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Prospect Resources Ltd share price up 217% in one day: Here’s why

Prospect Resources Ltd (ASX: PSC) saw its share price more than triple today, rising by 217% to 1.9 cents, as the hype over lithium continues.

PSC share price May 2016

Source: Google Finance

Companies only have to mention the word lithium these days to see their share prices fly, thanks to soaring commodity prices and the prospect of even higher lithium prices ahead.

Lithium prices have tripled in just the last 6-8 months as we noted earlier last week, with booming demand for the mineral that is expected to be in big demand for rechargeable batteries not just in smartphones, but automotive vehicles as well as homes and potentially in big demand by the energy industry.

Prospect Resources announced today that it had acquired an option over what it calls a ‘very high-grade Arcadia Lithium deposit’. The Arcadia Lithium Deposit lies within one of the three well-known lithium caps, approximately 35 kms north east of Harare, in Zimbabwe. The country was the 5th largest lithium producer in the world at its peak production – although that was in the 1950s-1970s.

The option allows Prospect to acquire, via its 70% owned Zimbabwe subsidiary Hawkmoth Mining & Investment, a 90% interest in the Arcadia V claim and the mineral claim applications comprising the Arcadia Camp for the cost of US$10,000. A further US$40,000 is payable on exercise of the option. Prospect then has 4 years to make a decision to mine, and now plans an aggressive exploration programme. Prospect has also filed tenement applications over the remainder of the Arcadia Camp, which includes other deposits.

With the share price up 200% today, what a perfect time to announce a capital raising to fund said exploration.

However, there are some major risks.

Firstly, Zimbabwe is ranked 150 out of 175 countries for corruption, so Prospect is going to have to be extremely careful of how it negotiates with the government and local suppliers. It may not even get approval, or in a worst-case scenario could see the government nationalise the mine if it is highly successful.

It could also find that previous drilling results are inaccurate and overstated. The Arcadia Deposit hasn’t been extensively drilled, and it’s possible that Prospect finds that it’s uncommercial to mine.

Prospect will also need to spend millions to get to the stage where it can even make a decision whether to go ahead and mine, so there’s a long road and many capital raisings ahead.

By the time the company is ready to mine, lithium prices may have crashed due to overwhelming supply and less demand than expected.

The rare earths situation over the past few years and Lynas Corporation Ltd (ASX: LYC) are a perfect example of that.

Foolish takeaway

Investors jumping into Prospect today are more than likely buying in on the basis that they can sell their shares to another sucker at a higher price down the track. That only works for so long.

Foolish investors should watch this one play out from the sidelines.

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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

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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