Vancouver, BC-based resource company
Desert Mountain Energy Corp. (
TSX-V: DME,
OTCQX: DMEHF,
Forum) turned heads among investors in September on news that its team had finished testing its Well Number 4, and those results show that the company was successful in discovering
another new helium field across 14 zones in Arizona.
Helium plays a major role in much of the tech we use in our daily lives and this news is sure to provide a boost for business.
In this exclusive video podcast, Stockhouse Media’s Dave Jackson was joined by company President Don Mosher to get company shareholders and investors completely up-to-date with all things Desert Mountain Energy Corp.
(Click image to play video)
TRANSCRIPT BELOW:
SH: To start off with, let’s get our audience up to speed on Desert Mountain Energy. Can you tell us a little bit about yourself and the history of the company?
DM: I joined the company in the middle of August, 2020. At that point in time the stock was trading at about 65 cents. We had drilled and set production casing in our first two Wells, drilled in the Holbrook Basin in Northeastern Arizona. Once we completed a management change, we actually replaced the CEO, the chairman, Rob Rohlfing came on as Executive Chairman and CEO. I took over the president's role. Rob has incredible technical knowledge and understanding of geology and he put the project together. It took him 20 years to come up with the modeling concepts and Wells 1 and 2 were really the first two wildcats testing out his geological theories and his theories were based on an old producer called Pinta Dome that produced in 63 to 75 with unheard of grades of helium running 6% to 12% in a nitrogen environment. Basically all helium comes out of natural gas fields at 0.3 to 0.75 percent, 1% is a bonanza grade in the helium industry.
I came on as President to deal with public markets and raise money and the management group became Rob and Don at that point in time. At the end of August, we sampled the two Wells. The one Well was over 4%, the other Well was over 7%. Both Wells were very high in nitrogen. The one was 90%, the other was 78%. Then some background gases. The market reacted dramatically on the upside. It went to a $1.90. I got a call from a gentleman in London, offered me $9 million. We negotiated a $1.60 unit financing with a two-year $2 warrant, but I also imposed a force trigger mechanism on it. So, if the stock traded north of $3.50 cents for 10 consecutive days. I called the warrants, which I did, and I brought in another $16.4 million. So that financing put our treasury at over $29 million at the end of March.
The stock traded along in those levels from September all the way through until March, we did a couple of interviews. Stock ran up to $4.50, which was what forced the warrants but we had no news along the way. We did Well number 3, we did set production casing. The city of Flagstaff had concerns about us contaminating their aquifer. A local judge did grant a temporary restraining order and that Well is still in the courts. We haven't sampled it yet. So, I can't claim I've got a successful Well in a successful field.
SH: Let's discuss the recent results from Well Number 4. Can you give us an overview of this drill program from the project?
DM: This Well was incredibly difficult for us. The other Wells that we drilled were like 10-day Wells. They cost us about USD$450,000 all the way to setting production casing and sampling. We started drilling Well number 4 in June, expected it would take us 10 days and cost us a similar amount of money. We had an unbelievable Well from hell. It took us four months to complete the Well, sample it and put the results out and it probably cost us a million and a half dollars. However, what it has supplied us with and what we couldn't do previously was give us gas composition on what field we would put into production. We obviously want to go to the simplest, quickest, most profitable field, the Rohlfing field with Wells 1 and 2 have a lot of noble gases in the background and they're difficult to separate.
Well number 4 was 94%+ nitrogen. It had 0.2% CO2 about 3.5% methane ethane, a little oxygen, and the rest was helium. From a processing standpoint because it's also dry gas. We have no water in this hole at all. So we don't have to put a pumpjack and re-inject water in aquifers and mess with the aquifers. Water is incredibly valuable in the desert. We don't want to encounter it. We'll be able to separate off the nitrogen at the wellhead and we will literally run a line over to our processing facility because our Well is on our own surface rights. We have 40 acres we were building the plant on anyways. We're going to be left with about little less than 6% of the crude gas coming out of the wellhead. At that point, we can separate and collect the methane and ethane and use it for a backup generator.
