The one thing that underpins every single tech giant in the world is experiencing a shortage–twice over. Semiconductors—some call the “New World Oil” with massive global implications–are in short supply. And Helium, a gas critical to their manufacturing, is experiencing a supply squeeze that can’t be remedied without new exploration and development. Mentioned in today’s commentary includes: Intel Corporation (NASDAQ: INTC), Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), Advanced Micro Devices, Inc. (NASDAQ: AMD), NVIDIA Corporation (NASDAQ: NVDA), Maxar Technologies Inc. (NYSE: MAXR).
It’s not just the demand explosion in the semiconductor industry that necessitates more Helium, either. Helium is a critical gas in the healthcare industry as the backbone of the MRI and the NMR, and a vital component in space exploration, not to mention everyday consumer electronics. That put this gas in pole position for the next boom. And it could be bigger than the Cannabis 1.0 boom. Maybe bigger than blockchain. Bigger, possibly, than lithium.
It also means that the next pure-play junior to make a significant discovery could end up being one of those success stories for early-in investors. Any time you have a commodity shortage looming, it pays to look to the small-caps whose stock most often reacts favorably to news of progress in an exploration play.
In March, Avanti acquired a license for 6,000 acres from the Government of Alberta in highly prospective Helium territory at the tipping point of a global supply squeeze. Less than a month later, they moved to acquire another 12,000-acre prospective Helium land package, this time in Montana.
They’re setting themselves up and aiming to become North American Helium superstars … with geopolitical implications …With global demand for Helium set to outpace supply until 2025 at the very least, Canada could end up becoming a global powerhouse, and Avanti could end up being the spark that ignites the flame.
Peak Helium: Are We Already There?
This isn’t “peak Helium” in the same way that analysts talk about “peak oil”. Peak oil suggests the earth is running out of crude and we’ve discovered everything there is to tap.
Peak Helium means we’ve run out of Helium reserves and have been caught napping: We don’t produce enough, and we can’t meet future demand unless we explore for more. It’s not enough to just extract it as a byproduct of natural gas.
We need pure Helium discoveries now. Why? Because there’s no more going to be sold commercially by the US federal Helium reserve. The U.S. Federal Helium Reserve (FHR) in Amarillo, Texas, has–until now–provided some 40% of the world’s supply. After 70 years of supply reserves, it’s running low.
In September this year, the Helium Stewardship Act expires, which means two things: First, the Bureau of Land Management (BLM) will have to auction off the Helium there is in the fed reserve to private operators. Second, BLM will exit the market, removing the current price ceiling.
Its now-7,000-acre Alberta project houses a previously abandoned natural gas well that shows 2.18% Helium and 96% nitrogen in the Cambrian, and 0.3% Helium and up to 98% nitrogen in the Devonian.
Furthermore, offset wells in the area have multiple tests in Cambrian and Devonian intervals with up to 1.79% Helium and 83-93% nitrogen content. Beyond that, drill stem tests (DSTs) in wells both in Avanti’s license area and nearby indicate reservoir-quality rock in the Cambrian and Ordovician zones. This is high-grade Helium potential. Anything above 2% is well above the commercially viable grades ranging from 0.3% to 1%.
Then Avanti has a letter of intent to buy another 12,000-acre play in Montana that’s in close proximity to and on trend with an active drilling area just north of the border in Saskatchewan. Nitrogen-rich Helium tests in Cambrian and Devonian zones show high potential, and seismic (2D and 3D) have already mapped out structures that appear prospective for Helium.
Helium: Beyond the Concept
Initiating coverage on Avanti, Beacon Securities Limited says it expects the company to start drilling this summer, with at least 3 wells in 2021. Beacon also expects Avanti to “consistently” add additional lands to the asset base for many more drilling locations and forecasts:
- Initial production and cash flow starting in Q3/22
- a $15-$16 million capex program in each 2022 and 2023, based
on a 10-well drilling program each year
- average initial production of 35 mcf/d per well
- 60% drilling success
“We note that since the transfer of drilling knowledge from the O&G industry should be seamless, we do not envision undue risks as it pertains to drilling the vertical Helium wells,” Beacon notes. Beacon forecasts $6 million of cash flow in 2020 (for six months) and $40 million after an assumed 5-million-share equity issuance.
It’s all about management, and Avanti (AVN; ARGYF) has proven natural gas success. Now, it’s set up in Alberta where the government has already drilled oil and gas wells, keeping in mind that Helium is usually found at natural gas sites.
