Penny stocks are hardly a good choice when market volatility springs back to live, butdontoverlook the shares ofXtract Resources(LSE: XTR)andJubilee Platinum (LSE: JLP), whose performances read80% and 90%so far this year, respectively. By comparison, the FTSE 100 is down 8% during the period.
With downward pressure on the dollar pushing up the prices of precious metals, my attention has been caught by these two tiny companies, which carry obvious operational and financing risks yet the shares of both could easily outperform themain index, based on certain assumptions.
I Do Not Dislike Jubilee
Why am I tempted to buy its shares now? Well, theytrade at 3.2p, which is below the price of the placing thatwas announcedearlier this month.This is one element I like.
The bears argue that it might be too early to invest inJubilee, but its quite possible that its shares will sky-rocket in this environment dollar down, gold upis an obvious correlation, but theres more to it.
At a time when risk appetite is unlikely to prevail, Jubilee has convinced me that its business is on the right track: it has managed to receive thebacking of its shareholders, and it could even raise debt to finance its producing assets, all of whichwould be a remarkable achievement for a 30m market-cap miner whose fair net asset value is virtually impossible to determine at present.
Funding Plan
In early August it said that it had secured the funding shortfall from the offered debt funding for the simultaneous execution of its two Platinum Surface Projects, by placing of 71m ordinary shares at a price of 3.4p. That valuation implies a 3.3% premium to the 30-day weighted average price of Jubilee as at 4 August 2015.
Moreover, it is in talkstalk with a major financial institution to secure the debt element of the project financing that is required to bring its two platinum projects into operation. The size of the ZAR based debt funding equates to 12.9m before financing costs, it said, adding that the budget is 13.71m, with working capital estimates at 3.8m.
These are big numbers for Platinum, butgood progresshas been made since early January.
So, why not?
Execution risk and the price of platinum which was up almost 10% at one point in August are elements that bring uncertainly, of course, but then you should invest in plain-vanilla bonds offering negative real yields if you are not willing to embrace risk!
Im More Cautious On Xtract Resources
Gold prices are up 2.5% in August but had risen more than 6% until Monday during the month.
Aside from a top-down approach, which could support the Xtract investment case,not many elements have emerged since the company in the second quarter said that it had identified asignificant concentration of gold on the intersection of two majorgeological structures at the Salvadori prospect at the Chepica Gold and Copper Mine in Chile.
That said, its currently valued at 0.25p a share, which is a valuation thatreceived the backing of investorsin previous funding rounds.
In truth, Xtract stock could be worth anything between 0.25p and 1p, for an impliedmarket cap of between 22m and 90m,but then its future success depends on how quickly it will actually deliver material updates on its pipeline of projects.
Until then, I am happy to hold fire.
I Am Bullish Here!
I am after more solid trading updates and cash flow prospects, and that’s why I’d rather bet on asmall, quality firm that boasts an outstanding track record, and whose sharesare up 10% today on the back of strong half-year results.
Its prospects are discussed in this exclusive FREE report, whichoutlines all the mainfeatures ofthispalatable investment, whose valuecould easily doubleinto 2016.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.