0.2 CO2 is basically negligible leaving us to deal with the helium and we can refine the helium. We're planning on vertically integrating the company and selling that helium to end users at prices $1,400 to $3,000, depending on end user specifications. So, the margin on this gas becomes over 90% and this field will carry we feel five to six more Wells. So we have an asset here that's worth multiples compared to what we lost in market cap. I'll put it that way to stay within compliant regulations. Figure out the loss in market cap multiplied by whatever number you want and you're going to get what we feel the Well’s worth.
SH: What can you tell us about the water-free production from naturally fractured formations you encountered and how this could lower long-term production costs?
DM: Well, for us, we're simply drilling a vertical Well on a structural high. As we drill down through different formations, we squeezed the formations off with cement and seal them. But at surface we've got a mass spectrometer, so we monitor the gas that's coming out of the ground. We know when we hit a formation that's producing helium nitrogen for example and we marked that formation. We squeeze it off. We continue to drill until we get to the depths we're interested in and Well number 4, the way it will be produced is the bottom zone is 78 feet thick. It's got pressure in excess of 2,300 PSI. So, we’ll perforate that zone and we’ll produce it until you get a decline in pressure to match the next zone in line. So there's 78 feet in the bottom. There's a 15-foot impenetrable formation that compares to a sheet of glass and then there's a 38-foot formation that's about 1,800 PSI. So when we get equalization and that pressure drops in the bottom zone to about 1,800 will perforate the upper zone and we'll now have 115 feet of pay at 1,800 PSI and we'll operate there until we see a decline in pressure again to match up to the next formation in line and we'll do another perforation and then we’ll have production out of three formations and over a 15 to 20 year period, we'll work our way up through 378 feet of payzone.
SH: How did this pocket of helium go untouched all this time?
DM: Well helium was not a very valuable commodity until recently. There was a strategic supply in the US that was run by the Bureau of Land Management, and they were having yearly auctions. About a year and a half ago they exhausted the supply and the price of helium jumped about 130%, but back when Pinta Dome was producing in the seventies, helium was worth $6.50 an MCF crude. There weren't a lot of uses for it back then but as we've moved forward with technology, the traditional uses are still there. You're still using it for welding. You're still using it for deep sea diving. You're still using it for leak detection and you're still using it for lifting gas but now you need it to create an environment to produce fiber optics, liquid hard drives. It's always been used for space launches. They purge the ballistic missiles with it.
Now the space programs are starting to come to life again with Space X and Blue Origin. They are using it for a coolant, MRIs use 30% of all production. They use it to cool the magnets. While at the same time we now have cloud-based technologies run by these big supercomputer sites and they're all cooled with helium. They use it for purging atomic accelerators and there's new applications coming online all the time. Because it's been used for deep sea diving, they're starting use it for medical applications, for delivering drugs into COVID patient's lungs. So there doesn't seem to be any kind of limit to the applications for helium but on the other hand, helium being one of the most abundant atoms in the universe, escape source atmosphere if it's not contained. And as the value of helium's gone up, you're seeing the Western Canadian plays now come to light.
They're all natural gas plays, Holbrook Basin’s unique and though we have a nitrogen environment, we don't have any natural gas. Really what we're looking for is dome like structures composed out of salt and hydrates, very dense rocks. And we've identified five helium trends in the Holbrook Basin running for about a 70-mile distance all the way from Flagstaff, all the way down through Winslow and Snowflake. So, it's 70 miles between Wells 1 and 2 and Well 3 up on Meteor Crater and the Macaulay Field’s about midway between, and we've identified other wildcat Wells that we'll be drilling in the future. So currently we have 85,000 acres, 60% State, 40% on private land and we plan on developing 60 to 70 producing Wells over a five-year period out of what we've got.
SH: The big news – the discovery of another new helium field in Arizona – how significant is this discovery, especially given the state of helium reserves globally right now?
DM: Well, I think from a domestic standpoint in the US, it's critical. The State of Arizona alone has 26 end users. Anywhere from Taiwan Semiconductor to Intel, to Panasonic building MRIs and then over the border in California, you got SpaceX and over the border in New Mexico, you have a Blue Origin. The big difficulty with helium is you can't transport it over long distances easily. It'll only stay liquified for 45 days and then it starts to de-liquefy in and it finds a way to escape. So the closer you are to the production Well and the processing facility, it is better off for the end user. You can lose up to 15% of your helium on a hot summer day transporting it 1,500 miles. We’re within 400 miles of 26 end users. They will come and pick it up if we process it to end user specifications, we don't even have to deliver it.
