What’s going on?

Before we get to the stock, let’s consider lithium. One of its main uses is in batteries, a key component for electric vehicles (EV’s). Despite higher demand for EV’s, there’s an oversupply in the lithium market.

There’s been a large increase in production, particularly in places such as Australia and China. Naturally, it makes sense to get into the market due to the long-term demand. But in the short term, the price has taken a sharp knock.

Looking forward, I think the price will rally. EV’s accounted for 18% of total car sales last year, up from 14% in 2022. The market’s expected to continue growing in coming years, especially as governments continue to push people to go green.

If China’s economy recovers in the coming year, this huge market should push lithium prices higher almost by itself.

A stock that could benefit

Based on my view, stocks related to lithium could outperform in the coming years. One example on my radar is Savannah Resources (LSE:SAV). The penny stock is a leading conventional lithium development company.

The stock’s down 24% over the past year. This is in part due to the weakness in the lithium price. Also contributing to the stock’s fall is investors treading water regarding its main Barroso lithium project in Iberia. Until this comes online and starts generating revenue, it’s currently just a costly expense.

Yet because the stock has a small market cap of just £69m, it has the potential to rocket with only a relatively small amount of buying activity. If the lithium price increases, then the monetary value of the Barroso project increases. This would help to boost the share price.

Construction is due to start next year, with first production in 2026. This isn’t that far away from yielding cash for the business. Even though the firm generated an operating loss of £3.5m last year, it had £9.7m of cash on hand at year end, so I don’t see a huge problem here.

A risk is that Savannah might have problems with the project before production in 2026. With this type of project, there are numerous things that can go wrong, even at the last minute. Until production actually begins, there’s always uncertainty.

Lithium’s the future

Based on my view on lithium being crucial going forward, I want to get exposure. If my forecast on the price is correct, Savannah Resources could gain in value, even before production comes online. Therefore, I’m thinking about adding the stock to my portfolio shortly.

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Michelmersh Brick Holdings

Homebuilding activity could slow sharply in 2023 as interest rates keep rising. In this scenario demand for construction products might fall off a cliff.

Fresh financials from landscaping specialist Marshalls this week has raised fears of a market meltdown. Here, like-for-like sales plummeted 14% between January and April. This was due partly to lower housebuilding rates and a subdued repair, maintenance and improvement (RMI) sector.

Yet it can be suggested that such a threat is baked into Michelmersh Brick Holdings’ (LSE:MBH) low valuation, a share I’m looking at today. Today, the penny stock trades on a forward price-to-earnings (P/E) ratio of 9.4 times.

I believe that a huge deficit in the UK brick market should help the business to absorb any temporary downturn. Just six weeks ago, Michelmersh noted that “we still have record low inventory volumes of bricks” despite a cooldown in the housing sector. This explains why the firm’s gross margin still sits at elevated levels around 40%.

Domestic brickmakers are boosting capacity to capitalise on this market imbalance. But it’s likely that Britain (which imports a third of all the bricks it needs) will continue to suffer a supply shortage if — as expected — home construction ramps up later this decade. So Michelmersh looks in good shape over the longer term.

I’m also expecting a solid RMI market to boost the company’s revenues once economic conditions improve. Britain’s housing stock is the oldest in the world and requires huge constant investment to keep it in good shape.

Savannah Resources

Junior miner Savannah Resources (LSE:SAV) describes its Barroso project in Portugal as “Europe’s most significant resource of hard rock spodumene lithium”. That’s no small claim and it suggests huge profits potential here as electric vehicle (EV) sales rocket.

Investing in early-stage mining companies carries extra risk. Businesses like this £65m market-cap have less financial clout than a FTSE 100 or FTSE 250 operator, for instance. This means they may have to take on debt, or sell, new shares to carry on operating.

However, the rewards can also be explosive. Assuming Savannah gets approval to start producing at Barroso, the cash could flood in as EV production heats up.

