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The year is barely two months old. However, some stocks have already had incredible performances. For example, a penny stock in the London market is up 55% since the start of 2023. I see a potential catalyst for further growth in the stock price, so should I buy now?
lithium shares
The company in question is Kodal Minerals (LSE: CODE).
Its recent performance has been strong, and over the past year penny stocks have risen 49%. But looking back, the share price has fallen 80% since Kodal went public in 2013.
There have also been surges before. For example, in late 2016 and early 2017, stocks rose to a higher level than they are today, before falling back. Clearly, this is a volatile stock.
Right now, however, there is a huge demand for lithium. That has fueled investor interest in renewable energy stocks like Kodal. However, it is not just benefiting from the growing general interest in lithium. The price increase in recent months has a specific root cause.
Last month, the company announced a financing package that could help it start production at its flagship Bougouni project in West Africa, as well as expand other exploration and development activities.
But Kodal still has no revenue and Bougouni’s long-term commercial viability remains to be demonstrated. Often when a company raises cash, diluting shareholders, the share price falls in response. So why has this penny stock risen?
chinese stake
I think the answer is partly that the financing is a sign of confidence in the viability of the company on the part of the strategic investor in question, hainan mining.
On top of that, I see the possibility of a longer-term takeover bid at a higher than current price. Lithium is in short supply and producers are trying to claim what they can. We have already seen Chinese lithium producers take over London-listed lithium miners, as happened with Bacanora Lithium.
Hainan might be happy to be a partner in the Bougouni project with Kodal. But if things go well, he might decide it’s easier to buy out Kodal and have full control.
For the shares it bought last month, Hainan paid a 100% premium over the recent average price of the shares undisturbed before the announcement. With a market capitalization of around £2 billion, the Chinese company dwarfs Kodal with its £70 million capitalization.
Should I buy this penny stock?
However, as a long-term investor, my goal is to buy shares in what I think are great deals.
I don’t buy shares just because I think they may be the subject of a future takeover bid. For now, in any case, Hainan has given no sign of wanting to increase its stake in Kodal in the future. It may never do.
Loss-making Kodal has destroyed a lot of shareholder value in the past decade. He still has no income and his fortune is closely tied to a project in a politically volatile area. Your risk profile is more important to me than the possible rise in the stock price, so I will not invest.
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