At first glance, it has been a blistering couple of months for Kodal Minerals (LSE: KOD). The share price has shot up by 60% since February.
In reality, the gain may have been more modest had I bought in February and sold now.
Like many small companies with share prices in fractions of a penny, there can be a difference between a share price chart and what happens in practice. That is partly due to what is known as spread. That is the difference between selling and buying prices (think of this in simple terms as a form of stockbroking commission). When a share sells for less than a halfpenny – like Kodal – that can make a meaningful difference.
Even so, the Kodal share price has clearly had a strong run. As a long-term investor though, my focus is on years not weeks. There too Kodal has done well, nearly tripling in the past five years.
The share seems to have momentum – am I too late to jump aboard?
The potential of potential
Kodal is what is known as a pre-revenue company. That is a way of saying that it makes no sales. So why might investors have pushed up the share price?
Kodal is in the mining business. A lot of small miners make no sales during the development phase of their projects. Then, if a mine moves into commercial production, years of zero revenues can sometimes change quite quickly into significant sales.
In return for helping fund the upfront costs, shareholders are sometimes rewarded with big price jumps once mines are producing. Often though, that does not happen. Shareholders pour money into a hole in the ground that ends up disappointing them.
Kodal has been exciting investors thanks to a lithium project in west Africa. It has attracted substantial investment from a large Chinese miner.
Lithium is in demand for batteries to fuel electric vehicles (EVs) among other things. The project prospects look exciting and I think that helps explain why the Kodal Minerals share price has been performing strongly. For now though, the story here still strikes me as one primarily about potential.
The mine has not yet entered commercial production and it remains to be seen how economically attractive it might be in practice. Last month, the company said the project remained on course to enter production later this year.
Why I’m not buying
To what extent is buying into a business with huge potential but not yet a proven business model investment – and to what extent speculation?
Different people will each have their own answer to that. From my perspective, though, I would not yet be ready to invest in Kodal Minerals, even though I think the share price could keep moving upwards.
If the project starts production this year I think reckon that could be a driver for a higher price.
Kodal does have other projects besides its flagship lithium one, although they too are yet to prove their potential.
For now, the business model is not proven to the extent I would like before investing. A lot rides on a single project. So for now, I will not be buying Kodal shares for my portfolio.
