After a 627% surge, is the Helium One share price primed for another rally?

Jon Smith explains why the Helium One share price has rallied in recent months and why more positive test results could provide a bigger kick.

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Over the past three months, the Helium One (LSE:HE1) share price has jumped 627%. Even though the market movements have been slightly calmer in the past month (up 7%), some are thinking that this consolidation phase will lead to another surge. Given that the stock is still down 74% over the past year, there’s plenty of room to run. But is this really viable?

The past few months

I last wrote about the company back in February. This was when the stock was blitzing higher, fuelled by retail investors piling in like there was no tomorrow.

The main driver behind the rally came from news from the Itumbula West-1 well in the Rukwa Rift Basin in Tanzania. Helium One focuses on the exploration and production of helium resources, so any news regarding an ongoing project can be market-moving.

In this case, testing revealed high helium concentrations of up to 4.7% at the well. If correct, it would make it one of the largest sources of helium globally. More extensive well tests on the same well are now pencilled in for Q3 this year. Yet the positive anticipation of the commercial success of this venture has been enough to send the stock into orbit.

Trying to quantify the opportunity

Buying a stock purely on speculation that a project will be successful isn’t that smart. Sure, I could get lucky. But it’s more gambling than investing. So are there reasons why an investor would see value in the stock right now?

The recent half-year results showed that the firm is in a supportive financial condition. It has $8.7m cash on hand. When I compare this to the $1.4m loss for the half-year, it’s clear that the firm has plenty of money to keep operations running for years to come. This is good, as until helium can be extracted and sold to generate revenue, the business will keep on posting losses.

However, due to the loss-making nature of the firm, it’s hard for me to accurately put a value on here the stock should be trading at. This becomes even harder because I don’t know what the potential profits could be from any wells from Tanzania.

Don’t get me wrong, a helium reserve as large as the one that the tests indicate would be a huge win for investors. If things go well over the next year, I see the share price back at the 52-week highs just above 10p. From the current share price of 1.55p, that’s a big move.

An unreliable rally

As bizarre as it sounds, I do think the stock could continue to rally later this year, but I won’t be investing. The firm does look to be in a strong position, and if more positive test results come back, the stock should jump.

However, I still don’t have a high enough conviction to stack the odds in my favour. There are other great businesses from other sectors that have better visibility on future earnings. Even though my potential reward for buying such shares is more limited, there’s a higher probability of profits.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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