Penny stocks do what they say on the tin. They are usually found on the Alternative Investment Market (AIM), with each share trading below £1. I regard them as a low-cost way to diversify my portfolio with the potential to grow in value over time. Granted, most of these stocks have flopped. However, some, such as ASOS and Fevertree, have generated truly staggering returns.
Investing in small, unproven companies is markedly riskier than backing larger, more established FTSE 100 ones. Thus, penny stocks will always represent a very small, speculative part of my portfolio. Nevertheless, I wish I’d bought £2,000 worth of shares in platinum and gold producer Eurasia Mining plc (LSE:EUA) back in 2017 when it was 28p. If I had, I would have earned £33,000 beyond my original investment in just five years. This figure is in line with the average price of a first-time house deposit in the UK.
The Eurasia penny stock case study
A UK miner based in Russia would not necessarily have been my top penny stock pick this year. However, I find the case of Eurasia Mining a compelling one. A booming gold price since the start of the pandemic helped supercharge the company’s valuation. Its share price has seen an astounding rise of 125% since 2020.
The upward momentum was primarily driven by exciting progress on its 75%-owned Monchetundra project in Russia. This site expanded the company’s portfolio to contain palladium, copper, nickel, platinum, and cobalt. However, it seems many investors ignored the boring part where management announced it would take a minimum of two years before any production could begin. So, after the initial hype, I believe impatient investors quickly lost interest.
Overblown sell-off
Today the share price reflects a deep sell-off — one I believe is far too steep and rash. Almost all the value Eurasia accumulated during the pandemic has been wiped out this year. The market valuation has fallen by a whopping 80% year to date.
In my opinion, fears about the Russia-Ukraine conflict have clearly played a part in Eurasia’s devaluation. Beyond this obvious headwind, the underlying business looks in rude health. I note significant improvement in its sales revenue. From £48,012 revenue in the first half of 2020 to £425,965 for the same period in 2021, is outstanding. The firm is clearly heading in the right direction and became profitable for first time this year.
Furthermore, the mining company’s cash balance rose from £50,000 to £16m as of the end of June last year following a private placement. More cash on the books for a fledgling business is never a bad thing in my eyes.
No reward without some risk
There are plenty of penny shares on AIM that can see staggering returns but stomach-churning falls. If AIM is the home of growth, it can also be the home of huge volatility. The performance of Eurasia Mining shares this year are a prime example. And with interest rates rising, I foresee growth becoming more expensive for penny stocks like Eurasia. This heightens the stakes for me.
But, providing the terrible conflict in Eastern Europe doesn’t lead to any future disruptions of operations, I am confident the Eurasia Mining share price could see some sizeable upward momentum. This is why I intend to pick up a small number of shares in due course.
