Last month, the Helium One (LSE: HE1) share price cratered after the company published what can only be described as a devastating update.
The firm announced it had failed to discover any meaningful amounts of helium at its flagship Rukwa project. While the company’s still looking, it could have done with an early win. Investors now face the progress of a long, drawn-out exploration programme.
The early failure also raises the prospect that the company will run out of money. Helium One has around £10m of cash to keep drilling. Unfortunately, this cash is unlikely to last long.
Further, the group has no room for manoeuvre. Additional delays, or a higher than expected drilling bill, could scupper its plans.
That said, while the company was unable to identify any meaningful amount of helium at its first prospect, helium was present. This suggests there’s a chance the enterprise could encounter a significant resource at its next well. And if it does, the outlook for the Helium One share price could improve substantially.
Helium One share price potential
Helium gas is in short supply around the world. Everything from magnetic resonance imaging (MRI) machines, to semiconductor manufacturing and car airbags, use the element.
As supply has failed to catch up to demand in recent years, helium gas prices have increased. Rising prices haven’t disturbed demand, and a shortage is growing. In 2020, some operations were forced to shut down as helium shortages persisted.
This backdrop is the reason why I wouldn’t give up on the Helium One share price, if I already owned it. However, I never acquired the stock because I thought it was just too risky.
Risk versus reward
The problem with investing in early-stage exploration companies is the fact that they’re incredibly challenging to value. Not only is it impossible to establish how much the resource could potentially be worth, as it hasn’t yet been found. But it’s also impossible to establish whether or not explorers will ever discover the resource.
Therefore, it’s challenging for me to place a value on the Helium One share price. This means it’s almost impossible for me to work out if the stock can ever recover to its all-time high of around 28p, reached at the beginning of August.
There’s just too much uncertainty surrounding the outlook for the company for me to try and place a value on the business. With that being the case, I’d not buy the stock for my portfolio. I think the risks of investing outweigh the potential rewards.
Still, some investors may be comfortable with the level of risk involved here. Indeed, considering the fundamentals of the helium industry, Helium One’s prospects could dramatically improve if the company does discover some of this valuable gas.
And if it does discover some of the gas, I think the stock could recover from recent losses. But this is far from guaranteed. Even in the best-case scenario, it could be a long time before the shares regain their lofty highs.
