Helium One (LSE:HE1) is a penny stock that’s been hitting the headlines recently.
On 5 February, it announced that it’s managed to flow helium to the surface of its mine in Tanzania. This helped sustain a bull run in its share price that’s seen it soar by over 700% since 16 January.
In my view, when considering the investment case for an exploration company, there’s little point spending time analysing its financial performance.
It’s yet to earn any revenue and, as of 30 June 2023, had accumulated losses of $31.5m.
I’m generally cautious about investing in pre-revenue companies, but there are other company-specific reasons why I don’t want to buy a stake in Helium One.
Bursting the bubble
Firstly, the company has repeatedly had to raise money.
In 2023, it raised $15.6m on two separate occasions. On 7 February 2024, it secured a further $6m. But the new shares were issued at a huge discount to the share price at the time — 10%, 72% and 30%, respectively.
Also, small private investors were excluded from these transactions. The company favoured placing the shares with “long-term supportive investors“, city institutions and high-net-worth individuals.
The shareholdings of those not participating were diluted — the company now has 4.5 times more shares in issue than it did at 30 June 2023.
I’m sure further dilution is likely.
Also, all its operations are concentrated in one country. Tanzania is a multi-party democracy and has a long history of peace and stability. But the UK foreign office says “corruption and bribery are widespread“.
Although probably unlikely in Tanzania, it’s been known for foreign-owned assets to be nationalised by African governments.
And currencies on the continent can fluctuate wildly.
Price instability
Then there’s the fact that Helium One’s share price is very volatile.
Although it was the most bought on the Hargreaves Lansdown platform during the week ended 9 February, when it accounted for 5.06% of all deals, it was also the most sold.
This suggests to me that many investors are looking to make a quick return (trading) rather than holding the stock for the long term (investing).
Against this backdrop, the share price is likely to seesaw for the foreseeable future.
Next, I was surprised to learn that the global market for helium isn’t that big.
According to the company, the market’s worth ‘only’ $7bn a year. For comparison, the natural gas market is currently valued at $1trn annually.
However, demand for helium is currently outstripping supply, which is forcing prices higher. Future growth is expected to be driven by the cryogenics and welding industries.
A gut feeling
Finally, there doesn’t appear to be much independent research available.
Indeed, the ‘Analyst Research’ section on the company’s own website last published an article in September 2021.
It feels as though any investment I’d make would be based on a ‘hunch’, rather than a thorough analysis of the facts.
Of course, I might regret my decision not to invest in Helium One. In a few years’ time, there could be huge volumes of gas flowing from the mine, and the company could be hugely profitable.
But at the moment, its stock is too risky for me. If I was going to invest in the sector, I’d choose a company that’s moved past the exploration stage and is generating cash from the sale of gas.
