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It has been a rollercoaster few months for Kodal Minerals (LSE: KOD). The share price has soared by 73% over the past 12 months and doubled in five years. But since April, it has tumbled 40%.
What is going on – and could there be further falls to come?
Capital raising
I think two things have been important in driving the Kodal Minerals share price.
One is the long-term outlook for the miner. With demand for lithium expected to grow, the area could be akin to a gold rush as investors try to get a slice of the action. Lithium shares including Kodal have benefitted from increased investor interest.
The second, more specific, driver for the Kodal Minerals share price has been a proposed funding package from Chinese investors first announced in April.
That would have helped improve the company’s balance sheet.
That is important, because in the early stages of developing mining projects before commercial production starts, they can consume a lot of capital while generating no revenues.
Funding delays
The capital injection is expected to be $100m. Kodal received $3.5m of the money this month.
But, for the deal to be finalised, certain terms need to be complied with. This is taking longer than the companies had hoped.
A deadline for the deal, already pushed back to today (31 August) has now been extended to the end of next month.
Bumpy road
Time kills all deals, as the old saying goes. As the final agreement for the funding has been repeatedly delayed, investors have marked down the Kodal Minerals share price. I think that is understandable. Clearly some investors are concerned that the longer things go on, the less likely the deal is to happen.
Finalising it involves Kodal negotiating with the Malian government. That involves political risks such as the government trying to extract more benefits from the company’s operations for itself.
On the other hand, the Chinese investors seem to be serious about the deal. They have repeatedly agreed to extending the deadline and already paid millions of dollars to Kodal even before the deal is finalised.
Rise or fall?
If the deal falls through, I think the Kodal Minerals share price could well tumble. Even after its recent decline, it remains about 30% higher than before the deal was initially announced in the spring. I think the shares could shed all of that gain immediately if it is announced the deal will not proceed.
However, I think the opposite is also true. If the deal is finalised, I think we could see the Kodal Minerals share price regain some of the ground it has lost since the initial announcement.
The ongoing uncertainty simply underlines why I have decided not to invest.
Kodal’s business faces significant risks. It also lacks a track record of profitability, despite having some attractive assets that might yet generate sizeable earnings in future.