The site contains enough lithium to support annual production of 22,000-25,500 tonnes. That’s equivalent to half a million car battery packs every year. There is huge expansion potential in the area too that could supercharge earnings at the company.

Analysts at Goldman Sachs believe EVs will account for half of all global auto sales by 2035. And as the graph above shows, demand growth in Europe is expected to be especially strong. If things go to plan Savannah could deliver outstanding investor returns over the next decade.

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Lithium miner

As a quick introduction, Savannah is an early-stage miner with a focus on a few different metal types. Although small in size, it possesses the largest lithium mining asset in the whole of Europe. This is where I believe its growth prospects lie, but more on that later.

It is worth remembering that a penny stock is one that trades for less than £1. As I write, Savannah shares are trading for 2.95p, so they qualify. At this time last year, the stock was trading for 3.5p, which is a decline of 15% over a 12-month period.

To buy or not to buy?

So let’s take a closer look at the pros and cons of me buying Savannah shares.

FOR: Savannah owns the Barroso lithium project in Portugal. This is perhaps the reason I’m most excited when it comes to the miner’s growth prospects. Lithium is set to play a huge role in the coming years in the energy and transport sectors. Lithium ion batteries are used in electric vehicles, for example. Demand for EVs is only rising as governments look to cut carbon emissions. Increased demand, coupled with the largest lithium project Europe, could be lucrative for Savannah.

AGAINST: The issue for a penny stock like Savannah is that larger competitors out there could out-muscle and outmanoeuvre them. The mining sector is competitive and saturated. A few big names dominate the market and can often buy out or overtake smaller firms like Savannah.

FOR: At less than 3p per share, Savannah seems to me like a very low risk way for me to open a position in a business that could experience a meteoric rise. That said, I am aware there is a long way to go and many ifs and buts.

AGAINST: Savannah hasn’t actually received sign off from authorities to begin mining at the Barroso mine. With this in mind, there are a couple of things that could occur for the penny stock. The biggest risk for me is that it could run out of money, which means it would need to take on debt to keep the lights on or risk being taken over by a larger competitor. I will monitor events.

A penny stock I would buy

In conclusion, I would add a small number of Savannah Resources shares to my holdings. I do believe that if it receives approval for its Barroso project, it could be quids in. This could be good news for an investor like me looking to get in at current levels.

I am conscious Savannah is a penny stock with some tangible risks, however. Ultimately, this is the case with many small caps entering large markets, looking to make a name for themselves. I’ll buy some shares and keep a close eye on developments.

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Here are two top penny stocks I’d happily spend £10k on right now. Each costs less than £1 to buy. And both have a market capitalisation of below £100m.

Alternative Income REIT

Price: 84.2p per share
Market-cap: £68.1m

I think buying property stocks could be a good idea during this period of high inflation. I also believe investing in Alternative Income REIT (LSE: AIRE) in particular could be an effective way for me to go about this.

Real estate businesses are a classic safe-haven when prices are rising sharply. The underlying assets of property shares tend to rise in value in inflationary environments. So do the rents they charge tenants, keeping revenues rising nicely.

I like Alternative Income because of its status as a real estate investment trust (REIT). This means at least 90% of annual profits must be distributed to investors by way of dividends. As a consequence, dividends often come in on the big side, which can greatly reduce the impact of inflation on my wealth.

This investment trust isn’t exactly immune to these difficult economic conditions. Some of its tenants like retailers and industrial firms could suffer as broader consumer spending slumps. Still, I think the company’s large exposure to stable sectors like healthcare, education and utilities helps reduce the danger this poses to profits.

Savannah Resources

Price: 4.1p per share
Market-cap: £70.9m

Savannah Resources (LSE: SAV) could be a great way for me to make big money from the electric vehicle (EV) boom of the next decade.

It owns the Barroso lithium spodumene project in Portugal, an asset which could play a critical role in the EV battery supply chain. Barroso contains some 27 million tonnes of lithium, making it the largest lithium mine in Western Europe.

