With a share price of lower than £1 and a market cap beneath £100m, Helium One World (LSE:HE1) meets the definition of a penny inventory. A lot of these shares — and the Tanzanian gasoline explorer is an effective instance — will be excessive threat. A low inventory market valuation is commonly an indication of an organization in its infancy. Sometimes, they’re loss-making and/or pre-revenue.

However Helium One has found gasoline and is now within the means of making use of for a mining licence.

It’s efficiently flowed helium at a focus of 5.5%. For comparability, the world’s largest discovery was 13.8%. However something over 0.3% is taken into account to be commercially viable.

Helium is the earth’s coldest aspect, which makes it very best for medical purposes. NASA’s believed to be the world’s largest single purchaser because it’s important for area exploration.

And regardless of being the second-most considerable gasoline within the universe, helium is scarce on earth. This makes it 100 occasions extra precious than pure gasoline.

The following steps

If Helium One’s in a position to efficiently set up manufacturing in Tanzania, I’m assured that the corporate can be commercially viable. There’s sturdy demand for helium and a finite provide. Due to this fact, at first sight, the prospect of shopping for the penny share appeals to me.

Simply think about, if an investor put £20,000 (the annual allowance of a Shares and Shares ISA) into the inventory in the present day and the share price rose to (say) 50p — they’d be a millionaire!

For this to occur, the corporate’s market cap must improve to £2.8bn. This may convey it near turning into a member of the FTSE 100. There are many different massive mining corporations round so this might occur.

And a take a look at the corporate’s inventory market valuation suggests it might be following the trail predicted by the Lassonde Curve (see beneath), which charts the everyday life cycle of a mining inventory.

After an preliminary interval of hype, adopted by a discovery of steel or gasoline, a miner’s valuation typically hits a low level, often known as the ‘orphan period’. I feel that is the place Helium One is presently.

However as soon as a path to commercialisation is established, the Lassonde Curve predicts that its market cap ought to then begin to decide up.

Nonetheless, there are numerous obstacles that should be overcome earlier than this turns into a sensible prospect. The largest of which is the necessity to elevate plenty of cash. And this implies dilution for current shareholders, except they take part in any fund elevating.

On itemizing, the corporate had 139m shares in problem. It now has 5.9bn in circulation. It just lately needed to problem 15.7m to pay a key provider. In my view, this can be a bit like providing an vitality provider a share of your own home in return for waiving an electrical energy invoice.

What does this imply?

Going again to my instance of a £20,000 funding, let’s say the corporate has to lift £250m (roughly 5 occasions its present market cap) to start out producing income.

The investor’s possession of the corporate would then be diluted by over 80%. This wouldn’t be an issue if the worth of the corporate elevated by the same quantity. However that’s unlikely as a result of every spherical of fund elevating is more likely to happen at a reduction to the prevailing share price.

That’s why I don’t need to spend money on Helium One.