Investing in smaller companies can produce substantial returns. Unfortunately, it can also lead to significant losses. Therefore, the strategy might not be suitable for all investors.
However, I’m entirely comfortable investing in these businesses, and there is one penny stock on the market I’d buy right now.
Penny stock to buy
Precious metals miner Petropavlovsk (LSE: POG) is technically a penny stock. But with a market capitalisation of more than £800m, the company is larger than most of its fellow penny shares.
I like to have an allocation to precious metals in my portfolio to provide some protection against uncertainty. As well as precious metals, I also want to own mining stocks because, unlike precious metals like gold and silver, these stocks can provide a dividend income.
This penny stock doesn’t offer a dividend to investors at this point. However, its production costs are incredibly low. Its all-in sustaining cost of production was $1,404 during the first half of 2021. That’s compared to an average realised gold price of $1,795 for the period.
Overall, the group generated cash from operations of $52m. These figures suggest the company has the potential to offer a dividend at some point in the future.
The first half was a transition period for the company. It’s shifting to mining refractory ore from stockpiling, which involves a temporary processing shutdown. This began in 2020 and is expected to complete in the second half of 2021.
When the restructuring is complete, and the business’s new strategy and development plan is organised, Petropavlovsk’s management hopes to increase shareholder returns.
This is why I’d buy the stock for my portfolio today. After two years of restructuring operations, the company is finally coming to the end of a long tunnel. When it’s completed this spending, management can then concentrate on growth. On top of this, the group’s also profiting from high gold prices and low production costs, which gives it some of the best economics and the industry.
Risks and challenges
Despite the company’s attractive qualities, this stock isn’t for the faint-hearted. Petropavlovsk is a Russia-based precious metal miner and some investors may not be comfortable investing in this region. In addition, gold prices can be incredibly volatile. Just because the enterprise is generating healthy profits and cash flows today doesn’t mean it will continue to do so further down the line.
The industry is also struggling with rising costs. Petropavlovsk’s cost of production alone increased 15% in the first six months of 2021.
But despite these headwinds, I’d buy the penny stock for my portfolio to build exposure to the precious metals sector. I’m also encouraged by its cash generation. I believe the potential additional shareholder returns when the current restructuring is complete is also exciting.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.