Buying penny stocks is a risky endeavour. Investors can experience considerable volatility in their portfolios when they take stakes in smaller companies due to their lack of liquidity and often unproven business models. Nonetheless, some can offer very high returns.
The story of the Premier African Minerals (LSE:PREM) share price is an excellent example. The tungsten, tantalum, lithium, and nickel miner has delivered 281% share price growth over five years. However, in recent weeks the stock has gone into freefall.
Let’s explore what’s going on and whether this could be a buying opportunity for me.
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A ‘nearly’ penny stock
I describe this company as a ‘nearly’ penny stock. That’s because, although it trades for well under £1, it has a market cap of £139m. This is above the £100m threshold used as the cut-off point for it to be a true penny stock.
But, with a share price of just 0.61p (that’s right, it’s less than a penny!) and a pre-revenue business model, it has all the hallmarks and risk profile of a penny share.
Premier African Minerals is currently developing a strategic metals and minerals portfolio across the African continent. It has interests in projects in Namibia and Ethiopia. But, the jewel in its crown is a lithium and tantalum operation at the Zulu mine in Zimbabwe.
Lithium is an especially useful commodity due to its wide range of industrial applications. It’s an integral metal for portable electronic device batteries. In addition, it’s a key component for electric vehicles (EVs). As the world transitions to net zero, the EV sector is widely expected to experience rapid growth.
Why is the share price crashing?
On 25 May, Premier African Minerals issued an update regarding the Zulu lithium project. Errors made by the plant supplier have resulted in delays in the project’s journey to full operability. This follows previous delays relating to approval from Zimbabwean authorities and the late delivery of an outstanding reagent. Ominously, the firm warns that cash is now “constrained“.
The plant requires various modifications. These include upgraded screening, relocation of the mill, and the addition of cyclones. The company understands that the plant supplier will cover the remedial work costs.
The upshot of these difficulties is that the company will no longer be able to ship its first spodumene delivery to energy materials producer Canmax Technologies Co. Limited. Accordingly, Canmax could elect to cancel the marketing and pre-payment agreement it has with Premier African Minerals. Canmax might require that pre-payment plus interest is settled within 90 days following due notice.
Ultimately, the company may need to seek alternative funding if there are any significant further delays to shipment. The share price has plummeted amid this vicious storm of events.
Should I buy?
I don’t doubt the enormous potential of the lithium mining sector. Premier African Minerals is arguably still in a good position. After all, the Zulu mine is the largest lithium deposit in Zimbabwe, which boasts Africa’s largest reserves of the metal.
However, cash is now a huge concern. Plus, any additional disappointing project updates could send the shares tumbling further. At this stage, the stock looks too risky to me. I won’t be buying today.
