Kodal Minerals PLC (LON: KOD) is down 9% or so at pixel time, this following the near 50% rise since recent lows earlier in December. This shows that, entirely separate from anything else, Kodal shares are volatile in their valuation. It’s also true that the spread – the gap between buying and selling price – is currently 2p, although it’s sometimes possible to deal inside that. The effect of both together is that volatility is considerably greater than the spread, so it is possible to trade this profitably.
Of course, to do so requires being on the right side of the movements in price. Knowing that trading is possibly worthwhile is only the first step, knowing which position to take is more difficult.
As we’ve discussed before about Kodal Minerals, the company is looking for gold in West Africa. For centuries this has been a significant source of artisanal mine output and there is great sense in re-checking the old workings with modern exploration and extraction techniques. As we’ve also pointed out about Kodal their second leg is lithium mining in much the same geographic area. Since those observations, the stock has moved a lot. Kodal is near 50% up of its most recent lows for example.
This sort of volatility is inherent in a junior – that is, one not producing as yet – miner. The valuation of any capital asset is the net present value of all future income streams. So, taking the lithium mine opportunity as an example here. To come to a valuation we need to know how much there is in that mine – this is currently still being confirmed. We also need to think about how much capital will be required to develop it. Then we want to know what the lithium price will be when production comes online. There are an awful lot of “ifs” in that calculation. Changing one or more of them as information comes through can wildly change the end result of that net present value calculation.
With the gold prospects, this is a little easier, as while the future gold price is unknown we don’t think that there’re going to be any massive new gold finds which radically change that global price. With lithium that’s not quite true. Even changes in Chile’s mining law could change supply enough to change future prices.
Exactly which way a junior miner’s price is going to go is difficult because of the number of moving parts in such a valuation. Something we can be reasonably confident about is continued volatility in that valuation at a company like Kodal Minerals. Volatility with a relatively tight spread, yes, that’s a possible trading opportunity. Which specific move, in which direction and when, will depend upon both news and the changing assumptions about what news will be of other market participants.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.