Every once in a while, a niche commodity - usually a relatively rare one - comes along that the world simply can’t get enough of.
Normally, the investment script reads something like this: Word gets out about a looming shortage of a certain commodity; Small-cap natural resource companies quickly “pivot” to said commodity, and the next thing you know a surge of investment interest and commodity bubble quickly follow.
It’s happened with numerous rare earth metals, potash, graphite, cobalt, vanadium, and even marijuana (though not strictly a commodity) …
We think that’s the position of a little-known Canadian stock Avanti Energy Inc. (TSX: AVN.V; US OTC: ARGYF), as it emerges off the acquisition trail with, in our opinion, a world-class team in a market that is primed for growth.
And we believe the best thing about this particular commodity is that it has largely gone under the radar until now.
Helium prices increased before the pandemic, and while Covid has delayed the supply squeeze, we think demand is sure to return as the world begins to recover.
And when prices begin to climb again, we think Avanti Energy is going to be one company to watch.
Why Helium is so important
Helium has the lowest melting point of all the elements (-272.2 °C), which makes it the go-to commodity when it comes to cooling.
Liquid helium is used for cooling everything from magnets in MRI machines and ventilator machines to supercomputers and data centers. About 30% of the world’s helium supply goes into MRI scanners, while another 20% of the world’s helium supply goes into the manufacture of hard disks and semiconductors.
With Big Tech companies such as Google, Facebook, Amazon, and Netflix being heavy users of helium in their massive data centers, we think this segment of the market is likely to be one of the fastest-growing over the next decade or so given the world’s insatiable appetite for data.
Overall, the global helium market was worth approximately $10.6 billion in 2019 but is expected to grow at a compound annual growth rate (CAGR) of 11% and reach approximately $15.73 billion by 2023.
Alarmingly, some scientists warn our helium supplies are growing very tight, something that we think could send prices much higher over the next couple of years.
A world without helium
Helium is the second-lightest element known to man and belongs to the group of the so-called noble gases. Helium also happens to be the second most abundant element in the universe behind only hydrogen.
Our helium comes from two main sources: Primordial, which is part of the original formation of the planet, or from radioactive decay of uranium and thorium in the earth’s crust. Most of our helium is mined in natural gas formations.
Despite its prevalence across the universe, helium is incredibly rare in our atmosphere, with a concentration of just 5.2 ppm. Because of its light weight and the small size of its atom, Helium readily dissipates into space and is incredibly difficult to store.
For decades, the U.S. has been the world’s largest producer, accounting for roughly 40% of supply. Unfortunately, the U.S. Federal Helium Reserve (FHR) in Amarillo, Texas, the world’s single largest source of helium for the past 70 years, is now exhausted after FHR discontinued the sale of crude helium to private industry, with the remaining stockpile earmarked for Federal users only.
Consequently, prices have been increasing and could continue doing so for years. With very few mines being discovered and according to some experts no helium substitute likely to be discovered for decades, we think the supply/demand imbalance is aligning for a helium price boom.
Playing the helium market
With the vast majority of our helium supply coming from natural gas reservoirs, we think the best and easiest way to play the helium boom is to invest in natural gas companies that own the richest deposits of helium, preferably with helium concentrations of >1.5+%.
On the Toronto Stock Exchange, smaller players appear to be positioning themselves in this developing market.
Avanti Energy is focused on the exploration, development, and production of helium across western Canada and the United States.
Back in March, Avanti acquired the license for over 6,000 acres of land highly prospective for helium-containing wells that were originally drilled for oil and natural gas from the government of Alberta. The newly acquired project resides in an area with confirmed reservoir rock and multiple Drill stem tests (DSTs) with analyzed gas.
A previously drilled well on the property returned gas with high helium content (2.18%) and high nitrogen content (96%). The high grade of helium gas of greater than 2% compares favorably to commercially viable grades ranging from 0.3% to 1%. The property fits well with helium tests in multiple nearby wells and the potential for viable helium reservoirs over a larger basement structure.
Avanti President & CEO Rob Gamley says the company plans to continue evaluating and mapping deeper Paleozoic zones in detail since mapping the basement structure is crucial to high grading areas with reservoirs of helium.
Some investors appear to have realized what we think is the significance of the findings and have been bidding up the Avant Energy share price to the tune of 400% in the year-to-date and more than 1,000% over the past 12 months.
Avanti Energy Inc. 52-Week History
Source: Yahoo Finance
But we think the sweetening on this play is the management story. In our view, there is no other helium play with this level of management experience. Some of the key people behind Avanti are the same ones who helped identify, model, and develop the Montney play in British Columbia at Encana (now Ovintiv).
Now, we think they’re ready to do it again…
Avanti’s team, including Genga Nadaraju, Dr. Jim Wood, and Ali Esmail are developing a plan to target helium accumulation that aims to strengthen North America's position on this gas map at a time when a supply squeeze may be looming.
That’s why we think Beacon Securities Limited has just initiated coverage of Avanti on what it calls “an enticing” investment opportunity with a solid team and helium prices that have risen over the past couple of years, all propped up by demand it expects to continue to climb nicely.
Other commodity stocks to watch as a new supercycle looms:
Teck Resources Limited (NYSE:TECK) is one of the global leaders in resource mining, with operations across the world. While its primary mining and mineral development plays focus on coal, copper and zinc, Teck also has a major stake in renewable energy ventures. It’s also a major producer of lesser-known resources like germanium, indium, cadmium, and more.