Savannah applied for environmental approval at Barroso more than two years ago. But it is still waiting for Portuguese authorities to give the go-ahead for work to begin. The business remains a long way from initial production and its balance sheet may need reinforcing if it doesn’t start mining soon. This could come by placing more shares or by raising debt.

This is a normal part of investing in smaller mining companies however. And, in my opinion, the potentially-colossal benefits of owning this lithium stock still make it an attractive buy.

Analysts at Statista think global lithium demand will hit 2.1m tonnes by 2030 as EV sales explode. That compares with 559,000 tonnes it predicts for 2022. The prices that Savannah charges for its lithium could be exceptionally strong too if, as many predict, material shortages develop towards the end of the decade.

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Lithium is a key ingredient for the lithium-ion batteries of EVs.  In 2010 there were only 17.000 EVs on the world’s roads.  By 2020 the number had climbed to more than 10 million.  And whilst overall EV penetration remains low, accounting for just 4% of light vehicle sales last year, Bloomberg predicts that by 2037 EVs will account for more than 50% of new vehicles sold globally.  In Q2 of 2021, Tesla alone delivered a record 201,250 EVs globally.

Lithium has a range of pricing markets, but generally the price of battery grade lithium has more than doubled since December 2020 as EV demand has pushed supply-demand into deficit.  Lithium price rises show no sign of abating.  China has invested $60 billion to support plans to transition completely to EVs by 2035, and already buys up the vast majority of lithium produced by the world’s largest producers, Australia and Chile.

I predict that carmakers will soon be chasing lithium supply and that ‘home grown’ battery-manufacturing capacity will become a hot-button issue for European Governments.  I also predict that European OEMs will increasingly seek to reduce their supply chain emissions by sourcing their lithium locally. 

2020 already saw Norway become the first country in the world where more EVs were sold than fossil fuel cars.  In the United Kingdom, 31,800 battery electric cars were sold in in the first three months of 2021 alone, accounting for 7.5% of UK car sales.  During that same quarter 30,500 EVs were sold in France and another 64,700 were sold in Germany. 

Bacanora looks likely to be the first UK-listed lithium miner to reach production and has already begun to build mining facilities at the Sonora clay lithium deposit in Mexico.  Bacanora plans to derive a battery grade lithium product from its own processing facilities that it will then sell directly to battery manufacturers rather than through exchanges. 

The majority of Bacanora’s supply is already committed to Chinese company Ganfeng, which owns 29% of the equity in Bacanora.  Whilst this undermines my ‘local demand for local supply’ thesis, the combined fact of Ganfeng’s stake and pre-committed supply for me mitigates risk for what could otherwise be regarded as a high-risk early-stage miner.  Bacanora has a market cap of £222m at the time of writing, and its shares are up 152% over the last year.

More aligned with my ‘local lithium supply for Europe’ thesis is AIM-listed Savannah Resources.  The company is working on a lithium mine in Portugal to supply European EV battery OEMs, but is still a long way off production.  Savannah has a market cap of just £62m currently, which makes it a minnow in the mining sector.  Its price is up by 73% over the last year but at 3.64p is currently far short of its 52-week high of 5.97p. 

For a five-year buy-and-hold investment in Savannah, I expect that a rather pleasant return would be waiting by 2026 and that a ten times return may even be possible.  Whilst that may seem outlandish, my prediction is that lithium prices will quickly enter into a self-perpetuating bubble as demand surges far more quickly than mining capacity grows.  I also predict that this will stimulate large-cap miners to buy out smaller producers at high prices.

Let’s be clear that these are currently pre-revenue companies with no dividend yield whatsoever any time soon.  Their price could fluctuate vastly as investors get to grips with the dynamics of local pockets of supply and demand for lithium.  Investors could also get diluted if these companies need more capital to reach production.  All of that is risk.

But in my view the strong correlation between lithium and EV demand make these lithium miners less speculative than other small and medium-cap miners whose product is slave to fluctuating market prices at the time they come on stream.

