Advancing technology has pushed up the demand for lithium and rare earth elements, and Canadian penny stock Avalon Advanced Materials aims to profit from both.

The company has a lithium development project in northern Ontario and a more advanced rare earth project in the Northwest Territories. While both projects hold promise for Avalon Advanced Materials, each must clear some very expensive hurdles before coming to production.

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AVALON ADVANCED MATERIALS (symbol AVL on Toronto; www.avalonadvancedmaterials.com) is a Canadian junior mineral exploration and development company. It is largely focused on lithium and rare earth elements.

The company’s main lithium prospect is its Separation Rapids deposit near Kenora, Ontario. Avalon Advanced Material completed a preliminary economic study on the project in September 2016. That research calls for a $514-million mine.

First, however, Avalon Advanced Materials must build a pilot plant to test the effectiveness of its new method of processing ore from the proposed mine. Whether the technology will work on the difficult-to-process ore is uncertain, and that adds a lot of risk.

Lithium has historically been mined for use in household batteries, glass and ceramics, lubricants, refrigeration, pharmaceuticals, polymers and aluminum production. Now, however, the metal mostly goes into lithium-ion and lithium-metal batteries for electric and hybrid-electric cars.

Most of today’s lithium comes from brine solutions drawn from salt lakes such as the Chabyer in Tibet and the Salar de Atacama in Chile. This is cheaper than producing lithium from hard-rock mining and other sources, and the recovered metal is suitable for most uses. However, when the purest lithium is needed, producers look to hard rock lithium because the final product has fewer contaminants.

Still, lithium could also fall victim to the oversupply issues that often plague commodities when producers rush to catch up with rising orders. Lithium deposits that previously were deemed uneconomical to mine could be accelerated into production and that would bring prices back down.

Penny Stocks: Avalon Advanced Material could have one of the world’s highest quality rare earth deposits

Rare earth elements go into a variety of modern devices and applications, including catalytic converters and petroleum refining; magnets in small and large motors; glass additives and glass polishing compounds; rechargeable batteries; television and computer screens; lighting; X-ray machines; and lasers.

Avalon Advanced Material’s main asset is its 100%-owned Nechalacho rare earth element deposit. This project, located at Thor Lake in the Northwest Territories, is in an advanced stage of development.

Avalon Advanced Materials believes that Nechalacho is one of the world’s highest-quality undeveloped rare earth element deposits. However, the cost of building a mine is too high at this point given the profit potential.

The company held cash of just $1.1 million on August 31, 2017. Then, Avalon Advanced Material estimated its exploration and development plans would exhaust those funds as early as February 2018.

While the company’s share price is just $0.12, it will likely need to raise funds by issuing more shares at that deflated price. That would significantly dilute current investors’ holdings.

TSI Network recommendation: We don’t recommend Avalon Advanced Materials.

Bonus tip: How to avoid buying volatile penny stocks for your portfolio

In general we avoid penny stocks that promote themselves too aggressively (or do so misleadingly). Here are some of the Successful Investor tips we consider when we analyze penny stocks for aggressive investors.

• We want to see experienced management with a proven ability to develop and finance a company.
• We look at environmental constraints when we consider mining penny stocks in particular. When we recommend junior stocks exploring for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
• We think you should avoid stocks that trade over the counter, where such things as regulatory reporting are lax.
• We also like to see a sound balance sheet in all the penny stocks we recommend. We like to see enough cash to keep operations going without the need for dilutive share issues at low prices.
• While you’re looking at the balance sheet you might also want to see if there are any hidden assets, such as real estate at historical prices.

How would you characterize your interest in lithium stocks given the rise of electric vehicles?

For our views on how to make right choices in penny stocks, read The top 10 penny stocks in your portfolio will have these characteristics in common.

For our recent report on a Canadian penny stock committed to growing through takeovers, read Big acquisition stores up growth and risk for this Canadian stock.