SH: Given the looming significant shortages for helium, the price is sure to reflect its value. If you could see into your proverbial crystal ball, where do you see the price heading in the near-term future? And how does that affect Desert Mountain Energy?
DM: I think the biggest deciding factor on that question is going to be what happens with traditional natural gas production. So we've actually seen a deficit of about three BCF a year in 2021. There was a plant in Algeria shut down. There was a BLM processing facility and there was another facility in the US that shut down and created that deficit. But in addition to that, if you take a look at natural gas production from traditional fields from 2015 to 2019, the production dropped from 9.3 BCF down to 7.7 BCF and you can see it in the production of helium in the chart. The reason for it was the production of natural gas out of shales went from 15.8 BCF to 27.7 BCF. So it depressed the price of natural gas and it's prevented a lot of development in traditional fields. There's no helium coming out of the shales.
It all comes out of their traditional fields. If you see natural gas go to $5 or $6, you're going to see more helium production but for us, we're a primary helium producer. We don't care what happens to natural gas prices and even if helium did correct down to $200 an MCF, our margins are still going to be 80%, 85%. At current prices is 90% to 95% and if the deficit continues to rise in the near term, you could see unknown prices on helium. I don't know where they'll go because the people that are using it can afford to pay for it. They just have to have it.
SH: What’s the long-term strategy for the company moving throughout 2021 and beyond, and what should retail, and institutional investors be looking out for?
DM: We're currently in the field doing work that we're not going to be telling the market about until we've completed it. We are currently sourcing used helium processing facilities because the McCauley Field’s composition allows us to buy a very simple use plant. It's probably going to save us $68 million off our original estimated capex. We will be drilling three more Wells in the Macaulay Field that will go into production, we hope at the end of the Q1 2022 or at least into April in 2022 and we will be drilling a wildcat Well early in the new year to hopefully discover a new field. It will be a company going from exploration to now development to by Q2 production and positive cashflow.
SH: Can you tell our audience a little bit about your corporate management and board teams, along with the experience and innovative ideas they bring to the resource space?
DM: Well, it all orbits around Robert Rohlfing. I mean, Rob conceived of this, Rob discovered the Wells. Rob sat on the Wells and directed the drilling of the Wells. Rob conceived the plan moving forward into production and Rob is building the team currently. He brought me on, we kind of met by accident. I was buying the stock and he introduced himself to me when he heard about it and invited me on the team. But since then, he has brought on the Board when I came on, he also brought on his daughter Jenaya Rohlfing, who's a senior VP for Conoco Phillips and headed up all their drilling in Alaska. Currently relocated to Texas and still working for Conoco Phillips. He brought on Dr. Kelli Ward. She specializes in children's medicine in Arizona and she's the head of the Arizona Republican party. So we get very good political connections with the doctor.
We just recently brought on Jessica Davey as VP of Land, but she also joined our Board. We kind of stole her away from Sproule Calgary. When we started drilling Well number 4, Jenaya Rolfing introduced us to Eric Witt who had just been working for Marathon and she trained them to drill for Conoco prior to that. So, he is now our drilling Operations Manager and then recently we brought on James Hayes last week actually, he's our VP of Engineering and he will help Rob design and build the processing plants. Right now they're both reviewing engineering specifications as to which of four facilities or five facilities that we may want to buy, which may meet our conditions for producing out of the Macaulay Field. We also brought on Ched Wetz as a VP of Risk Management. He came out of the hospital industry, and it lowers our insurance costs and Jim Cronoble came on the Board with me but he's also our VP of Exploration. He's a PhD in geology, teaches at the University of Oklahoma and has worked for Rob with Rob and known Rob for probably 20 years. So we've put together a pretty good team that we're going to continue to add to.
SH: Finally, Don, if there’s anything I’ve overlooked please feel free to elaborate.
DM: I really don't see anything other than the fact that we do have just under $26 million in the treasury. We think that the processing facility will cost us between four and a half and six and a half million dollars. Even if we drill another six Wells and they cost us a half million dollars a piece, that is still only going to chew up another 3 million of that. So we think we can comfortably get to production and positive cashflow without having to further dilute the company by doing any more issuance.
For more information, visit
desertmountainenergy.com.
FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.