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Today, I want to talk about two lowly valued UK shares that are in the lithium business. Here’s why I think Kodal Minerals (LSE: KOD) and Savannah Resources (LSE: SAV) could be great investments for me.

2 penny stocks with high demand

Lithium has become a hugely sought after commodity in recent years. According to Statista, lithium’s market value is set to increase to $4.93bn by 2027. Consequently, companies have emerged from all over the world to seize on this rapidly developing market. 

I think that the size of the market will provide opportunities for smaller businesses to get their piece of the pie. So, although competition in this market is fierce, I still see Kodal and Savannah having a respectable chance to develop.

Kodal Minerals

Kodal Minerals is a UK mining and mineral development company that has a strong focus on the lithium industry.

What I find very exciting is that the Kodal share price has seen exponential growth in the past 12 months. This time last year, Kodal was trading at a price of just under 5p and as I’m writing, it’s trading at 40p. It could also rise in the near future with Kodal expected to have its mining licence accepted for its flagship project in Mali. The licence is currently in its final stage awaiting approval. 

Kodal’s cash balance reached a new high in its FY20 report at £870,000, whereas in its FY19 report, the company only recorded £315,000. On top of that, the company’s losses are narrowing every year. In 2020, Kodal reported a loss of £255,000, compared to £339,000 in 2019. I think these are very encouraging results for an emerging penny stock. 

Savannah Resources

Savannah Resources is a mineral development company and is listed on the FTSE-AIM. The company has ambitions to be the first major producer of lithium in Europe.

The Savanah share price has risen 73% in the last year which is not as impressive as Kodal’s increase, but is still quite an advancement. The lithium stock is operating on two major projects at the moment, one in Portugal and another in partnership with Rio Tinto, in Mozambique. 

Risks

I’ve identified two main concerns for these stocks. The first is in regard to the rise in hydrogen fuel cell technology. This development has the potential to alter the electric car production line in the future, making lithium based batteries obsolete in this sector. 

Secondly, there are multiple lithium mining companies and developers that have already established themselves in the market. It could become difficult for Savannah and Kodal to push their way in.

Should I invest? 

Penny stocks can be volatile investments and with the news surrounding the advancement of hydrogen fuel cell batteries I’m concerned for Kodal and Savannah.

However, I think I’ll take a speculative position with these two shares as I’m encouraged by the strong financial reports, the share price growth and overall potential. 

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I don’t have a problem buying penny stocks for my own shares portfolio, however. This is because I buy UK shares with the aim of owning them for a long period of time, say 10 years or more. So the possibility that prices could be choppy at times doesn’t put me off. I’m confident that the stocks I’ve chosen to buy will demonstrate the quality to rise in price over the next decade.

Here are what I think could be two of the best UK penny stocks to buy right now.

Meat-free mammoth

Companies that help develop and manufacture so-called ‘clean’ and meat-free foods could prove to be great investments as people change their diets on health and welfare grounds in huge numbers. This is where Agronomics (LSE: ANIC) comes in, an investment firm chaired by Innocent Foods co-founder Richard Reed. This penny stock’s investments include fake beef manufacturer Mosa Meat, synthetic cheese maker Formo, and Bond Pet Foods which makes meat-free foods for companion animals.

The field of ‘next gen’ foods is attracting huge investment from specialised businesses (like those of Agronomics) as well as from multinational food manufacturers. Even global meats giant Tyson Foods is splashing the cash to exploit the vegan revolution. So Agronomics is operating in an extremely competitive environment which means that success is not guaranteed.

That said, the stock has stakes in a number of cutting-edge firms whose industry-leading technologies could have a huge part to play in our dietary changes over the next few decades. Nielsen says that plant-based food sales rocketed 264% year-on-year in the nine weeks to 2 May, illustrating the huge potential of companies like this.

