Royal Helium Ltd. (RHC:TSX.V; RHCCF:OTCQB) signed an offtake agreement with an undisclosed North American space launch company to supply it with helium-containing gas, reported Eight Capital analyst Phil Skolnick in an August 29, 2022 research note.
"This derisking milestone is the news that we and the market have been waiting for as it verifies the fact that Royal Helium's assets are commercial and the company is expected to realize near-term cash flows," wrote Skolnick.
This difference in current price and target price suggests a significant potential return for investors in this Canadian energy company.
Also of note, Royal Helium is currently trading at around CA$0.44, and Eight Capital's price target on it is much higher, at CA$1.85 per share. This difference suggests a significant potential return for investors in this Canadian energy company.
In his report, Skolnick discussed the terms of the offtake agreement.
Royal Helium is expected to sell 50% of grade A helium volumes, amounting to about 7,500,000 cubic feet per day of raw gas containing 43% helium. The supply will come from its Steveville wellhead, and thus, this agreement highlights the strategic importance of Royal Helium's acquisition of Imperial Helium, the previous owner of the Steveville, earlier this year.
In addition, Skolnick wrote, "the near-term focus of the higher deliverability Steveville asset gives Royal Helium more flexibility in building a portfolio of offtake agreements, which reduces risk due to the higher mix of buyers and allows the company to optimize pricing and contract tenure."
As for the sales price agreed to, it was not disclosed in the agreement, but Skolnick purported Royal Helium should be able to garner a realized helium price of US$300–500 per thousand cubic feet (US$300–500/Mcf). This means revenue generated from this agreement alone would be in the CA$4.7–7.8 million per year (CA$4.7–7.8M/year) range and result in CA$1.9–$4.8M/year of cash flow.
"With this report, we expect to see the volumes of recoverable helium in place and the pricing that Royal Helium is expected to receive," wrote Skolnick.
Skolnick pointed out that the anticipated contract price of US$300–500/Mcf exceeds Royal Helium's original estimate of CA$250/Mcf.
Regarding the other party to the agreement, Skolnick speculated it could be NASA, SpaceX, or Northrop Grumman Space Systems, as they are North America's three active space launch companies.
Looking forward, Royal Helium needs to finish building the first of two helium processing facilities in Steveville, Alberta. This plant is expected to be ready to deliver sales gas by early 2023. Another catalyst on the horizon is the completion of a current resource report.
"With this report, we expect to see the volumes of recoverable helium in place and the pricing that Royal Helium is expected to receive," wrote Skolnick.
Eight Capital has a Buy rating on Royal Helium.
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