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I've been thinking about what stocks I might want to add to my portfolio next month. A penny stock that has become cheaper is Kodal Minerals (LSE: CODE).
The stock is down about a quarter over the past year, but the five-year share price chart shows a 72% jump.
As far as being a penny, Kodal definitely meets that description! At the current price, you could buy around 322 shares for one pound.
All quiet in 2024
So far, this year has been quiet in terms of news flow on Kodal. The last stock announcement came last year and interim results were published in December.
So why has the penny stock lost 14% of its value so far in 2024?
I think the answer is that investors are still mulling over the business's prospects. This is a common situation for penny stocks in mining companies.
Kodal has some seemingly promising prospects. A cash injection from a larger Chinese miner (Hainan Mining) for a majority stake in its West African flagship project underscores the potential of that prospect alone.
Untested opportunities
But potential is just potential. What I think could help this penny stock rise is converting that potential into cash flows into cash.
That could happen.
Hainan Mining agreed to invest a lot of money ($100 million) in the Mali project (and take a majority stake). He has spent almost $18 million on Kodal stock, becoming a major shareholder.
The Mali project looks attractive and in November Kodal published a new estimate of the project's mineral resources, which was 40% higher than the last such estimate in 2019.
Meanwhile, Kodal has also been moving forward in the development of other projects. The cash from the Hainan deal has given it more funds for that exploratory work.
For now, however, there is no proven business model here. The mines are not in commercial operation. Kodal is not yet generating revenue. Whether it ever does depends on how the projects develop.
This is partly outside Kodal's control as it depends on the viability of recovering minerals and selling them profitably. Kodal's operations are in areas with high political risks. That is a risk for Kodal, as well as many other miners.
I'll pass for now
That risk profile doesn't match what I'm looking for in any stock. I view penny stocks the same as more expensive ones: I look to get what I believe is worth substantially more than what I pay.
That could still happen with Kodal. If their flagship project works out the right way, I think the stock price could go much higher than it is now.
But that may not materialize. There is certainly a lot of potential here, but also a lot of risk.
I prefer to invest in a profitable business with a proven business model. So, at least this March, the penny stock won't be on my stock market shopping list.