This penny stock has soared 55% in 2023! Time to buy?

A year is barely two months. However, some stocks have displayed outstanding performance. For example, one penny stock on the London market has risen 55% since the beginning of 2023. I see a potential catalyst for further share price growth – so should I buy now?

Lithium shows

The company in question is Kodal Minerals (LSE: CODE).

Recent performance has been strong and, over the past year, the penny stock has risen 49%. But looking back, the share price has fallen 80% since Kodal was listed in 2013.

There were also previous increases. For example, in late 2016 and early 2017, the stock jumped to a higher level than it is now, before retreating. Clearly this is a volatile stock.

But now, there is a high demand for lithium. That has fueled investor interest in renewable energy stocks like Kodal. It’s not the only benefit of the general interest in lithium, though. The rise in prices in recent months has a special reason.

Last month, the company announced a financing package that could help start production at its flagship Bougouni project in West Africa as well as expand other exploration and development activities.

But Kodal is still unprofitable and Bougouni’s long-term commercial viability remains to be proven. Often when companies raise cash, diluting shareholders, stock prices fall in response. So why are these penny stocks rising?

Chinese stocks

I think the answer is partly that funding is a sign of confidence in the company’s viability by concerned strategic investors, Hainan Mining.

Above, I see the possibility of a long-term takeover offer at a higher price than the current one. Lithium is in short supply and producers are trying to claim what they can do. We have seen Chinese lithium producers take over London-listed lithium miners, as happened with Bacanora Lithium.

Hainan may be interested in becoming a partner in the Bougouni project with Kodal. But if things go well, they can decide that it’s easier to buy Kodal and have full control.

For the shares it bought last month, Hainan paid a 100% premium to the average new undisturbed share price before the announcement. With a market capitalization of around £2bn, the Chinese company undercut Kodal with a capitalization of £70m.

Should I buy these penny stocks?

However, as a long-term investor, I am interested in buying stocks that I think are good businesses.

I don’t buy shares just because I think they might be subject to future takeover bids. Now, in any case, Hainan has not indicated that it wants to increase Kodal’s stake in the future. It may never do so.

Loss-making stocks have eroded much of shareholder value in the past decade. It continues to have no revenue and fortune is very tied to one project in a politically volatile area. The risk profile is more important to me than the potential share price, so I won’t invest.