Shares in Rare Earth Minerals (LSE: REM) touched a high of 1.35p when markets opened this morning and have climbed more than 25% over the last week.
The reason? This morning, REM released a new report claiming that El Sauz and Fleur Lithium Project in northern Mexico, in which REM has a 38.4% stake alongside Bacanora Minerals, could be worth $2,023m.
This suggests that REM’s share of this potential value could be around $775m, a figure that dwarves the firm’s current market cap of around $100m.
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Too good to be true?
There doesn’t seem to be much doubt that the lithium assets in which REM has a stake contain some good quality deposits.
However, today’s report is only a preliminary scoping study, not the kind of detailed feasibility study usually required to raise funds for a big project.
In my view, the net present value (the value of all expected future cash profits, in today’s money) of $2,023m provided in today’s report is quite optimistic.
Firstly, the current market price of lithium concentrate is $6,500 per tonne. This has risen strongly in recent years, but the NPV in today’s report assumes that the price will average $6,500 per tonne for the next twenty years.
Secondly, the report uses a discount (interest) rate of 8% to calculate the NPV, rather than the more commonly used 10%. A lower rate has the effect of boosting the NPV.
Could REM be worth 3p/share?
Today’s report says that $422m would be required to build the mine and buy the necessary equipment, but the report says this is only an estimate, so let’s say that around $600m would be needed to get the mine up and running.
Of this, REM would have to provide $230m, based on its 38.4% interest. The company’s latest results showed cash of just $4m, so all of this would have to be borrowed or raised from shareholders, probably a combination of both.
Based on all of this, and the firm’s $775m share of today’s NPV projection, my rough calculations suggest that REM shares could be worth 3p, if things go to plan and the numbers in this report — which I feel are a bit optimistic — are proved to be correct when a more rigorous feasibility study is carried out.
Overall, I’d say REM still has the potential to deliver a 100% gain — but it’s a fairly risky and speculative buy, in my view.
