Penny stocks are high-risk, high-reward investments. Buying shares in companies with market capitalisations below £100m demands a tolerance for volatility, but well-chosen stocks can deliver market-beating returns.
The proof of the pudding is in the eating for shareholders in Hummingbird Resources (LSE:HUM), a gold production, development, and exploration business. The share price has more than doubled this year, and its rapid growth shows few signs of slowing.
However, long-term investors are still waiting for a positive return. Over five years, the share price is down 54%. So, is this penny stock a bargain buy for me at today’s price of 14.68p per share? Let’s explore.
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A golden opportunity?
Hummingbird’s operations are located in West Africa. Its two flagship gold projects are the Yanfolila mine in Mali and the Kouroussa mine in Guinea.
Yanfolila is already operational and the company expects total gold production will more than double after Kouroussa commences its first gold pour by the end of Q2. The business also has a controlling interest in the Dugbe Gold Project in Liberia.
The rising gold price is a key tailwind for the firm. Spurred by the global banking crisis that has claimed Silicon Valley Bank and Credit Suisse among its victims, investors have flocked to the precious metal in search of safety.
And growing demand isn’t confined to retail buyers or institutional players. Central banks continue to purchase huge quantities to boost their gold reserves. In that context, I think there’s a good chance the yellow metal could hit an all-time high this year.
Encouraging progress
However, the climbing gold price alone can’t explain a three-digit percentage gain in the Hummingbird share price. For me, the core factors behind the astronomic growth can be found in the company’s recent trading update.
Confirmation that construction work at Kouroussa is nearing completion is a positive development. No doubt shareholders’ hopes are buoyed by the prospect of production doubling, reduced costs, and the risk diversification that the firm’s Guinean operations could offer.
Yanfolila’s numbers look promising too. Gold poured in during Q1 2023, soaring to 27,262 ounces, up from 15,548 ounces in Q1 2022. What’s more, EBITDA of $17.5m represents a 59% improvement quarter on quarter.
So, is this penny stock a ‘no-brainer’ buy for my portfolio?
Risks
I wouldn’t go quite that far. The group’s net debt of $111m is a little high for my liking and the company is a small operator in an industry where economies of scale matter. In addition, there are political risks to contend with in the jurisdictions where Hummingbird has a presence.
Plus, I’m wary that I could be paying too much by buying shares today. After all, the share price has doubled in just a few months. Recent investors could take this opportunity to lock in profits, which might limit further growth.
Should I buy this stock?
Despite the risks, I believe there are good reasons to be bullish on Hummingbird shares following years of disappointing results from its Yanfolila mine.
The company’s performance in Mali shows signs of improvement and if all goes to plan with its Kouroussa operations, this could be one of the most exciting penny stocks in the UK market.
If I had some spare cash, I’d enter a small position today.
