A common investing theme for the coming years is likely to be alternative energy sources. With growing demand for battery materials as electric vehicle use increases, it seems likely that lithium shares will remain in the spotlight.
One UK-listed share that could offer me exposure to lithium is Kodal Minerals (LSE: KOD). Its shares have leapt just over 50% so far in 2023 as I write this on Thursday. That sort of explosive price growth sounds intriguing. Could this be a smart purchase for my portfolio?
Share price jump
A quick look at the chart shows that the company’s share price has moved around a fair bit.
Although it has leapt in 2023, over the past 12 months it is up 25%. That is still modest, although attractive to me. On a five-year basis, the shares would have more than doubled my money. But they are still less than half of where they were back in 2014.
Reasons for the surge
The main driver for the recent increase in the share price is a funding package it announced last month.
Kodal has secured a conditional package of $118m that the firm says “will provide full financing for the development and commencement of production at the Bougouni Lithium Project in Mali”, as well as supporting a major exploration and development programme.
That could be transformative for the business. The Bougouni project in west Africa is Kodal’s flagship asset. This deal with Chinese company Hainan Mining will help Kodal recover the costs it has put into developing the project and let it expand its portfolio of potential projects. That could turn out to be very lucrative for shareholders in future.
Digging into the deal
Hainan Mining is a subsidiary of Chinese giant Fosun. Chinese industry has high demand for lithium.
This deal reminds me of a situation with some other UK lithium shares in 2021. Back then, Ganfeng Lithium built a stake in London-listed Bacanora Lithium. It later successfully made a full takeover offer, at a premium to the prevailing share price.
There is no guarantee that the same thing will happen with Kodal. But I think it may.
Under the recently announced deal, Hainan basically gets a 51% share of a new Kodal subsidiary focused on developing Bougouni. If it likes what it sees as things develop, Hainan may decide it wants the whole pie.
Should I buy?
Despite that, I will not be investing in these penny shares.
I am a long-term investor. So I do not buy in anticipation of an event like a takeover, but rather try to identify brilliant businesses that trade at an attractive valuation.
Bougouni seems like a promising development and the Hainan deal could turn out to be good news for Kodal. But the latter lacks substantial diversification and does not generate any revenues yet. Early stage mine development can be fraught with disappointment and costly setbacks.
The risks are too high for my tastes. I will keep hunting for lithium shares I can add to my portfolio. But I will not be buying Kodal at the moment.
