What’s all the fuss about with the Kodal share price?

Lithium continues to be a buzzword for investors today. Due to its extensive commercial use (ie, car batteries), growth stocks involving lithium are generating a lot of interest. A case in point is Kodal Minerals (LSE:KOD). Trading volume has increased significantly in recent months, with Kodal’s share price up 72% over the past three months. Here’s what happened.

Potential for revenue

Kodal is a lithium exploration and development company focused on West Africa. A key project for the business is the development of the Bougouni lithium project in Southern Mali. However, it also has an interest in gold, with six projects related to gold mining in progress at the moment.

Even though lithium is in some ways not working, I understand why the stock price has been rising in the last few months. Feasibility studies have been carried out which suggest a minimum mine life of 8.5 years and a payback period of 0.8 years. Based on a selling price of $1,060 per tonne, the mine’s revenue would be more than $2bn.

Funding secured

This all sounds good, but one of the reasons for the real lift in the stock has secured funding. These projects are expensive to run before there is any revenue. But in January, the business secured $117.5m in funding from Hainan Mining in China. Some of this $65m will be used for the Bougouni lithium project, meaning it is now fully funded.

This is a huge benefit to the company and its existing shareholders. The risk of not being able to extract the potential from the mine due to cash flow issues has been removed. Therefore, it is now to be seen whether the mine can be successfully optimized to extract lithium first and then reach the revenue target.

Risks to consider

One point to consider is the variation in the capital cost of the project. It has increased due to higher cost of raw materials and transportation. If inflation globally does not fall as quickly as expected, costs could continue to rise. This will result in businesses having to readjust their expectations of how much funding they need.

The only other risk is that there are unknown problems when further study of the project is carried out. This can hinder the ability to extract lithium, or mean that a smaller volume can actually be removed. Again, expectations should be revised lower in this case.

Balancing everything

I get the fuss about Kodal’s share price. It has funding for a large potential lithium project. Over the past year, prices have risen by 28%. But given the market value, it is still only a small stock with high volatility. On that basis, I’m considering investing but only with a small amount, to manage the risk, but also on the chance that something big happens here in the next year.