Typically, penny stocks are known for their high volatility and low market caps. This often makes them a riskier investment than many FTSE 100 stocks, yet the potential for growth may also be larger. These are two penny stocks I’d buy today with the view of holding them for the long term.
Early stages of development
Greatland Gold (LSE: GGP) is an interesting case because it hasn’t actually started making any revenues yet. Instead, the gold miner is still in its exploration stages, and no mining has commenced. This process seems to be going very well, however, hence the reason for the company’s £600m valuation. Indeed, at the company’s flagship Havieron deposit, it is estimated that there is as much as 4.2m ounces of gold. This means that the company’s potential is massive.
However, the GGP share price has been falling recently and is currently 35% lower than at this time last year. This is partly because the price of gold has fallen to around $1,850 per ounce, far lower than the $2,000 it hit last year. Further, many investors have used last year’s incredible rise to bank profits.
Recently, the penny stock has fallen further, thanks to an equity raise. Indeed, the company issued 82,000,000 shares at 14.5p, a 10.5% discount to the closing price on 17 November. Through this equity raise, the company has raised £11.9m, which will be used to speed up the development of the Havieron gold deposit and be used for working capital. Overall, while I am slightly concerned that this equity raise occurred because GGP was running out of cash, of which it had £6.2m as of 30 June 2021, I still believe it is good for the long term. This is because it will hopefully allow it to start mining quicker.
As such, although there are several risks in buying a pre-revenue company, I feel that GGP’s potential is hard to ignore. Therefore, I may buy more shares while it’s priced at around 15p.
A slightly more developed penny stock
Pan African Resources (LSE: PAF) is another gold miner, yet one which is actually making profits. And with gold priced significantly higher than it was pre-pandemic, these profits have been growing. In fact, in the most recent full-year trading update, it recorded profits after tax of $74.7m, an 69% increase from last year. This enabled it to announce a record dividend of 0.916p per share, equivalent to a yield of around 5%.
Largely due to fears about inflation, the price of gold has also been able to rise recently, and there are some hopes that it can re-reach last year’s prices. This would have a majorly positive impact on the PAF share price.
But like many other penny stocks, there are of course risks. For one, mining in South Africa has had a turbulent history, with strikes and miner deaths common. Two years ago, PAF even had to halt production for a few days due to protests. This is a risk that must be considered with any mining company, and it’s no different for PAF.
Nonetheless, I’m still confident in the company’s prospects, which is why I originally bought shares. At a price-to-earnings ratio of around seven, the shares are also cheap and therefore, I may buy more.