Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place on his shopping list?

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British Pennies on a Pound Note

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I have been thinking about what shares I might want to add to my portfolio next month. One penny share that has been getting cheaper is Kodal Minerals (LSE: KOD).

The shares are down around a quarter over the last year but the five-year share price chart shows a 72% jump.

As for being a penny share, Kodal definitely meets that description! At the current price, I could buy around 322 of the shares for a pound.

All quiet in 2024

So far this year has been a quiet one in terms of news flow at Kodal. The most recent stock market announcement was last year, with the interim results in December.

So why has the penny share lost 14% of its value so far in 2024?

I think the answer is that investors continue to chew over the prospects for the business. That is a common situation for penny shares in mining companies.

Kodal has some promising seeming prospects. A cash injection from a larger Chinese miner (Hainan Mining) for a majority stake in its flagship west African project underlines the potential of that prospect alone.

Unproven opportunities

But potential is just potential. What I think could help this penny share surge is turning that potential into hard cold cash cashflows.

That could happen.

Hainan Mining has agreed to put serious money — $100m — into the Malian project (and take a majority stake). It has spent almost $18m on Kodal shares, becoming a sizeable shareholder.

The Malian project is looking tasty and in November Kodal published a new estimate for the project’s mineral resources, which was 40% larger than the last such estimate in 2019.

Meanwhile, Kodal has also been moving forward in developing other projects. The cash from the deal with Hainan has given it more funds for such exploratory work.

For now, though, there is no proven business model here. The mines are not in commercial operation. Kodal generates no revenue yet. Whether it ever does depends on how the projects develop.

That is partly beyond Kodal’s control, as it depends on the viability of recovering minerals and selling them in a cost-effective manner. Kodal’s operations are in areas with high political risks. That is a risk for Kodal, as well as many other miners.

I’ll pass for now

That risk profile does not match what I am looking for in any share. I look at a penny share the same way as more expensive ones: I am looking to get what I think is substantially more value than I pay for.

That could yet happen with Kodal. If its flagship project delivers in the right way, I think the share price could move much higher than it is right now.

But that might not materialise. There is certainly a lot of potential here – but also a lot of risk.

I prefer to invest in a profitable business with a proven business model. So, this March at least, the penny share will not be on my stock market shopping list.

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.

C Ruane 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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