Investing in penny stocks can be risky. Occasionally pre-revenue and often lacking the financial firepower of bigger companies, they don’t appeal to everyone. But one recently caught my eye after I noticed that the three brokers covering the stock believe it to be 126%, 207%, and 287% undervalued, respectively.
Want to find out more? Here goes.
Who?
Kodal Minerals (LSE:KOD) is an exploration and development company with operations in West Africa. At the moment, its only source of revenue is from the sale of spodumene concentrate (high-purity lithium), which is a major component in the electric vehicle and grid-scale battery storage industries.
Production has only recent started at its Bougouni mine in Mali. Importantly, it claims the operation is “fully permitted and financed”, which removes some of the risk normally associated with small mining companies.
The group also has a 100% offtake agreement with Hainan Mining. In other words, the Chinese company will buy all of the mine’s output. This is a useful arrangement, which helps avoid the need to repeatedly find new customers.
Kodal Minerals has now sent three shipments to China generating revenue of $89m. And prices appear to be going in the right direction. The company received the equivalent of $1,148 per tonne for its first shipment. For the second, it was $1,681.
A crucial element
This isn’t surprising given lithium’s critical importance in the move to net zero. According to Fortune Business Insights, the global market is currently worth $16.5bn. This is forecast to rise to $78.5bn by 2034, implying an annual growth rate of 18.9%.
With production underway, a guaranteed buyer, and rising prices in a growing market, everything appears to be going well for Kodal Minerals. On this basis, surely I want to take a stake?
Actually, no.
On the plus side, I can see why the three brokers see it as undervalued. If everything goes to plan, the potential is huge. They have 12-month price targets of 1.2p, 0.95p, and 0.7p, respectively. The group’s current (20 June) share price is approximately 0.34p.
However, an investment would be too risky for me.
Not in control
A look at the legal structure of the group shows that Kodal Mining UK (KMUK) is the owner and operator of the mine. Meanwhile, Kodal Minerals (the London-listed company) only has a 49% stake in KMUK. The remaining 51% is owned by Hainan Mining. In effect, the Chinese company has control of the project by virtue of its majority stake.
In turn, KMUK has a 65% interest in Bougouni. The government of Mali holds the remaining 35%. In other words, the listed business has an effective interest of 31.9% (49% x 65%) in the mine.
Because it’s not classified as a subsidiary, the assets and liabilities associated with the project don’t appear on Kodal Mineral’s balance sheet. There’s nothing wrong with this arrangement. But in my opinion, it’s a potential risk.
Geography is also an issue for me. As well as being one of the most politically unstable countries in Africa, Mali is landlocked. All exports to China have to be routed through Cote d’Ivoire, which could be operationally complex.
I acknowledge the potential – Hainan claims (unconfirmed) that there’s another 15.5m tonnes of reserves at the mine. But on balance, I think there are better opportunities to consider elsewhere.
Should you invest £5,000 in Kodal Minerals Plc right now?
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James Beard does not own shares in any of the companies mentioned.
