A penny stock for the EV boom

I think Bluejay Mining (LSE: JAY) could prove an excellent stock to own as demand for electric vehicles (EVs) soars. You see this particular UK mining share is developing a series of projects in Greenland which contain elements like nickel, copper, cobalt and lead.

It also owns various copper projects in Finland which it is assessing for future development. These commodities are critical in the manufacture and the running of these low-carbon vehicles.

The problem with investing in Bluejay is that it isn’t actually generating any revenues at present, meaning it may struggle to afford to get its assets to production. Accruing lots of debt and tapping shareholders for cash are common options for companies in this scenario.

Encouragingly though, Bluejay created a joint venture with KoBold Metals — the mining technology business backed by Bill Gates and Jeff Bezos — to fund the Disko-Nuussuaq nickel, copper, cobalt and platinum project. This has helped remove a large chunk of the risk for Bluejay and its investors.

Bluejay Mining’s share price rocketed following the KoBold Metals news broke. But it’s more than halved since then to current levels of 7.4p. I think this could represent an attractive dip-buying opportunity for my ISA.

A top buy after IPO disaster

Victorian Plumbing Group (LSE: VIC) began trading in London to much fanfare last summer. Its IPO was the largest ever on the AIM market and so it came with lofty expectations. News of difficult trading conditions since then has inevitably yanked it lower.

At 54p per share, Victorian Plumbing trades at an eye-watering discount to its IPO price of 262p. The now-penny stock has been hitting by slowing sales and rising costs as a consequence of broader inflationary pressures. And this threatens to continue for some time (consumer price inflation just surged to 6.2%, data shows today).

However, I still believe in the long-term outlook for Victoria Plumbing. And as someone who loves value I’m highly tempted to load up on the business. At today’s prices, Victorian Plumbing trades on a forward price-to-earnings growth (PEG) ratio of just 0.5. Any reading below 1 suggests that a stock could be undervalued.

I like Victorian Plumbing’s online-only trading model and the steps it has taken to create a cutting-edge internet presence. Its focus on e-commerce is enabling it to exploit the rising popularity of online shopping with consumers and is keeping costs down. The strength of its online offering is one reason for its ‘excellent’ rating with customers on Trustpilot.

I also believe Victorian Plumbing will continue to benefit from a strong housing market. The favourable mortgage rates of recent years look set to persist, meaning sales of Victorian’s plumbing to both sellers and buyers should be robust.

I fully expect Victoria Plumbing to recover from that disastrous IPO and deliver rock-solid shareholder returns.

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What exactly does the business do?

Bluejay Mining is a young exploration company on the prowl for battery-essential metals. The firm has various projects across Greenland and Finland that contain nickel, copper, cobalt, and platinum. All of these metals are in exceptionally high demand today, largely due to the automotive industry.

After all, with petrol and diesel vehicles now being slowly phased out in favour of electric alternatives, the supply of these precious metals is struggling to keep up. That undoubtedly creates an exciting opportunity for Bluejay Mining and its share price.

Having said that, the company has yet to start extracting anything from the ground. Meaning this is a pre-revenue business. Needless to say, this lack of cash flow creates a pretty big problem. Namely, how does the firm intend to afford the cost of developing a mining site after confirming a discovery?

The exploding Bluejay Mining (JAY) share price

This isn’t an uncommon problem for young exploration companies. But there’s a solution – sell an equity stake in a project to a larger mining company with more funding. And that’s exactly what sent the Bluejay Mining share price skyrocketing this week.

The management team signed a joint venture agreement with KoBold Metals for its Disko-Nuussuaq project in Greenland. KoBold might be one of the first tech mining companies around. It uses artificial intelligence and machine learning to make significantly more effective mining exploration decisions. And it’s garnered the attention of key investors, including Microsoft founder Bill Gates and Amazon founder Jeff Bezos.

Under the agreement, KoBold gains a 51% equity stake in the Disko-Nuussuaq project. In exchange, they’ll cover the cost of the project’s geological study and initial drilling activities. With funding secured, and a mountain of battery metals to be extracted, I can see why the Bluejay Mining share price has erupted.

