Here’s what I’m doing about Pensana stock

There’s a buzz around Pensana (LSE: PRE), the London-listed rare-earth elements exploration and development company.

Pensana’s robust news flow

Since listing on the London Stock Exchange’s main market in July 2020, the company has seen its share price increase from around 27p to near 167p today. And the move has been driven by a flow of positive news cementing the firm’s strategy.

The company is focusing on the development of its rare earth metals projects located in Longonjo and nearby Coola in Angola. But the directors’ vision extends to downstream operations as well. And the company recently submitted a planning application to establish a rare earth oxide separation facility at the Saltend Chemicals Park in Humber, Yorkshire.

If Pensana can develop its upstream and downstream operations, it would provide the UK with the “world’s first” sustainable magnet metal supply chain. And this is exciting because the industry is set to balloon. That’s because of burgeoning demand driven by Electric Vehicle (EV) and offshore wind generator production. However, Pensana reckons China has a near-monopoly supplying around 87% of the world’s rare earths. And the country sources much of it unsustainably.

Pensana’s proposed production facility at Saltend will have a nameplate capacity of 4,500 tonnes per year. And it will be one of only two major producers outside China. It will be “strategically located” on the UK’s busiest ports complex and gateway to Europe. But Lynas Corporation of Australia is the world’s largest non-china producer right now. And last year the company produced around 4,700 tonnes from its facility in Malaysia.

The sector looks set to grow

To put those figures in perspective, the company reckons the new Volkswagen (VW) range of EVs will consume the equivalent of Pensana’s entire production for the next decade. And VW is just one of many EV manufacturers. On top of that, there are the needs of the entire offshore wind industry to consider. And China is planning a 15-fold increase in capacity by 2060, according to Pensana. And the European Union expects to grow its offshore wind facilities by 2,400%.

The company points to forecasts from commodity research and analyst companies Roskill, CRU and Adamas suggesting “substantial” increases in magnet metal prices ahead as demand ramps up. It seems that Pensana has its operations in the right place and there’s a substantial tailwind in the sector to support growth. However, most of the development work is still ahead for both the upstream and downstream operations. So far, activities have been mainly concerned with proving resources in the ground and securing planning permissions.

There’s a long road ahead and a lot more money needed before Pensana begins supplying the world with sustainable magnet metals. And right now, the company is loss-making and spending millions in development costs. This is one of several stocks with a great story and bags of potential. But I reckon the road ahead for shareholders is risky. And I’m watching from the sidelines for the time being until the company’s projects are further advanced.