The dream of shopping for a penny share solely to see it soar in price may be alluring – however in follow many make large strides within the flawed route.

One penny share that has carried out very nicely over the previous 5 years is mining prospector Kodal Minerals (LSE: KOD). Over that interval, the share has soared 540%.

It nonetheless sells for lower than a penny (little greater than a farthing in outdated cash, in truth!) However current efficiency has been disappointing. This yr the price has fallen 11%.

The Kodal Minerals share price is now round 64% decrease than its excessive level in April of final yr (coincidentally, the very month I wrote that I’d not be investing within the miner).

Rollercoaster journey

That type of volatility underlines the purpose that, typically, investing in penny shares is just not for the faint-hearted. So what has been happening – and would possibly the decrease price provide an opportunity for me so as to add Kodal to my portfolio?

As tends to be the case with a lot of penny shares, Kodal mainly has an curiosity in some mining prospects which may transform extremely profitable. However whether or not that ends up being the case is dependent upon elements just like the viability of manufacturing, political dangers (Kodal’s flagship undertaking is in west Africa) and in addition market pricing for the minerals it goals to mine (equivalent to lithium on the principal prospect website).

A rising lithium price for some time, promising outcomes from the primary drill websites, and a partnership with a bigger Chinese language mining firm all assist clarify why the Kodal share price has carried out so nicely over the previous 5 years.

Probably nonetheless a lot of alternative

However I believe these issues have now been factored into the share price, notably the Chinese language deal that helped increase Kodal’s attraction because it concerned a big money injection.

I nonetheless see a lot of issues to love in regards to the Kodal funding case. The flagship west African lithium undertaking is near completion and manufacturing is predicted to begin within the first quarter of subsequent yr. From the second quarter of subsequent yr, the corporate tasks sturdy free money circulate (although for now that is still a projection – we are going to see what occurs in follow).

On the finish of March, Kodal had a money stability of £16m. That’s equal to round 1 / 4 of its present market capitalisation and helps it to fund ongoing operations earlier than it strikes into producing free money flows.

Tempting, however not for me

All of that is recognized to the market. However I nonetheless reckon that, if manufacturing does certainly begin within the upcoming quarter and Kodal generates sturdy free money flows throughout the subsequent seven or so months, because it predicts, that will encourage some traders to look once more at its funding case.

If issues go nicely – for instance manufacturing meets targets and lithium costs are cheap – I might see a justification for the price to go up.

However the previous a number of years have seen the lithium price fall sharply (although it’s nonetheless nicely above the place it stood 5 years in the past). Kodal is closely depending on one undertaking. Some traders could also be snug with that stage of threat however I’m not, so is not going to be shopping for this penny share.