This EV-linked penny stock looks dead cheap to me at 30p

Jon Smith explains why a penny stock with a unique exploration project for rare earth deposits here in the UK could be ready to move higher.

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It’s true that penny stocks usually carry a high level of risk, due to the small size and often short track records of performance. Yet when the business is UK-based and involved in a growing sector, it makes me feel more comfortable about potentially investing.

Here’s one such firm that’s just come on my radar.

Understanding the stock

The company on my radar is Pensana Metals (LSE:PRE). The business has a market-cap of £88m with a share price of 30p. Over the past year the stock’s down 45%.

Pensana explores and develops sites for rare earth deposits. It has two main projects at the moment, one in the UK and one in Angola. Its flagship Saltend rare earth refinery project in the UK is the one that could send the stock soaring if things go well.

The facility in East Yorkshire aims to process neodymium and praseodymium. If you haven’t heard of those before, don’t worry, I hadn’t either. They are critical minerals used in the creation of magnets. As such, there’s huge commercial impact here, with components linked to electric vehicles (EVs) as one of the largest benefactors.

Looking at the numbers

Let’s not beat around the bush. The business lost $5.1m in the last financial year. Most of this was driven by expenses and research involved with the two projects.

The net assets for Pensana stand at $56m, which did rise by 48% versus 2022, but most of these assets are intangible, so that doesn’t help me much.

On the positive side, it has $9.7m of cash on hand. It also has debt facilities with banks that it can draw on, for credit if cash flow gets tricky.

Given the positive benefit to the environment of utilising the rare earth deposits, the UK government is onboard. In a recent business update, the Secretary of State for Business and Trade has offered a £4m grant towards the Saltend project.

Bringing it all together

I completely understand that Pensana doesn’t have a track record to boast about to entice investors. The main risk I see is that timelines get pushed back, with hopeful investors losing patience with the business. Given the trend lower in the stock over the past few years, I think some have already thrown in the towel, fed up of waiting.

However, two things make me positive about the outlook for the penny stock. The first is that the Saltend project is unique. It has the potential to hold 5% of the world market supply of neodymium which, if realised, would have major financial implications for the stock.

The other factor is that unlike some other commodity explorers, Pensana has strong government backing. This is by grants, exposure and other support in both the UK and Angola. Although this doesn’t guarantee success, it certainly provides a helping hand.

So when I look at the market-cap and share price versus the unearthed potential value in the projects, I think the stock is cheap right now. I’m considering adding a small amount of money to the stock now.

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.

Jon Smith 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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