Penny shares are notoriously risky investments. But when these tiny businesses manage to deliver on their promises, early investors can be rewarded with phenomenal returns. And right now, a number of analysts have started eyeing Kore Potash (LSE:KP2) as a potentially explosive winner.
In fact, one forecast is projecting that in the next 12 months the 3.2p penny share could surge to as high as 9.14p – a 186% gain!
So what does this business do? And should I be rushing to buy shares while they’re still seemingly cheap?
Imminent surge potential?
Kore Potash is a development-stage mining company. Its flagship Kola project is estimated to be one of the world’s largest undeveloped high-grade sylvinite potash deposits. And as a quick crash course, the potash mineral is a special type of salt used as fertiliser by farmers.
Once Kola enters production and ramps up to a steady state, the project’s expected to produce roughly 2.2 million tonnes a year to a total of 50 million tonnes over its entire lifespan. Based on current forecasts, that could translate into $22.5bn of lifetime gross revenues from the project.
Investors should always apply a chunky margin of safety when it comes to multi-decade spanning forecasts. But even if the project only delivers 50% of this target, it nonetheless represents a massive opportunity compared to the $2.2bn estimated development cost of the project.
This is where the aggressive analyst’s share price forecasts enter the picture.
Kore Potash currently doesn’t have a revenue stream. It’s relying on its cash reserves to move the project forward. But with the current production timeline suggesting commercial production is still at least four years away, management is looking to sell itself to a larger player.
In fact, the firm’s already in active discussions for a potential complete cash buyout. And while a formal price per share for such a deal hasn’t been announced, a chunky premium could end up being paid.
Risk versus reward
The formal sale process for Kore Potash has already made some significant strides, including site visits with two interested parties and even the Mines Minister of the Republic of the Congo seemingly giving his blessing for a takeover deal.
However, while this is all very encouraging, it’s important to recognise that a takeover at this stage is far from guaranteed. Until recently, management was engaged with two interested parties. But at the end of last month, the company announced that one of these has pulled out.
If the other interested buyer also decides not to proceed, Kore Potash shares could take a nasty tumble. After all, without additional funding, management may have no choice but to aggressively dilute shareholders in an attempt to raise more cash to keep the lights on.
What’s the verdict?
Investing in a pre-revenue business is an exceptionally risky endeavour, particularly for mining companies, which have to deploy vast sums of capital before seeing any return on their investment.
In the case of Kore Potash, a potential acquisition offer does open the door to some rapid chunky gains. But these are far from guaranteed. And if a deal fails to emerge, it could be years before a revenue stream materialises, potentially leaving investors with nothing. Personally, that’s not a risk I’m interested in taking.