Taking a step back

As exciting as this joint venture is, investors may have become over-excited. Based on the share price today, the market capitalisation of Bluejay Mining is currently around £140m. That’s quite a lofty valuation for a company that doesn’t even make money yet. And it could be a while before Disko-Nuussuaq becomes a source of income.

Based on the published timeline, the extraction process may not start until as late as 2024. Bluejay does have partnerships established with companies like Rio Tinto for its other projects. But these are also in a similar state of development.

Needless to say, this adds quite a substantial amount of risk. So while the Bluejay Mining share price might have the potential to continue exploding, it’s not a stock I’ll be adding to my portfolio today.

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Big backers

KoBold “uses machine learning to guide exploration for new deposits rich in the critical materials for electric vehicles“. Among its backers is a climate and technology fund called Breakthrough Energy Ventures. This fund is overseen by none other than Microsoft founder (and now committed philanthropist) Bill Gates. 

But Gates isn’t the only name that will be familiar to Foolish readers. Investors in his fund include former Amazon CEO Jeff Bezos, Alibaba‘s Jack Ma, and legendary money manager Ray Dalio. Michael Bloomberg and Norweigian energy giant Equinor are also on board. As rosters go, I’m not sure they get much better. 

So, what’s the deal?

The agreement will see Bluejay and KoBold develop the former’s Disko-Nuussuaq project in Central West Greenland. Once up and running, this “world-class battery deposit” will hopefully produce nickel, copper, and cobalt. We already know the electric vehicle revolution will place huge demand on miners to generate sufficient quantities of metals. Since this should push prices up, it’s fair to say this has the potential to be a highly lucrative investment for those involved. 

For its trouble, KoBold will be entitled to 51% of Bluejay’s licence for the area under a “two-stage earn-in” agreement. The remainder stays with the AIM-listed stock who will also manage field operations over this period. 

Unsurprisingly, Bluejay CEO Bo Stensgaard described today’s agreement as “transformative” for the company. So, where might the JAY share price go from here?

Where next for the JAY share price?

Today’s big uplift will naturally be welcomed by those already invested. However, it’s important to put this rise in perspective.

I last looked at Bluejay almost four years ago. Back then, the stock was available for a little over 18p a pop. Since then the JAY share price has been as high as 26p. This huge volatility tends to be the norm with junior miners, however promising they might be. Even so, it’s sobering that those who took positions back then will still be underwater.  

Of course, those that picked up the stock for around 3.5p as the first UK lockdown kicked in will have done very well indeed. So, the fact that JAY’s share price has been all over the shop doesn’t mean it hasn’t generated great returns for some investors already. Whether the announcement of a new partner means it now follows in the footsteps of Greatland Gold and multi-bags from here remains to be seen. 

Cautiously optimistic

It’s hard to look at today’s announcement and be anything but optimistic. Having some of the world’s best business minds on board certainly won’t do the JAY share price any harm either. 

As with other investment themes, however, a truckload of patience will be required. Drilling using KoBold’s tech will take time and a slowdown in global growth could be a catalyst for yet more volatility. For this reason, I’d need to make sure I was properly diversified elsewhere before taking a stake.

Bluejay could prove very rewarding in a few years’ time but one should never overlook the potential perils of penny stock investing.

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Picking future mining stars can be tough. But I can give myself the best chance to increase my future earning power by investing in high-demand commodities.

UK mining stocks risk/reward

Two UK mining stocks have caught my eye. Neither is a household name. But if successful, both could easily become massive companies. The first has an £85m market cap and the second weighs in at around £187m. So neither are fly-by-night minnows with no chance of financing their projects.

UK mining stocks require huge amounts of cash to run costly drilling programmes and employ scientists to help pick the best locations. And neither company has yet posted a profitable year.

I could get diluted if they run out of money and need to go back to the market to fundraise. A poor result in one project or another could crash the shares as analysts mark down the future earnings of the company. So there is high potential, but also high risk here.

Why to buy these UK mining stocks

AIM-listed BlueJay Mining (LSE:JAY) has gained around 40% over the past 12 months.

[fool_stock_chart ticker=LSE:JAY]

We heard on 25 May that Bluejay had started its first 3,000m drilling programme targeting nickel, copper and cobalt at Enonkoski in east Finland. The company also announced a crucial $20m joint venture deal in November 2020. Partnering with Rio Tinto here has reduced its future share of earnings, but also its ongoing costs.  

