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Lithium is still a buzzword for investors right now. Due to the wide commercial uses (ie car batteries), lithium related growth stocks are generating a lot of interest. An example of this is Kodal Minerals (LSE:KOD). Trading volumes have increased in recent months, with Kodal’s share price rising 72% in the past three months. This is what is happening.
earnings potential
Kodal is a lithium exploration and development company focused on West Africa. The company’s main project is the development of the Bougouni lithium project in southern Mali. However, it also has interests in gold, with six gold mining-related projects underway at the moment.
Although the lithium one is far from functional, I understand why the share price has been going up in recent months. Feasibility studies have been carried out suggesting a minimum mine life of 8.5 years and a payback period of 0.8 years. Based on a sales price of $1,060 per ton, life-of-mine revenue would exceed $2 billion.
secured financing
This all sounds great, but one of the reasons for the actual rise in shares was secured funding. These projects are expensive to run before revenue is earned. However, in January, the company secured $117.5 million in financing from Hainan Mining in China. Some $65 million of this will be used for the Bougouni lithium project, meaning it is now fully funded.
This is a huge benefit for both the company and the shareholders already on board. The risk of not being able to extract the potential of the mine due to cash flow problems has been eliminated. So now it’s a matter of seeing if the mine can be successfully optimized to first mine the lithium and then hit those revenue targets.
Risks worth mentioning
One point worth considering is the variability in the project’s cost of capital. It has already risen due to higher raw material and transportation costs. If global inflation does not fall as fast as we expect, the cost could continue to spiral. This would cause the company to readjust expectations regarding the amount of financing needed.
Another risk is simply that an unknown problem will arise when more studies are done on the project. This could hinder the ability to extract the lithium, or mean that much less volume can actually be removed. Once again, expectations would have to be revised down in this case.
balancing everything
I understand the fuss about Kodal’s stock price. He has funds secured for a potentially large lithium project. Over the past year, the price has risen 28%. However, given the market value, it is still only a small-cap stock with high volatility. On that basis, I am considering investing, but only a small amount, to manage my risk, but also for the possibility of something big happening here in the next year.
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