For a while now, I’ve been looking to invest in the lithium sector, which has a number of penny stocks to choose from.
With the transition to electric vehicles, it’s clear to me that demand for the primary metal used to produce the batteries will grow significantly over the next decade.
The future
According to Global Markets Insights, the lithium-ion battery market was worth $53bn in 2022. This is forecast to grow to $254bn by 2032. If correct, that’s a compound annual growth rate of 17.1%.
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To put this in context, if £1,000 invested today grew at this rate, it would be worth £4,848 in 10 years’ time.
Such high growth rates have been achieved by some penny stocks. That’s why investors spend a lot of time looking at these shares hoping to find the ‘next big thing’.
But there’s a high degree of risk associated with these companies. Many are in their infancy and loss-making, just like the two below that I recently came across.
Option 1
Kodal Minerals (LSE:KOD) has identified large lithium deposits in West Africa.
The company is negotiating a $100m funding package from Hainan, a Chinese company looking to develop a lithium processing plant.
If successful, Kodal will have sufficient funds to start production. But I’m concerned because the deal was supposed to complete before the end of April 2023. The new deadline is August 2023.
Another worry is that at the end of 2022, the government of Mali decided to suspend the allocation of new mining licences. Although this is not expected to affect Kodal, it does highlight how unstable operating in some regions can be.
Option 2
Premier African Minerals (LSE:PREM) is much further advanced with its mining activities in Zimbabwe. Although unconfirmed, production was due to start in June 2023.
Problems with an equipment supplier meant the company missed a deadline to start supplying lithium to CANMAX, a Chinese heavy machinery manufacturer. CANMAX paid upfront for the spodumene concentrate (lithium ore) and is now seeking repayment of the full amount plus interest ($34.7m). It may convert the amount owed to equity in Premier African — it already owns 11% of the company — or debt.
Premier African now needs to find alternative funding as well as another customer. I see no reason why it can’t do this. But it will take time and further delay the ramping up of production at the mine.
Verdict
To be honest, I don’t want to invest in either of these two stocks. I think they are a long way from achieving sufficient scale to generate the earnings that will justify a far higher valuation.
Regretfully, I should have invested in lithium long before now. I therefore don’t want to lose any more time waiting for these companies to deliver.
Instead, I’d rather invest in an established producer. Rio Tinto has interests in Canada and Serbia but output is still relatively small. In contrast, during the first quarter of 2023, Sociedad Quimica y Minera de Chile derived 73% of its revenue from the mineral.
Alternatively, I could buy an exchange-traded fund that tracks companies in the lithium sector or the price of the metal itself. This removes the problem of having to identify which individuals stocks to buy. Therefore, when I next have some spare cash, that’s what I’m going to consider doing.