Nickel and cobalt play an important role in rechargeable electric vehicle (EV) batteries. Higher nickel content helps increases battery energy density to extend vehicle range. With everyone from NIO to Volkswagen now pumping out EVs, the dash for nickel is definitely on.

I’m keen to buy now because the higher-risk stages of identifying targets and finding funding are already complete. BlueJay’s bosses expect to announce Enonkoski results by the autumn. 

New nickel discoveries are also fairly rare, and daily nickel price have jumped 42% since May 2020, which would make a Finnish find particularly valuable.

Rare earth metals

The second UK mining stock I’d buy is Pensana (LSE:PRE). It is one of the only UK mining stocks targeting rare earth elements like neodymium and praseodymium (NdPr). One of its main projects is a 35-year licence at Longonjo in Angola.

NdPr is key for making magnets in EV traction motors, as well as manufacturing wind farm turbine magnets. Prices have rocketed from £41000/tonne last June 2020 to £66,000/tonne this year. And investment bank UBS said in recent research that prices could double as soon as 2024.

Pensana is not just a miner, either. It has won government support for what will be the UK’s first rare earth metals processing plant at the Saltend Chemicals Park in Hull. The company plans to “create the world’s first fully sustainable magnet metal supply chain” here. None of this cash-creating work is yet under way, so it could be a while before any profits hit Pensana’s balance sheet.

Still, I say diversification is key for any serious investor. And I think I can do it by picking the hottest UK mining stocks out there. 

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For those that have the time and inclination, however, the rewards from stock picking can be substantially better, as the following example shows.

Index-beater

Celebrating its tenth anniversary in the FTSE 100 this morning was miner Fresnillo (LSE: FRES) — the world’s largest silver producer. The first Mexican business to list in London, it was spun-out from Peñoles Group in 2008 but has a history going all the way back to the early 20th century. 

Having invested more than $6bn over the last 10 years, developed four new mines and grown its silver equivalent resources by 158%, the £10bn cap has vastly outperformed the index of which it is a constituent.

Using the figures provided in today’s news release, Fresnillo’s share price has climbed from 555p to 1,338p over that time — a gain of 141%. That’s over 118% more than that achieved by the FTSE 100 index. What’s more, this excludes dividends which, despite the volatility inherent in commodity markets, the company has never failed to pay to its owners (to the tune of $2.5bn over the last decade).

It is, of course, impossible to say whether the next 10 years will be so kind. In the very short term, however, things appear to be ticking along nicely. April’s Q1 report for the three months to the end of March showed a 14% rise in silver production compared to the previous year. Gold production (Fresnillo is Mexico’s largest producer) rose by 4.1%. Management’s outlook on 2018 was unchanged with 67-70moz of silver and 870-900 koz of gold targeted.

At 26 times forecast earnings, Fresnillo stock is fairly expensive but not ludicrously so. While I probably wouldn’t lap up the shares at the current time, the decent returns on sales and capital employed it’s been able to achieve over the years suggest there are worse options for quality-focused investors.

Massive potential 

It may not be anywhere near the size of Fresnillo, but things are increasingly positive for AIM-listed Bluejay Mining (LSE: JAY). The company is focused on resources in Greenland and Finland, including the world’s highest-grade ilmenite project (Dundas) and the promising Disko nickel, copper, cobalt and platinum project.

Back in April, the £200m cap reported a 400% increase to the maiden resource at the former — equating to 96 million tonnes at 6.9% ilmenite with “significant further upside” remaining. Production is scheduled to begin in 2019 with costs expected to be in the lowest quartile globally.

Currently in talks with a number of potential off-take partners, Bluejay will take a bulk sample later this year “to supply final product parcels to customers“. Thanks to the project’s location, the company believes it can sell to buyers in both Europe and North America far more easily than competitors based in Africa. 

Taking all this into account (and so long as you’re prepared to invest in a market minnow that will probably require more funding further down the line), I’m confident that Bluejay will — like Fresnillo has since 2008 — outperform the FTSE 100 going forward.

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However, this view may not hold true in all circumstances. In some cases there may be further growth to come. Having risen 1,476% in the last five years, is this small-cap stock worth buying right now?