In a release on Teck’s website, the company explains why this investment is so important: “Flow batteries – such as the zinc-air battery developed by ZincNyx, with its flexible and low-cost scaling, long-term storage properties and the ability to separate the energy storage function from the power generation source – could provide a more efficient alternative for large-scale energy storage.”
Teck Resources fell to just $7 per share in March of last year due to the market chaos sparked by the COVID-19 pandemic. Despite this downturn, however, the company was able to rebound significantly, rising by nearly 200% to its current price of $21.
Turquoise Hill Resources Ltd. (NYSE:TRQ) is key player in Canada’s resource and mineral industry. Like Teck Resources, Turquoise Hill is a major producer of coal and zinc, two resources with distinctly different futures. While headlines are already touting the end of coal, zinc is a mineral that will play a key role in the future of energy for years and years to come.
In addition to its zinc operations, Turquoise Hill is also a significant producer of Uranium. Uranium is a key material in the production of nuclear energy, which many analysts are suggesting could be a major component in the global transition to cleaner energy. While the mineral has not seen significant price action in recent years, there are a number of new projects set to come online across the globe in the medium-term, which could be a boon to Turquoise Hill.
Though 2019 was a particularly rough year for Turquoise Hill, its downturn led to an opportunity for new shareholders to get in on the company at reduced prices. Since dropping from all time highs and settling at a low of just $5, Turquoise Hill has outperformed many of its peers, climbing by nearly 150% in 2020 alone.
Lithium Americas Corp. (NYSE:LAC) is one of North America’s most important and successful pure-play lithium companies. With two world-class lithium projects in Argentina and Nevada, Lithium Americas is well-positioned to ride the wave of growing lithium demand in the years to come. It’s already raised nearly a billion dollars in equity and debt, showing that investors have a ton of interest in the company’s ambitious plans, and it will likely continue its promising growth and expansion for years to come.
It’s not ignoring the growing demand from investors for responsible and sustainable mining, either. In fact, one of its primary goals is to create a positive impact on society and the environment through its projects. This includes cleaner mining tech, strong workplace safety practices, a range of opportunities for employees, and strong relationships with local governments to ensure that not only are its employees being taken care of, but locals as well.
Lithium Americas’ efforts have paid off in the market, as well. While many companies across multiple industries struggled last year, Lithium Americas’ stock soared. In February last year, the company’s stock price was sitting at just $5.26, while today it is at $13.32, representing a more than 100% return for investors who bought in just a year ago.
Magna International (NYSE:MGA) is a fantastic way to get in on the explosive battery market without betting big on one of the new hot stocks tearing up among the millennials right now. The 63-year-old Canadian manufacturing giant provides mobility technology for automakers of all types. From GM and Ford to luxury brands like BMW and Tesla, Magna is a master at striking deals. And it’s clear to see why. The company has the experience and reputation that automakers are looking for.
More than a decade ago, Magna International was already making major moves in the battery market, investing over half a billion dollars in battery production while the market was still in its infancy. At the time, electric vehicles as we know them had barely hit the scene, with Tesla launching its premiere car just two years prior.
Magna’s massive investment has paid if in a big way, however. Since its battery bet, the company has seen its valuation soar by tens of billions of dollars, and it has solidified itself as one of the leaders in the business.
Celestica (NYSE:CLS), like Magna, is a key company in the lithium boom due to is role as one of the top manufacturers of electronics in the Americas. Celestica’s wide range of products includes but is not limited to communications solutions, enterprise and cloud services, aerospace and defense products, renewable energy and enough health technology.
Thanks to its exposure to the renewable energy market, Celestica’s future is tied hand-in-hand with the green energy boom that’s sweeping the world at the moment. It helps build smart and efficient products that integrate the latest in power generation, conversion and management technology to deliver smarter, more efficient grid and off-grid applications for the world’s leading energy equipment manufacturers and developers.
Like the rest of the market, Celestica fell victim to the massive selloff sparked by the global COVID-19 pandemic, seeing its share price fall into the $2 range in March 2020. Since then, however, the stock price has soared by nearly 400% to its current trading price of $8.11. As the world races towards a greener future, however, the upside potential for Celestica could be even higher.
By. Pauline Calfe
**IMPORTANT! BY READING OUR CONTENT YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ
This publication contains forward-looking information which is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ from those projected in the forward-looking statements. Forward looking statements in this publication include that prices for helium will significantly increase and that helium will retain its value in future due to global demand increases and overall shortage of supply; that Avanti can fulfill all its obligations in respect of its recently acquired licenses over the Alberta property; that Avanti’s licenses in respect of the Alberta property can achieve drilling and mining success for helium; that historical geological information and estimations will prove to be accurate or at least very indicative of helium; that high helium content targets exist; and that Avanti will be able to carry out its business plans, including timing for drilling and exploration. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. Risks that could change or prevent these statements from coming to fruition include that demand for helium is not as great as expected; the Company may not fulfill requirements under its Alberta licenses for various reasons; Avanti may not be able to finance its intended drilling programs to explore for helium or may otherwise not raise sufficient funds to carry out its plans; geological interpretations and technological results based on current data may change with more detailed information or testing; and despite promise, there may be no commercially viable helium or other resources on Avanti’s property. The forward-looking information contained herein is given as of the date hereof and we assume no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.
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