Bacanora Lithium (LSE:BCN) is a London-listed company exploring for lithium carbonates in Mexico and Germany. The penny stock has been a favourite of speculative mining traders over the past year. And the BCN share price took a jump last week when China’s Ganfeng Lithium Company offered to buy it out for £190m. This acquisition values Bacanora at up to £267m. Supply chain disruption caused by the pandemic has led many commodity prices to rise in the past year and lithium is one of them. This is encouraging a wave in M&A activity across the sector. I’m interested in investing in sought-after commodity stocks, but would penny stocks in exploration be too risky an addition to my Stocks and Shares ISA?
London-listed lithium stocks
Ganfeng already has a 17.41% stake in BCN. In February, the companies agreed to raise this to 28.88% and this should complete shortly. The BCN share price is currently around 57.6p and to make a full acquisition, Ganfeng would acquire the rest of its stake in BCN at 67.5p a share. But this arrangement is still at the proposal stage, and as yet no formal offer has been made. Therefore, I think it would be speculative to buy the shares today.
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Meanwhile, Savannah Resources (LSE:SAV) is another FTSE-AIM-listed lithium stock with a rising share price. Savannah is a much smaller company than Bacanora, with a £60m market cap. But it has big ambitions to be Europe’s first major lithium producer. The Savannah Resources share price has risen 104% in the past year but is down 35% from its 52-week high.
Savannah has two projects on the go. A 90% stake in a lithium project in Portugal and a 20% stake in a heavy mineral sands project in Mozambique. The Mozambique project is in partnership with FTSE 100 stock Rio Tinto.
Savannah’s target is to create a premium, carbon-neutral lithium concentrate in the EU.
A rocketing lithium price
The price of lithium has risen over 106% in the past year. And a recent International Energy Agency (IEA) clean energy transition report notes lithium demand could increase 40-fold by 2040. That’s because meeting the Paris Agreement goals will massively raise demand for lithium-ion batteries for use in electric cars.
And according to the South China Morning Post, there are now over 500 electric car companies in China alone vying for market dominance. So this helps explain the soaring lithium price.
China is currently by far the biggest lithium processing country, which the IEA says presents a potential ‘energy security’ issue. With this in mind, investors and governments may be disheartened to see Bacanora acquired by a Chinese firm.
Investing in penny stocks
Penny stocks are highly speculative and junior exploration stocks even more so. While the soaring price of lithium could well bring a share price rise to each of these companies, they also carry significant risk. Projects often cost more than expected and multiple share placings are par for the course. Savannah completed a share placing only last month at 4p a share, raising £10.3m towards its Portugal project.
With all that in mind, I’m not tempted to invest in Bacanora Lithium or Savannah Resources today.