Another top penny stock

I think getting a slice of the electric vehicle (EV) market is another good idea for UK share investors like me. And I believe that investing in Savannah Resources (LSE: SAV) is a good way to play this theme.

Why? Well this penny stock owns the Mina do Barroso lithium project in Portugal. And so it’s in the box seat to exploit exploding demand for EV vehicles. The European Commission has set a target of having 30m EVs on the road by the end of the decade. That compares with fewer than 2m at the end of 2020.

A word of warning, though. Setbacks in the development of Mino do Barroso could have serious ramifications for Savannah Resources’s profits outlook and cost models, and critically for small-cap UK shares like this, its balance sheet. Still, the company’s share price has dropped sharply in recent months due to fears over car production rates on supply chain issues. And I think this makes the penny stock an attractive dip buy for long-term investors like me.

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Supplying the world’s largest lithium market

Savannah Resources (LSE: SAC) is my first share to buy now. It has massive potential due to its Portugal-based Mina do Barroso mining project. The company argues that it is “well established as Western Europe’s most significant spodumene lithium project.” In addition, “Savannah believes that there is significant potential for further resource definition.”

Two days ago, Savannah Resources joined the Portuguese Association for the Battery Cluster (BATPower) as a founding member. BATPower was coordinated by the International Iberian Nanotechnology Laboratory, an organisation set up and funded by the Spanish and Portuguese governments to help promote lithium power. This is a strong positive indicator for Savannah’s prospects. Furthermore, CEO David Archer has highlighted its research into new mining technologies that will reduce high underlying costs.

Europe, as a global car manufacturing hub, is the world’s largest lithium market. As the largest miner of the most important component of electric car batteries in Europe, Savannah Resources is well placed to take a massive market share as the EV revolution gets under way.

In 2018, the raw price for lithium reached an estimated $17,000 per metric ton, before falling to $8000 due to the effect of the pandemic on car manufacturing. However, it looks likely that the demand for lithium will only grow, though this is not guaranteed.

The bad news is that Savannah Resources shares were priced at 13.4p in June 2018, but tumbled with the price of raw lithium, and are now at 3.5p. However, it’s still a share I’d buy today.

A lithium-powered takeover?

Kodal Minerals (LSE: KOD) is my second share to buy now. It recently paid the mining licence application fee to begin work in the next few weeks at the Bougouni Lithium Project in Mali. Kodal predicts a production of 2550 kilotonnes of spodumene (lithium ore) over the next eight years.

I’d buy this stock primarily for its potential buy-out by Ganfeng. Ganfeng, China’s largest lithium producer, has a history of buying out lithium miners, recently taking complete control of Bacanora.

In addition, Ganfeng just purchased a 50% stake in the Goulamina Lithium Project for £93,500,000, securing 455 kilotonnes of spodumene over the mine’s lifetime.

Kodal’s market cap is currently £72,000,000. Ganfeng was prepared to pay over £20,000,000 more than this for less than a fifth of the lithium that Kodal currently controls.

The best news? The Bougouni Lithium Project and the Goulamina Lithium Project are geographically adjacent to each other.

The caveat is that this stock has quadrupled in the past two months to 45p today. However, for me, the long-term upside and potential buyout makes this a share I’d buy today.

The post 2 of the best ‘secret’ shares to buy now appeared first on The Motley Fool UK.

London-listed lithium stocks

Ganfeng already has a 17.41% stake in BCN. In February, the companies agreed to raise this to 28.88% and this should complete shortly. The BCN share price is currently around 57.6p and to make a full acquisition, Ganfeng would acquire the rest of its stake in BCN at 67.5p a share. But this arrangement is still at the proposal stage, and as yet no formal offer has been made. Therefore, I think it would be speculative to buy the shares today.

Meanwhile, Savannah Resources (LSE:SAV) is another FTSE-AIM-listed lithium stock with a rising share price. Savannah is a much smaller company than Bacanora, with a £60m market cap. But it has big ambitions to be Europe’s first major lithium producer. The Savannah Resources share price has risen 104% in the past year but is down 35% from its 52-week high.

