Why the Kula Gold Ltd share price soared more than 100% today

If management of Kula Gold Ltd (ASX: KGD) receive a speeding ticket (price and volume enquiry) from the ASX, they can point their finger at one broker.

The Kula Gold share price is currently up 110% at 4 cents, after analysts from Credit Suisse tipped the prospective gold miner as one of their top 6 shares for 2016. Frankly, that’s pretty irresponsible for a company with a market cap (after the rise) of just $8.9 million.

Earlier this week, Credit Suisse tipped Kula Gold’s share price to rise 362%, with a target price of 6 cents.

Kula Gold is developing the Woodlark Island Gold project in Papua New Guinea (PNG) and received its mining lease in July 2014.

But investors are forgetting that the company will need at least US$160 million (A$228 million) to build the processing plant and associated infrastructure – At the end of December 2015, Kula Gold had just $1.1 million cash in the bank. A capital raising is likely just around the corner.

Construction is expected to take 18 months, IF the company can acquire the financing, and then IF everything goes to plan (unlikely). Production is expected to be around 100,000 ounces of gold a year.

This is truly a highly speculative investment (actually, it shouldn’t be called an investment, rather a lottery ticket), and the odds of it not paying off for investors buying in today are high. If you truly want to invest in a gold miner, you’d be better off with producing, profitable miners like Northern Star Resources Ltd (ASX: NST) or Evolution FPO (ASX: EVN). Northern Star even paid a fully franked dividend last year and Evolution paid out a token dividend.

Foolish takeaway

Speculators and traders may be buying in today in the hope of seeing a quick profit – but they are more than likely to see a quick loss of their capital.

Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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