The year is barely two months old. Yet already, some shares have put in incredible performances. For example, one penny stock on the London market has surged 55% since the beginning of 2023. I see a potential catalyst for further share price growth – so ought I to buy now?
Lithium shares
The company in question is Kodal Minerals (LSE: KOD).
Its recent performance has been strong and, over the past year, the penny stock has surged 49%. But looking back further, the share price has fallen 80% since Kodal listed in 2013.
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There have been surges before, too. For example, in late 2016 and early 2017, the shares leapt to a level higher than they are today, before falling back. Clearly this is a volatile share.
Right now, though, there is high demand for lithium. That has driven investor interest in renewable energy shares like Kodal. It is not just benefitting from generally growing interest in lithium, though. The price rise over the past couple of months has a specific root cause.
Last month, the company announced a funding package that could help it start production at its flagship Bougouni project in West Africa as well as expand other exploration and development activity.
But Kodal still has no revenues and the long-term commercial viability of Bougouni remains to be proven. Often when a company raises cash, diluting shareholders, the share price falls in response. So why has this penny stock leapt?
Chinese stake
I think the answer is partly that the funding is a sign of confidence in the company’s viability by the strategic investor concerned, Hainan Mining.
On top of that, I see the possibility of a longer-term takeover bid at a higher price than today. Lithium is in short supply and producers are trying to stake a claim on what they can. We have already seen Chinese lithium producers take over London-listed lithium miners, as happened with Bacanora Lithium.
Hainan might be happy to be a partner in the Bougouni project with Kodal. But if things go well, it could decide that it is easier to buy Kodal out and have full control.
For the shares it bought last month, Hainan paid a 100% premium to the undisturbed recent share price average before the announcement. With a market capitalisation of around £2bn, the Chinese firm dwarfs Kodal with its £70m capitalisation.
Should I buy this penny stock?
As a long-term investor, though, I aim to buy shares in what I think are great businesses.
I do not buy shares just because I think they may be subject to a future takeover bid. For now, in any case, Hainan has made no indication of wanting to increase its Kodal stake in future. It may never do so.
The loss-making Kodal has destroyed a lot of shareholder value in the past decade. It continues to have no revenue and its fortunes are highly tied to one project in a politically volatile area. Its risk profile is more important to me than the potential share price upside, so I shall not be investing.
