While it still sits in pennies, the share price of Kodal Minerals (LSE: KOD) has soared so far this year.
In fact, it is up 69%.
Impressive though that sounds, the longer-term gain has been even more impressive. The Africa-focused mining exploration company’s shares have soared 659% in five years. Yes, 659% — despite not yet commercialising a mine.
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What is going on – and could the stock still be a bargain even at its current price?
Promising outlook for key project
I reckon a couple of main factors explain the incredible rise in the Kodal Minerals share price.
At a high level, it has been a case of right place, right time. Kodal has been focused on prospecting for lithium during a period when demand has surged.
Lithium is an important component of the batteries used in many electric vehicles, meaning companies have been scouring the world for supplies. That has sent prices soaring.
At a more company-specific level, Kodal has benefitted from the promise shown by its flagship project in Mali, west Africa. A large Chinese mining company has stumped up cash for a sizeable stake in Kodal and the project in Mali specifically.
I see that as a vote of confidence in the prospects for the project. But in mining it is always worth remembering that a lot of projects look promising — until they do not.
That can be because commercialisation is harder than planned, for example because a host government slaps unforeseen taxes on the product. Or it can be because the sale price of a specific mineral falls below breakeven for a project. Both are risks for Kodal.
Moving from exploration to production
The company had good news for the market today (25 June). It announced that further drilling assay work on site in the past couple of months suggests the total size of the Malian project could turn out to be larger then previously expected.
That might boost future revenue and profit prospects. As I write this on Tuesday morning, the Kodal Minerals share price has moved up over 7% in early trading.
That comes on top of an update last month that confirmed that the project is on schedule to start production at the mine in the fourth quarter of this year.
It may still be a potential bargain
If that happens on track – and for now the indications are that it will – I think it could help boost the share price. Longer term, if lithium prices rise, I think Kodal’s value could also go up even from here.
For now, the company’s market capitalisation remains a fairly modest £125m despite the sharp upwards movement seen this year. Once production begins at commercial scale, that could turn out to be a bargain.
So, why does the Kodal Mineral share price not excite me enough to buy?
Basically, the risk profile does not suit me. Kodal has multiple projects but a lot is riding on one flagship project, in a politically volatile region.
For now, the company remains lossmaking and commercial production is yet to start. The potential rewards look high, but the risks are higher than I would like.
