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Are The Stars Aligned For Penny Stocks Churchill Mining Plc & Xtract Resources PLC?

Churchill Mining (LSE: CHL) and Xtract Resources (LSE: XTR) have issued ordinary trading updates today: little news on this front to report, but there are no signs that the time to cash in may have come, either. 

Nonetheless, the shares of both companies are down about 4% in early trade — as you might know, you must be patient if you are invested in them. Here’s why. 

Churchill Mining

The miner announced today what is commonly known as a block admission of up to 4,350,000 new shares, which “may be issued pursuant to the exercise of warrants granted in connection with the issue of equity notified on 14 May 2015“. In these situations, the ranking of the shares in the capital structure tends to be on par with the company’s existing ordinary stock — essentially, they have the same seniority. 

It’s very unlikely that the drop in Churchill’s share price is to be attributed to its latest announcement. Rather, investors seem to be taking profit after a performance that reads +254% since 21 May. There’s no visibility on financials, and I think that investors may be underestimating the threat posed by Indonesia, a country where political risk is seldom easy to gauge and could leave Western investors with a bitter taste in their mouth. 

The allure is obvious, though.

Pre-tax capital gains could be between 200% and 300% if a base-case scenario plays out, even assuming that its East Kalimantan coal project is valued only between £150m and £300m. While investors should err on the side of caution, if their bets are properly hedged I reckon that those who are adamant to hold long positions in the stock at between 20p and 40p a share could be proved right.

We are in high-risk territory, of course. 

Xtract Resources

Elsewhere, Xtract issued an update on its Chepica gold and copper project in Chile, “which returned to profitability in May 2015“, the group pointed out.

That came only a couple of weeks after it released its 2014 annual results, which showed: 

  • First revenue received from concentrate £1.14m (2013: nil)
  • Net loss of £2.95m (2013: £0.13m loss)
  • Administrative and operating expenses of £2.34m (2013: £0.80m) 
  • Project costs of £0.21m (2013: £0.35m)
  • Cash of £0.16m (2013: £0.16m)

The stock is down 6% since its annual results were released, but has been rising for some time and I would expect more solid operational updates in the second half of the year. S0, should you buy before then? 

That’s your call,  but if your portfolio is properly diversified, I doubt the losses associated to Xtract will be substantial. Similarly to Churchill, however, Xtract remans a highly speculative trade at present, but one that could help your portfolio deliver an outstanding performance in 2015 and beyond. 

 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.