Some penny stocks can be far riskier options than traditional FTSE 100 shares. Indeed, they often have small market caps, and volatility is an issue. But when chosen well, penny stocks can also prove lucrative. These are two that I have recently bought because I believe they have significant upside potential.
A bright future ahead for this gold miner?
Greatland Gold (LSE: GGP) had an incredible 2020, with its share price rising over 1,800%. Nonetheless, 2021 has been far less favourable, and the Greatland Gold share price has fallen nearly 50% year-t0-date, to a price of 19p.
I feel that this decline offers the perfect opportunity to buy this penny stock though. Firstly, although the company is pre-revenue, there is a ton of potential. This is mainly due to the Havieron deposit, where GGP has a joint venture with Newcrest. In fact, it is believed to hold around 4.2m ounces of gold, which is equivalent to around £5.58bn in gold at current prices. On Thursday, the company also reported a strong update on the progress at Havieron. This gives me hope that production is not too far away, and means GGP may soon become profitable. This is the main reason why I have added GGP to my portfolio.
On the other hand, there are risks that must be considered. For example, GGP is pre-revenue, yet is still valued at around £750m. This valuation is solely based on speculation that GGP will become profitable in the future. Setbacks are therefore likely to be met with major falls in the GGP share price and are a risk that must be considered. This is the reason why GGP only makes up a small part of my portfolio.
Another gold-mining penny stock
Pan African Resources (LSE: PAF) is another gold miner yet has a number of differences to Greatland Gold. For example, PAF has started gold production, and has been profitable for the last two years. Things also look promising for 2021. In fact, the miner is expected to produce over 200,000 ounces of gold, around 12% higher than 2020. PAF has also managed to reduce its senior debt from $62m last year to $33.8m. This demonstrates that the firm is in a strong position right now.
Unlike GGP, PAF pays a dividend of around 4%. This is far higher than a number of other UK shares, especially in comparison to other penny stocks, and offers a compelling reason to invest, I feel. With dividend cover of 2, it is also well supported by profits. As such, I cannot see the company cutting its dividend. This was the main reason that tempted me into buying PAF shares for my portfolio.
Of course, like all other gold stocks, the PAF share price is heavily dependent on the price of gold. After soaring in 2020, the price of gold has struggled more recently, and this has negatively affected many gold stocks. Therefore, there is the risk that the price of gold will continue to decline, and PAF’s profits will also be hit. This is also completely out of the company’s control.