Oak Securities has set a price target for Quantum Helium (QHE ) of 0.064p, more than double the current value of the shares.
Quantum Helium is developing the Sagebrush and Coyote Wash helium projects in Colorado, and is midway through a major testing programme at Sagebrush.
“We value the company on the basis of a RENAV (Risked Exploration Net Asset Value), Oak analyst Peter Hitchens wrote in a lengthy note.
“This valuation is derived through using a DCF (discounted cash flow) methodology to the known fields and discoveries of the company.”
Hitchens noted that Quantum Helium is currently in a strong financial position, following a £5 million raise conducted a couple of months ago.
But what lies ahead?
“We are assuming that the cost of the equipment is US$8-12 million for a plant that can process 2 mmcf/day of gross gas,” the Oak note continues.
“We have assumed that there is a concentration of 2.7% for helium and 40% for the carbon dioxide – giving sales gas capacity of 54 mcf/day for helium and 800 mcf/day for carbon dioxide. We have assumed that the cost of processing is US$20/mcf of helium produced. This is lower than some of its peers due to the use of hydrocarbons to generate in-situ electricity. We are assuming that Quantum will be selling 98% pure helium and not going through the process of producing very pure grade 6 (99.9999%) helium which would require the costly process of liquefaction.”
Quantum Helium’s development work is taking place against a strong helium market, still reeling from recent supply disruptions.
“For our valuation, we have assumed a flat helium and carbon dioxide prices which, we believe, are conservative and below the current prices achieved by the industry,” said Oak.
“In our base case, we have assumed a helium price of US$500/mcf. We still believe that this is conservative price for helium. For example, General Helium recently announced that it had agreed a Letter of Intent to sign a long-term take-or-pay offtake agreement with a NYSE listed cryogenic company for a minimum price of US$550/mcf for compressed helium gas. This is expected to be finalised as soon as the gas compression unit has been installed. This style of agreement (a floor price with upside) is becoming increasingly common in the industry. General Helium also noted that current long term offtake agreements are currently averaging US$600 – US$760/mcf.”
There is still some risk, of course.
“For the RENAV, we have assumed that the chance of success for the 52.5% for Sagebrush which is based on a geological chance of success of 75% and probability of commerciality of 70%,” continues the Oak note.
“We believe that a successful test will start to increase the chances of success. We have also included the potential upside that could be available if the 3U resource level proved to be possible. This requires a high porosity, which is predicted by analogous wells in the area. For the exploration we have assumed that there is a 25% chance of success. As exploration wells are drilled then this would change. We believe that this is conservative given the discoveries that have been made in the region but decided to err on the side of caution. We have excluded any potential of further helium being found in the Lower Leadville formation but this could change once the current DST is completed.”
View from Vox
The Oak note underlies just how prospective the Quantum Helium ground is, and how much upside there really is on offer. It’s a good time to be in helium, and a good time to be testing wells that could go into production in fairly short order. There’s also the added benefit of the recently established oil production at Sagebrush. Newsflow should be fairly plentiful over the coming months.