Savannah has two projects on the go. A 90% stake in a lithium project in Portugal and a 20% stake in a heavy mineral sands project in Mozambique. The Mozambique project is in partnership with FTSE 100 stock Rio Tinto.

Savannah’s target is to create a premium, carbon-neutral lithium concentrate in the EU.

A rocketing lithium price

The price of lithium has risen over 106% in the past year. And a recent International Energy Agency (IEA) clean energy transition report notes lithium demand could increase 40-fold by 2040. That’s because meeting the Paris Agreement goals will massively raise demand for lithium-ion batteries for use in electric cars.

And according to the South China Morning Post, there are now over 500 electric car companies in China alone vying for market dominance. So this helps explain the soaring lithium price.

China is currently by far the biggest lithium processing country, which the IEA says presents a potential ‘energy security’ issue. With this in mind, investors and governments may be disheartened to see Bacanora acquired by a Chinese firm.

Investing in penny stocks

Penny stocks are highly speculative and junior exploration stocks even more so. While the soaring price of lithium could well bring a share price rise to each of these companies, they also carry significant risk. Projects often cost more than expected and multiple share placings are par for the course. Savannah completed a share placing only last month at 4p a share, raising £10.3m towards its Portugal project.

With all that in mind, I’m not tempted to invest in Bacanora Lithium or Savannah Resources today.

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We’re looking at a 35% climb so far in 2018, though the price chart again shows what seems to be ubiquitous behaviour for growth shares — a massive spike on good news, followed by a gradual fall as reality sets in. If you follow a general rule that says “after you see a share spike rapidly, don’t buy,” you might miss the occasional bargain, but I reckon you’d save a lot of money (and heartache) overall.

Precious stuff

Anyway, lithium is a very desirable commodity, being the stuff that in-demand batteries depend on, and Savannah has just announced a big jump in estimates for how much of it there is at its Mina do Barroso project. It’s apparently Western Europe’s largest known spodumene lithium deposit (with spodumene being lithium aluminium inosilicate).

With estimates up by 44%, the company reckons on having around 20.1 million tonnes of it at 1.04% lithium. That’s the equivalent of 209,000 tonnes of Lithium Oxide (Li₂O).

Cash?

A downside of an investment in Savannah Resources, in common with many resource exploration companies, is lack of profitability — forecasts for 2018 and 2019 suggest two more years of losses. But the firm enjoyed a successful £11.5m placing in July, which was followed by major shareholder Al Marjan Ltd shelling out £1m for some additional shares.

It’s a high-risk investment, but one that I think has a decent chance. But beware of previous false starts — the price is still below an earlier spike in 2014.

Recovery

I’ve long seen Petrofac (LSE: PFC) as a tempting recovery prospect, thinking that a sustained oil price recovery could see the firm’s fortunes turn back up. The services the company provides to the oil industry have been under severe pressure as the sector had slashed non-essential spending, with outsourcing taking a lot of that hit.

The big question for many was when things would start to turn upwards, but I’ve never been one for trying to time the market. A stable oil price, I think, was the needed trigger, and it’s starting to look like that’s what we’re getting.

From a 2018 low in early February, the Petrofac share price has gained 45%. And even after that, the shares are trading on a lowly P/E multiple of less than nine based on current forecasts. On top of that, dividends for this year and next are expected to yield around 5%, even after the payout was cut by almost half in 2017.

Organic growth

First-half results in August showed the firm pursuing “organic growth as the market recovers.” That was on the same day we heard of a new $600m contract in Algeria, taking new orders for the year to August up to $3.3bn.

Petrofac still has the weight of an SFO investigation bearing on its shoulders, but I really see the pessimism as being already factored-in to the share price. It’s probably being held back by small EPS falls forecast for this year and next too, but that’s after a very big earnings recovery.

Petrofac looks like a solid recovery buy to me right now, and it might get some of my next pension investment cash.

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