Positive update

Reporting on Friday was Bluejay Mining (LSE: JAY). The company is focused on advancing the Dundas Ilmenite Project in Greenland into production in 2018. It released news of the commencement of a feasibility study, with a number of advisers appointed in order for it to be completed. The final feasibility report is expected for completion during the first quarter of 2018, and it will form the final part of the exploitation licence application that is expected to be approved in the first half of next year.

Bluejay Mining has risen significantly in the last five years. Investor sentiment is increasingly positive regarding the company’s outlook. If its progress continues and it is able to start production over the medium term then further share price gains could be on the cards.

Clearly, the company remains a relatively high-risk opportunity. While its strategy and project potential appear to be sound, it is a small stock which could be highly volatile and could be the subject of profit taking should its outlook deteriorate. However, for less risk-averse investors who are seeking a small mining company with high growth potential, it could be worth a closer look.

High growth potential

Offering significant investment potential right now is gold and silver miner Hochschild (LSE: HOC). The company’s share price has disappointed in the last three months, with it falling 10%. However, it has high earnings growth potential which could catalyse investor sentiment.

For example, the company is expected to post a rise in its bottom line of 81% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it could be worth considerably more than its current valuation. Furthermore, there is the prospect for an upgrade to its guidance since the price of gold could move higher. With uncertainty surrounding North Korea set to continue, and inflation likely to rise if US spending increases, demand for gold could increase over the medium term.

Hochschild could also become a more in-demand income stock. It currently yields just 1.3%, but with dividends due to be covered over three times by profit next year the level of shareholder payouts could increase rapidly. Therefore, with some defensive characteristics as well as high growth potential at a low price, the risk/reward outlook for the company remains favourable.

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Last week’s interim results made reference to “excellent progress” being made on the company’s Woodsmith Mine and associated infrastructure with development progressing on time and on budget.

Having completed all highways and enablement works and most of the preparations at the site, CEO Chris Fraser stated that the company now eagerly anticipated the commencement of shaft sinking activities. He also reported that Sirius was continuing to engage with commercial partners around the globe and that interest in the company’s POLY4 product “remains strong“.

Of course, there’s still a very long way to go and many hurdles to overcome before the mine becomes operational, which probably explains why the share price is still struggling to stay above the 30p mark. Nevertheless, I remain bullish on Sirius and its ability to grow its investors’ wealth steadily over the next few years, particularly with the company now comfortably occupying a space in the relatively stable FTSE 250 index following its move from the junior market.

For those who simply can’t wait for next four years to elapse however, there may be an alternative.

Bluejay Mining

It may be a minnow compared to Sirius but Bluejay Mining (LSE: JAY) is quickly winning friends thanks to the potential of its relatively low-cost Pituffik Titanium project in Greenland — independently verified as being the highest grade ilmenite mineral sand deposit in the world.

According to today’s interim results, Bluejay’s work programme for the year is now “well advanced” with management aiming to begin constructing the mine plant in early 2018 and a full exploration licence expected during H1. Offtake discussions with potential customers are progressing and likely to conclude within the next 3-6 months. 

Thanks to the levels of visible ilmenite concentrations being so great, Bluejay’s proof-of-concept bulk sampling programme is also “exceeding expectations” to such an extent that stockpiling is now forecast to begin far earlier than planned assuming production rates can be maintained. This puts Bluejay in an excellent position to begin selling its product as soon as the relevant licence is received.

Like Sirius, Bluejay’s project has been warmly received by the local community as well as many government and environmental agencies. June’s oversubscribed placing — allowing Bluejay to boast a net cash balance of £5.8m at end of H1 — also means the company’s popularity among institutional investors (including Prudential plc) continues to grow.

The shares have climbed over 200% since last August, leaving the company with a market cap of £136m. Based on comments from CEO Rod McIllree however, the coming months could be “equally transformative“. In time, he believes that the Pituffik project could completely transform the titanium industry. All this before Bluejay’s wider asset portfolio in Greenland and Finland is even considered.

Bottom Line

While mining projects carry significant risk, both Bluejay and Sirius could be excellent medium-to-long term investments for those determined to become financially independent. That said, while the North Yorkshire Moors are a far more hospitable environment than that faced by Bluejay, it could be that the latter’s relatively simple production model could reward holders a lot sooner. 

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