Image source: Sam Robson, The Motley Fool UK
At first glance, it's been a whirlwind couple of months for Kodal Minerals (LSE: KOD). The share price has soared 60% since February.
In reality, the gain might have been more modest if you had bought in February and sold now.
Like many small companies with stock prices in fractions of a cent, there can be a difference between a stock price chart and what happens in practice. This is due in part to what is known as spread. That's the difference between the sell and buy prices (think of this in simple terms as a form of stock brokerage commission). When a stock sells for less than half a cent, like Kodal, that can make a significant difference.
Still, Kodal's share price has clearly had a good run. However, as a long-term investor, my focus is on years, not weeks. In this too Kodal has done well, almost tripling in the last five years.
The stock seems to have momentum – am I too late to get on?
The potential of potential.
Kodal is what is known as a pre-revenue company. That's one way of saying you don't make sales. So why might investors have driven up the stock price?
Kodal is in the mining business. Many small miners do not make sales during the development phase of their projects. Then, if a mine moves into commercial production, years of zero revenue can sometimes turn quite quickly into significant sales.
In exchange for helping finance startup costs, shareholders are sometimes rewarded with large price increases once the mines are in production. However, that often doesn't happen. Shareholders pour money into a hole in the ground that ends up disappointing them.
Kodal has attracted investors thanks to a lithium project in West Africa. It has attracted substantial investment from a large Chinese mining company.
Lithium is in demand for batteries that power electric vehicles (EVs), among other things. The prospects for the project look interesting and I think that helps explain why Kodal Minerals' share price has performed well. For now, though, the story here still seems mostly about potential to me.
The mine has not yet entered commercial production and it remains to be seen how economically attractive it could be in practice. Last month, the company said the project remained on track to enter production later this year.
Why am I not buying?
To what extent is buying a company with enormous potential but not yet a proven business model an investment and to what extent is it speculation?
Different people will each have their own answer to that. However, from my point of view, I would not be ready to invest in Kodal Minerals just yet, although I think the share price could continue to rise.
If the project goes into production this year, I think that could drive the price higher.
Kodal has other projects besides its flagship lithium project, although they have yet to demonstrate their potential.
For now, the business model is not as proven as I would like before investing. A lot depends on a single project. For now, I will not be buying Kodal shares for my portfolio.