Lithium continues to be a buzzword for investors at the moment. Due to the extensive commercial uses (that is, car batteries), growth stocks that are involved with lithium are generating a lot of interest. A case in point is Kodal Minerals (LSE:KOD). Trading volumes have increased in recent months, with the Kodal share price up 72% in the past three months. Here’s what’s going on.
Potential for gains
Kodal is a lithium exploration and development company focused on West Africa. The primary project for the business is the development of the Bougouni lithium project in Southern Mali. However, it does have interests in gold too, with six projects related to gold mining in progress at the moment.
Although the lithium one is some way away from being functional, I do get why the share price has been rising in recent months. Feasibility studies have been carried out that suggest a minimum 8.5-year mine life and a payback period of 0.8 years. Based on a selling price of $1,060 per tonne, the life-of-mine revenue would be over $2bn.
Funding secured
This all sounds great, but one of the reasons for the real lift in the stock was secured funding. These projects are expensive to run before any revenue is realised. Yet in January, the business secured $117.5m in funding from Hainan Mining in China. Some $65m of this will be used towards the Bougouni lithium project, meaning that it’s now fully funded.
This is a huge benefit to both the company and to shareholders already on board. The risk of not being able to extract the potential from the mine due to cash flow problems has been removed. Therefore, it’s now down to seeing whether the mine can be successfully optimised to firstly extract the lithium and then to hit those revenue targets.
Risks worth noting
One point worth considering is the variability in the capital cost of the project. It has already risen due to higher raw material and transport costs. If inflation globally doesn’t fall as quickly as we expect, the cost could continue to spiral upwards. This would cause the business to have to re-adjust expectations regarding the amount of funding needed.
Another risk is simply that an unknown problem crops up when further studies on the project are carried out. This could hinder the ability to extract the lithium, or mean that a much smaller volume can actually be removed. Again, expectations would have to be revised lower in this case.
Balancing everything out
I do get the fuss about the Kodal share price. It has funding secured for a potentially big lithium project. Over the past year, the price is up 28%. Yet given the market value, it’s still only a small-cap stock with high volatility. On that basis, I’m considering investing but with only a small amount, in order to manage my risk, but also on the chance that something big happens here over the next year.
