supply and influence prices,” VSA’s Paul Renken said in a note.
Looking at Helium One, Renken added: “The ‘end game’ for Helium One would be to define a resource of global significance in volume and quality of helium such that there is a trade sale at a future date.
“Barring that, the plan would be to bring to production this resource and become a significant global supplier of helium at source with a cost profile being in the lowest quartile of largest global primary helium producers-a business model analogy being as Fortescue Metals have done in iron ore or Orocobre have done in lithium in recent years.”
Earlier, in the company’s statement, Neil Ritson added: “Helium One's portfolio of prospective helium projects in Tanzania provide Solo with a unique early stage investment into a potentially world-scale helium resource.
“The company believes that Rukwa, together with Helium One's additional project areas at Eyasi and Balangida, represent an attractive strategic investment, especially given the helium market's weak supply dynamics and continued demand growth."