Penny stocks are hardly a good choice when market volatility springs back to live, but don’t overlook the shares of Xtract Resources (LSE: XTR) and Jubilee Platinum (LSE: JLP), whose performances read 80% and 90% so far this year, respectively. By comparison, the FTSE 100 is down 8% during the period.
With downward pressure on the dollar pushing up the prices of precious metals, my attention has been caught by these two tiny companies, which carry obvious operational and financing risks — yet the shares of both could easily outperform the main index, based on certain assumptions.
I Do Not Dislike Jubilee
Why am I tempted to buy its shares now? Well, they trade at 3.2p, which is below the price of the placing that was announced earlier this month. This is one element I like.
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The bears argue that it might be too early to invest in Jubilee, but it’s quite possible that its shares will sky-rocket in this environment — dollar down, gold up is an obvious correlation, but there’s more to it.
At a time when risk appetite is unlikely to prevail, Jubilee has convinced me that its business is on the right track: it has managed to receive the backing of its shareholders, and it could even raise debt to finance its producing assets, all of which would be a remarkable achievement for a £30m market-cap miner whose fair net asset value is virtually impossible to determine at present.
Funding Plan
In early August it said that it had “secured the funding shortfall from the offered debt funding for the simultaneous execution of its two Platinum Surface Projects,” by placing of 71m ordinary shares at a price of 3.4p. That valuation implies a 3.3% premium to the 30-day weighted average price of Jubilee as at 4 August 2015.
Moreover, it is in talks talk with “a major financial institution to secure the debt element” of the project financing that is required to bring its two platinum projects into operation. “The size of the ZAR based debt funding equates to £12.9m before financing costs,” it said, adding that the budget is £13.71m, with working capital estimates at £3.8m.
These are big numbers for Platinum, but good progress has been made since early January.
So, why not?
Execution risk and the price of platinum — which was up almost 10% at one point in August — are elements that bring uncertainly, of course, but then you should invest in plain-vanilla bonds offering negative real yields if you are not willing to embrace risk!
I’m More Cautious On Xtract Resources
Gold prices are up 2.5% in August but had risen more than 6% until Monday during the month.
Aside from a top-down approach, which could support the Xtract investment case, not many elements have emerged since the company in the second quarter said that it had identified a significant “concentration of gold on the intersection of two major geological structures at the Salvadori prospect at the Chepica Gold and Copper Mine in Chile.“
That said, it’s currently valued at 0.25p a share, which is a valuation that received the backing of investors in previous funding rounds.
In truth, Xtract stock could be worth anything between 0.25p and 1p, for an implied market cap of between £22m and £90m, but then its future success depends on how quickly it will actually deliver material updates on its pipeline of projects.
Until then, I am happy to hold fire.
