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Penny stocks in general are typically higher risk than large-cap peers. However, even within the sphere of penny stocks, there’s another layer of risk depending on the company’s sector. So, when I spotted a mining company with a market cap under £100m and a share price of 0.3p, I was both nervous and excited.
Details to note down
I’m referring to Kodal Minerals (LSE:KOD). Unlike established mining giants that already generate billions in revenue from operating mines, Kodal Minerals is largely a development-stage company. That means it makes money differently from a mature miner. Currently, its value comes mainly from advancing its projects, securing funding, proving resources, and moving closer to commercial production.
When I’m talking about production, I’m mainly talking about lithium. This is a very interesting area of the market. The metal is a key ingredient in lithium-ion batteries, which is used in electric vehicles, energy storage systems, and consumer electronics.
The focus for me is whether or not it can extract value from its sites for the lithium. I’m confident that the demand for the end product will only increase in the coming years.
Waiting for a re-rating
Kodal’s flagship asset is the Bougouni Lithium Project in Mali, West Africa, which is being developed with the aim of becoming a producing lithium mine. In the latest half-year results, the CEO commented:
I am delighted with our achievements at Bougouni over the last six months, as commissioning of the plant nears completion and first export and receipt of first revenues was achieved post Period end.
Once Bougouni gets more fully operational, the company’s business model should shift towards generating revenue quickly.
The share price has rallied 13% over the past year as investors have increasingly recognised the potential value of Kodal’s lithium assets, especially following the CEO’s comments at the end of last year.
This ties into the high-reward part of the equation. The main reason Kodal Minerals could rally significantly over the coming year is that small mining stocks often move ahead of earnings. The biggest re-ratings can happen when a company transitions from being seen purely as an explorer to a fully fledged producer.
If Kodal continues to grow revenue from the mine and demonstrates that Bougouni can produce lithium at competitive costs, the market may start valuing the company more as a legitimate operating miner rather than a speculative project.
Risks to note
Of course, this is a high-risk stock. Kodal remains exposed to lithium price movements, and a prolonged period of weak lithium prices could hurt the economics of the project. Mining in Mali also carries political and operational risks, including regulatory changes and infrastructure challenges.
There’s certainly a lot to take in here, but I think the long-term outlook for the business is positive. There are lots of short-term factors that could cause share price volatility, and that’s true for any penny stock. But I’m looking at allocating a small amount of capital to this, as the potential for growth could be very high. Investors who have a similar risk tolerance may wish to consider it as well.
Should you invest £5,000 in Kodal Minerals Plc right now?
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Jon Smith has no positions in the shares mentioned.
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