This time last year, Anglo Asian Mining (LSE: AAZ) was very firmly in penny share territory.
Since then however, the share has jumped a stunning 83% in value. Can this performance help provide me with any lessons for when I am assessing possible penny shares to buy for my portfolio in future?
Right place, right time
The company’s focus on precious metals and copper has positioned it well to benefit from surging metal prices. Last year saw copper prices perform solidly, silver hit an 11-year high, and the yellow metal hit a new all-time high.
So a lot of Anglo Asian’s share price performance reflects the fact that it operates in markets that are riding high. Sometimes it is easy to anticipate that a given market may do well and sometimes it is not.
Ideally though, I prefer not to be too highly exposed to very cyclical markets unless I am confident I am getting in fairly close to the bottom. Even after the recent rise, Anglo Asian shares are 20% lower than five years ago.
Investing is about the future
Anglo Asian’s interim results talked of its ramp-up to full production being underway. But suspension of some activities during the first six months of the year meant that revenues fell by over 50% year-on-year.
A profit in the prior year period was replaced by a loss. Production of all three metals was down markedly.
In many companies, a dramatic cut in production and revenues, accompanied by a loss, would see the share price crash not rise.
But clearly, in recent months Anglo Asian shareholders were looking at the future potential once temporary setbacks were a thing of history and the company could get back to a much higher level of production again.
On top of that, its large copper reserves could be more fully exploited as the company develops more infrastructure at a key site.
Concentration risk
That is interesting as a lot of penny shares – especially in the natural resources sector – are focused on an investment case about future production potential. One thing that helped set Anglo Asian apart, in my view, was the fact that it had already demonstrated it was able to mine and sell at volume.
Indeed, the company announced this week that, after resuming full processing at its key mine in the most recent quarter, production more than doubled compared to the prior quarter.
But — again like many shares in the natural resources sector — the flipside of focusing on just a few metals is that, if prices move down sharply, Anglo Asian’s profitability will likely follow. Its heavy focus on one mining territory (Azerbaijan) is positive in terms of making the business less complex to operate, but ties the firm’s fortunes more closely to geopolitical risks there than if it had a more diversified portfolio.
That — and cyclically high precious metal prices — puts me off buying this one for my portfolio just now.
But some of the factors above that separate it from some other penny shares –such as a proven business at scale – do give me food for thought when assessing penny shares to buy for my portfolio.
