Penny stocks are notoriously volatile. But they compensate for that fact by having the potential to deliver explosive returns for investors. And shareholders of Helium One (LSE:HE1) got to experience this first-hand in the last few weeks.
The helium gas exploration business saw its stock price jump from a near-worthless 0.2p in late January to around 2.1p today. That’s a 950% return in about three weeks! To put that into perspective, a £10,000 investment would now be worth over £100,000!
Needless to say, that’s pretty extraordinary. And opportunistic investors are now eying up the business in the hopeful anticipation of another sudden jump. So, at just over 2p a share, is this a dirt-cheap stock worth buying?
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What’s going on with the share price?
There are two significant developments that have sparked the surge in Helium One’s market capitalisation. The first is the confirmation that its Itumbula West-1 well has a high concentration of helium and hydrogen gas. For an exploration business, that’s terrific news, and it brings it one step closer to reaching production.
Considering the demand for helium and hydrogen on the rise thanks to the energy, aerospace, and healthcare sectors, the company is on track to potentially becoming a world-leading supplier. If this story pans out as management expects, then the penny stock’s recent performance could be just the tip of the iceberg.
The second important bit of news is that Helium One successfully raised £4.7m by issuing new shares to investors. That’s a nice chunk of change, providing the group with the capital needed to continue developing its helium projects throughout Tanzania.
Explosive potential comes with exceptional risk
As I previously highlighted, penny stocks carry a lot of risk. And Helium One is no exception to this rule. With a practically non-existent revenue stream and exploration costs venturing into the millions, the business is burning through cash very quickly. So much so that the bulk of the newly raised funds aren’t likely to last more than a year.
Pairing this with the group’s financials being too weak for any lenders to offer reasonable terms on debt, investors should expect further equity issues in the future. As such, any investment made today comes with a high probability of dilution.
Of course, this may not matter if Helium One is successful in its mission. Unfortunately, even with the latest drilling results, the Itumbula West-1 site may still be economically unviable to tap into. And if the cost of resource extraction ends up exceeding the sales that can be made, this penny stock could quickly end up crashing as it has done numerous times.
With that in mind, investing in Helium One at this stage involves a lot of speculation. There’s the potential for making a fortune with a sizable investment. However, that comes with a significant risk of the share price dropping to near zero once again if the slightest bit of bad news were to emerge.
Personally, I’m not interested in adding that sort of risk to my portfolio.
