Could this penny stock soar amid the lithium boom to come?

Our writer takes a closer look at this penny stock which could benefit from an impending lithium boom linked to electric vehicles.

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A penny stock that I reckon has the potential to climb is European Metal Holdings (LSE: EMH). Should I buy the shares now with a view to them eventually soaring?

Why could lithium soar in demand?

Lithium is a core component of ion batteries, which power electric vehicles (EV). In addition to this, the metal is vital in running energy storage systems other uses.

Rising demand for EVs — as well as government initiatives to transition to cleaner energy and reduce the global carbon footprint — means that lithium could experience heightened demand for years to come.

European Metals is one of a number of firms looking to capitalise. It owns the Cinovec asset in the Czech Republic and it is primed to become the largest hard-rock lithium deposit in Europe.

As I write, European Metal shares are trading for 30p. They’re down 28% over a 12-month period from 42p at this time last year. Macroeconomic volatility has hurt blue-chip stocks, so I’m not surprised to see small caps like European Metals hindered as well.

Bags of potential and positives

A recent update from the business regarding the Cinovec project made for good reading. European Metals said that its tests and work uncovered battery-grade lithium and work is now underway to mine it. In fact, the quality of lithium was higher than the required standard for batteries.

Furthermore, according to Statista, demand for lithium is set to soar by three times by 2030. Between 2025 and 2030 alone, it is set to double!

When I consider European’s position geographically, there’s lots of potential. Its location could be pivotal as it is very close to some of the biggest automakers and chemical producers. This ease of access could be crucial to developing lucrative partnerships and boosting performance and shares.

Finally, from an ESG perspective — a popular method of sustainable investing that is rising in prominence — European Metals could be a good choice. Its water usage, acidification, and carbon dioxide emissions are industry leading. This could help boost investor sentiment and potentially performance too.

Risks and what I’m doing now

Of course, there are risks to consider. First of all, mining is a complex process. Operational and geopolitical issues could arise. This could hurt European’s lithium output and performance. I’ll keep a close eye on updates and developments.

Another risk I’ll bear in mind is the short-term demand for lithium. EV sales have slowed during the current volatility. For example, in the UK, the Prime Minister pushed back the target for electric vehicle adoption to 2035. Plus, China — one of the biggest lithium buyers — has experienced growth and economic issues, resulting in weakened demand for the metal.

Overall, at 30p a share, I reckon there’s minimal risk if I were to buy a few shares for my holdings. I’ll do this when I next have some cash to invest to help diversify my portfolio.

If European shares climb and the business performs, then happy days. If the opposite happens, I won’t be too concerned about a penny stock I bought a few shares in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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