There’s no denying that Rare Earth Minerals (LSE: REM) has plenty of potential. Indeed, according to figures already published by the company, the net present value (NVP) of all Rare Earth’s interests in the Fleur-El Sauz, Ventana, Yangibana and Western Lithium projects amounts to £800m. As Rare Earth’s market cap is only £70m at present, based on the NPV value, Rare Earth looks to be significantly undervalued.
However, Rare Earth still has a long way to go before it can unlock value from any of its mines.
Will take time
It could be years before the mining minnow is able to start producing lithium from any of its prospects. Unfortunately, the market is also moving against Rare Earth. Commodity sector investors and backers are becoming increasingly cautious about which projects they commit their capital too. Falling commodity prices have made many projects, commissioned and funded over the past five years, uneconomic. This could leave Rare Earth struggling to raise the capital it needs to develop the required infrastructure needed to start mining.
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That being said, as the demand for lithium increases, Rare Earth’s world-class lithium prospects could attract attention from large investors who have the capital and experience required to develop the prospects.
Risk/reward
Investors have to weigh up the possible risks and rewards of investing in Rare Earth. On one hand, if the company reaches its goal of commencing production from owned lithium assets, Rare Earth could unlock £800m in value.
On the other hand, there’s a serious possibility that Rare Earth could struggle to reach this goal. The market is moving against the company, and few mining projects move from planning to production without cost overruns. While Rare Earth’s 38.4% owned, Fleur-El Sauz project is forecast to have some of the lowest operating costs in the industry, future uncertainties such as interest rates, inflation rates, and volatile lithium prices could render existing forecasts useless.
Overall, right now it really is difficult to tell if Rare Earth will go to zero or become one of the world’s largest mining companies.
Still, the risk/reward ratio looks promising. If you take the NPV of Rare Earth’s lithium projects and cut it in half to build a margin of safety into the numbers, Rare Earth’s share of the mines could be worth £400m — around 5.9p per share.
So if you’re willing to take on the risk, Rare Earth’s shares could jump 470% from present levels. However, I should say that this is a best case scenario. Based on the current market environment, it’s almost impossible to tell if Rare Earth can make it big. And, as with all investments, there’s a chance that Rare Earth could go to zero, wiping out existing shareholders.
But only you can decide if Rare Earth is suitable for your portfolio. If you decide that you want to take a position, it should be part of a well-diversified portfolio to minimise risk.
