Buying penny shares can expose investors to higher-than-normal levels of risk. Smaller companies often lack the scale and the financial strength of other operators. Investing in them can be especially risky during uncertain economic times.
Yet snapping up these small-cap shares can also yield spectacular results far ahead of the market average. With this in mind, here are three I’ll be looking to buy when I have spare cash to invest.
Shanta Gold
Signs of ‘sticky’ inflation across the globe means that getting exposure to gold could be a good idea. As the value of paper money erodes, investor demand for ‘hard currencies’ like bullion picks up.
I’d buy Shanta Gold (LSE:SHG) to capitalise on this supportive environment. It owns the Singida yellow metal mine in Tanzania, an asset where production is beating forecasts following a recent ramping up. It also operates a string of exploration assets, including in West Kenya, where drilling results have been especially impressive.
Mining is complex and expensive business. And operational problems can have a significant impact on shareholder returns. But the impressive momentum at Shanta suggests it might be a great stock to own.
Kodal Minerals
Buying lithium stocks also offers exceptional long-term investing potential. Rocketing electric vehicle sales mean that demand for key battery materials are also rising strongly.
I like the look of penny stock Kodal Minerals (LSE:KOD) today. It owns the Bougouni mine in Mali which, when up and running, could produce 220,000 tonnes of the lithium-rich mineral spodumene each year.
Early-stage miners can be especially risky because of their weaker balance sheets. But Kodal looks safer than many other London-listed commodities plays. In January it obtained significant funding from China’s Hainan Mining this year that it said provides full financing for the development and start of production at Bougouni.
Renold
One good way to ride the new commodity supercycle might be to buy so-called pick and shovel stocks. These are the companies that provide the goods and services that let miners (or indeed any business) do their thing.
Industrial component maker Renold (LSE:RNO) is one such share on my radar today. It makes chains, gears and couplings that are used on the conveyor belts and buckets that let miners pull minerals from the ground.
Pick and shovel stocks offer a huge advantage to risk-averse investors. Even if a mining stock encounters operational problems, they will still need the products that the likes of Renold supply. This tends to give the latter a solid stream of revenues.
That’s not to say that this penny stock is immune to trouble, of course. If a wider industry downturn happens and miner profits sink then demand for its chains and other hardware might fall.
But, encouragingly, the business sells its products to a wide range of sectors. These include agriculture, transport, energy, utilities as well as mining. So its reliance on strong conditions in any one sector is reduced, cutting risk.
