Penny stocks are often associated with pre-revenue mining companies hoping to strike it lucky. I’ve taken a look at two popular shares to see if they’d make a good long-term investment for me.
South America
The main gold and copper interests of SolGold (LSE:SOLG) are in Ecuador.
To date, the company has raised $494m from investors, and has borrowings of $139m. It still hasn’t earned any revenue, but its directors are confident it soon will. They haven’t yet specified a date for the start of commercial operations. But the company’s website claims that is reserves are worth $2.9bn — nearly six times its current market cap.
Under a worst-case scenario, the company has sufficient cash to continue until November. The most optimistic view is that it will run out of money in January 2024. Either way, it’ll soon have to go fundraising.
And that’s the problem with small mining companies. They’re cash hungry. Looking for precious metals deep underground is an expensive business. If I bought shares in SolGold today, I’d have no idea by how much by shareholding would be diluted by the time its mines start producing.
So it’s no surprise that the company’s share price is down 38% over the past year.
The price fall could be a buying opportunity and some share chat forums are full of speculation about a possible takeover bid. Personally though, I think it reflects concerns about how much more cash SolGold will have to find before it becomes commercially viable. I’m not buying.
Down Under
I already own shares in Greatland Gold (LSE:GGP), another popular mining stock with smaller investors.
And to be honest, my investment has been a bit of a disaster. Even after the company starts generating revenue from its 30% stake in the Havieron mine, I don’t think I will ever recover my initial outlay.
In September, it reached an agreement with Wyloo Metals that means it now has access to the necessary finance to fully fund production at Havieron.
Wyloo invested when the share price was 7.8p. Since then, its fallen by nearly 5%. Greatland now has a stock market valuation of £375m but this looks on the high side to me.
An independent expert recently valued its stake in Havieron at $360m (£300m). The company does have other interests, but I don’t see how they can be worth £75m given that they’re at an early stage of development.
The verdict
I know how easy it is to get caught up in the hype surrounding mining companies.
But I’ve learned my lesson. Because of the risks associated with exploration, I’m now only interested in miners with proven reserves that are generating revenue. They also need to be of sufficient scale to pay a generous dividend to shareholders. That’s why I own shares in Anglo American.
Its share price has taken a bit of a battering lately, falling by 13% over the past month. And it’s down 27% since March last year. Last month, the company released disappointing results for 2022, showing a 30% drop in profit.
Even though the total dividend for last year is 60% lower than it was for 2021, the stock is still yielding 5.9% — above the FTSE 100 average. That’s the sort of mining stock I like!
