The dream of buying a penny share only to see it soar in price can be alluring – but in practice many make big strides in the wrong direction.

One penny share that has done very well over the past five years is mining prospector Kodal Minerals (LSE: KOD). Over that period, the share has soared 540%.

It still sells for less than a penny (little more than a farthing in old money, in fact!) But recent performance has been disappointing. This year the price has fallen 11%.

The Kodal Minerals share price is now around 64% lower than its high point in April of last year (coincidentally, the very month I wrote that I would not be investing in the miner).

Rollercoaster ride

That sort of volatility underlines the point that, often, investing in penny shares is not for the faint-hearted. So what has been going on – and might the lower price offer a chance for me to add Kodal to my portfolio?

As tends to be the case with a number of penny shares, Kodal basically has an interest in some mining prospects that might turn out to be highly lucrative. But whether that ends up being the case depends on factors like the viability of production, political risks (Kodal’s flagship project is in west Africa) and also market pricing for the minerals it aims to mine (such as lithium at the main prospect site).

A rising lithium price for a while, promising results from the main drill sites, and a partnership with a larger Chinese mining company all help explain why the Kodal share price has done so well over the past five years.

Possibly still lots of opportunity

But I think those things have now been factored into the share price, notably the Chinese deal that helped boost Kodal’s appeal as it involved a significant cash injection.

I still see a number of things to like about the Kodal investment case. The flagship west African lithium project is close to completion and production is expected to start in the first quarter of next year. From the second quarter of next year, the company projects strong free cash flow (though for now that remains a projection – we will see what happens in practice).

At the end of March, Kodal had a cash balance of £16m. That is equivalent to around a quarter of its current market capitalisation and helps it to fund ongoing operations before it moves into generating free cash flows.

Tempting, but not for me

All of this is known to the market. But I still reckon that, if production does indeed start in the upcoming quarter and Kodal generates strong free cash flows within the next seven or so months, as it predicts, that may motivate some investors to look again at its investment case.

If things go well – for example production meets targets and lithium prices are reasonable – I could see a justification for the price to go up.

But the past several years have seen the lithium price fall sharply (though it is still well above where it stood five years ago). Kodal is heavily dependent on one project. Some investors may be comfortable with that level of risk but I am not, so will not be buying this penny share.