Over the past five years, Kodal Minerals (LSE: KOD) has rewarded investors 10-fold. The sort of 900% increase seen in the share price during that period is the stuff of investor dreams. So, might the penny share have further potential gains ahead of it – and should I add it to my portfolio?
Promising moves towards commercial production
I do see some reasons to be optimistic about the outlook for the company.
In an update to the stock market today (4 April), Kodal provided some encouraging news on developments at its flagship lithium mining project in west Africa.
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It said the mine (owned by a company in which Kodal has a 49% interest) is “ramping up towards commercial production”, having produced over 11,000 tonnes of spodumene concentrate to date. The plan is for that to be transported to a port in a neighbouring country and shipped to China, where the lithium can be extracted from it.
For now, the company is stockpiling spodumene concentrate in anticipation of future sales.
High-risk operating environment
So far, so good. But the process also demonstrates some of the risks I see as inherent in Kodal’s business model.
For now, its investment case is heavily focussed on one flagship project, meaning there is a lack of diversification both geographically and also in terms of product. For example, if lithium prices crash, the economics of the project would change dramatically.
But even if lithium prices are strong, there are risks.
The company in which Kodal has a stake in turn owns a local company in west Africa, in which the Malian government has taken a stake. The subsidiary “experienced delays beyond its control in relation to the finalisation of the mining licence transfer” to the local subsidiary. The company has accordingly requested a delay in making a payment due to the Malian government although for now has not received a response.
Clearly, the politics of running a mine in west Africa are not straightforward. Even once the spodumene concentrate is pulled out of the ground, however, it needs not only to be processed but also shipped over an international border from landlocked Mali and then loaded onto ships for a long voyage to China.
Whether it is geopolitical risk, the risk of arbitrary taxation in one of several countries or logistical issues, there is a lot that could go wrong here even if the mining does ramp up commercially as Kodal hopes.
Well outside my comfort zone!
None of that in itself is necessarily bad news. Kodal’s flagship project seems to be moving forward in a positive direction. If that continues, it could be excellent news for the penny share’s price.
But the set-up means that Kodal is far outside my risk tolerance as an investor. Some penny shares carry elevated risks, although as Kodal has shown that can also mean outsized rewards.
But the combination of risks here puts me off as an investor despite the potential gains if things go well. This is one penny share I will not be adding to my portfolio.
