I’m always searching for small-cap stocks that could be diamonds in the rough. One penny stock I’m currently considering adding to my holdings is Savannah Resources (LSE:SAV). Let’s take a closer look at the bull and bear case to help me decide if I should buy the shares.
Lithium miner
As a quick introduction, Savannah is an early-stage miner with a focus on a few different metal types. Although small in size, it possesses the largest lithium mining asset in the whole of Europe. This is where I believe its growth prospects lie, but more on that later.
It is worth remembering that a penny stock is one that trades for less than £1. As I write, Savannah shares are trading for 2.95p, so they qualify. At this time last year, the stock was trading for 3.5p, which is a decline of 15% over a 12-month period.
To buy or not to buy?
So let’s take a closer look at the pros and cons of me buying Savannah shares.
FOR: Savannah owns the Barroso lithium project in Portugal. This is perhaps the reason I’m most excited when it comes to the miner’s growth prospects. Lithium is set to play a huge role in the coming years in the energy and transport sectors. Lithium ion batteries are used in electric vehicles, for example. Demand for EVs is only rising as governments look to cut carbon emissions. Increased demand, coupled with the largest lithium project Europe, could be lucrative for Savannah.
AGAINST: The issue for a penny stock like Savannah is that larger competitors out there could out-muscle and outmanoeuvre them. The mining sector is competitive and saturated. A few big names dominate the market and can often buy out or overtake smaller firms like Savannah.
FOR: At less than 3p per share, Savannah seems to me like a very low risk way for me to open a position in a business that could experience a meteoric rise. That said, I am aware there is a long way to go and many ifs and buts.
AGAINST: Savannah hasn’t actually received sign off from authorities to begin mining at the Barroso mine. With this in mind, there are a couple of things that could occur for the penny stock. The biggest risk for me is that it could run out of money, which means it would need to take on debt to keep the lights on or risk being taken over by a larger competitor. I will monitor events.
A penny stock I would buy
In conclusion, I would add a small number of Savannah Resources shares to my holdings. I do believe that if it receives approval for its Barroso project, it could be quids in. This could be good news for an investor like me looking to get in at current levels.
I am conscious Savannah is a penny stock with some tangible risks, however. Ultimately, this is the case with many small caps entering large markets, looking to make a name for themselves. I’ll buy some shares and keep a close eye on developments.