It was the Avanti team, led by Chris Bakker, that developed the world-class Encana/Ovintiv’s Montney natural gas production in British Columbia. They famously brought production to 300,000 boe/d.
Now, they’re building a proprietary model to target significant Helium accumulation in Alberta and Montana. And while the details of that model remain an industrial secret, we think the success of Encana shrouds it in confidence.
Multiple Sector Demand Makes Helium the Hottest Gas Around
The global Helium market was worth $10.6 billion in 2019. By 2023, it is projected to close in on $16 billion. The demand is undeniable. It comes from sectors as diverse as healthcare and space exploration to big tech and … well … party balloons, which manage to hoard some 10% of the dwindling supply to the point that birthday parties may have to go without.
We think that demand can do nothing but surge at this point. Big tech isn’t getting any smaller; nor is our hunger for big data, all of which require Helium.
And the semiconductor industry, which also relies on Helium, has an appetite that these days is insatiable and is experiencing its own shortage. It can’t keep pace with demand. A global computer chip shortage is looming …NASA is back in the business of space exploration and will have to look for Helium privately soon enough.
Those looking for the next commodity supercycle should look no further than Helium–trading the hydrogen hype for a critical gas with a clear demand picture and a supply setup that’s running on empty.
That makes Beacon’s prediction that Avanti’s wells “should payout in only two to eight months and generate an IRR of 122-635%” all the timelier. And while helium is facing a shortage, a key component in modern tech, and one of helium’s primary uses, semiconductors, are also running out of supply.
Companies To Watch As Semiconductors Grow Scarce
Google has gotten a lot of praise for its electric driving subsidy Waymo, but few might know that it’s partner in this groundbreaking project is none other than chipmaker Intel Corporation (INTC). Intel and Waymo teamed up way back in 2017, and have worked together to fine tune their technology together ever since. Through their mutual knowledge of hardware and software, the tech giants have made leaps and bounds towards building the car of the future.
At its core, Intel is a chipmaker. And a big one at that. It’s also a leader in the global semiconductor game thanks to its investments in 65nm process, an advanced node used in volume CMOS semiconductor fabrication. Intel has manufactured semiconductors in Ireland since 1990, and has invested around $6 billion there in this time, but is beginning to branch out with new investments in the United States, as well.
Taiwan Semiconductor Manufacturing Co. (TSM) is the world’s largest contract chip manufacturer, meaning it’s tasked with making chips for dozens of fabless tech companies including Apple, Qualcomm, Nvidia and Advanced Micro Devices among others.
The fact that only a handful of chip manufacturers actually own chip-making facilities has made the situation even more dire. Indeed, many leading top semiconductor companies are “fabless,” meaning they only design the chips but rely on other companies, known as foundries, to actually make the chips. The shift to outsourcing has been having a big effect on structural changes and related capacity because companies that cut orders in the early days of the pandemic have been forced to go to the back of the line.
Advanced Micro Devices (AMD) is another one of the world’s top chipmaker and semiconductor producers. While it’s primarily known as a gaming company, AMD, along with Nvidia (NVDA), are present in most modern computers, whether it’s a Dell, Lenovo, Razer or even an Apple, at least one component in that computer will likely be built and manufactured by either AMD or NVDA.
They’re not just present in home computers, either. AMD, for its part, is building CPUs to be used in massive data centers, the kind propping up Microsoft’s Azure cloud-based workstations and desktops. And its GPUs are providing the speed, security, and scalability to keep these data centers performing at the level needed to push modern tech into the future.
Nvidia, as AMD’s biggest competitor, is also pushing new tech into the future. In fact, it’s even setting new records with the introduction of its A30 and A10 enterprise server GPUs. Thanks to its innovation and dedication to its clients, Nvidia is present within the highest levels of tech in just about every industry imaginable.
Maxar Technologies (MAXR, TSX:MAXR) isn’t a semiconductor company, but it is a particularly interesting play positioned right in the middle of a number of the most exciting industries exploding this year. While the space firm specializes in satellite and communication technologies, it is also a manufacturer of the infrastructure required for in-orbit satellite services, Earth observation and more.
Maxar’s subsidiary, SSL, a designer and manufacturer of satellites used by government and commercial enterprises, has pioneered research in electric propulsion systems, lithium-ion power systems and the use of advanced composites on commercial satellites. These innovations are key because they allow satellites to spend more time in orbit, reducing costs and increasing efficiency.