Rare Earth Minerals (LSE: REM), Jubilee Platinum (LSE: JLP) and Kibo Mining (LSE: KIBO) are three of the market’s hottest stocks. And there are three key reasons why now could be the time to buy these AIM darlings.
Undervalued
The first reason to buy these three mining minnows is that they are all currently trading for less than the value of their reserves.
For example, Rare Earth’s Sonora lithium project has an in-ground value of $50bn. The net present value of the asset, which includes all the costs and incomes that would be associated with the project over its lifetime, amounts to $4.4bn. Rare Earth’s share of this total stands at just under $1.3bn, eclipsing the company’s current market cap of £65.5m.
Similarly, Jubilee and Kibo are both trading below the value of their asset NPVs.
According to Jubilee’s February investor presentation, the company’s platinum surface processing projects have the potential to produce 80,000 tons per month of platinum-containing surface material. Figures presented at the beginning of this year show that Jubilee’s production target of 80,000 tons per month could yield $14m per annum in operational cash flow — not bad for a £30m company.
Kibo’s coal projects have an NPV of between $211m and $244m — and that’s without placing any value on the rest of the company’s operations.
Making progress
The second reason tyat now could be the time to buy these miners is to do with the progress they’ve made this year.
Specifically, at the end of August Rare Earth signed a landmark deal to supply Tesla’s world-class Gigafactory with lithium. On the condition that Rare Earth’s Sonora lithium project reaches certain performance milestones during the next two years, Tesla will buy lithium hydroxide for its Gigafactory in Nevada for five years, starting from when Tesla places its first order. There’s an option to extend the contract for a further five years.
Jubilee has disposed of unwanted assets, raising £5.8m after the sale of its South African Middleburg operations, and has secured funding for the continued simultaneous execution of its Surface Platinum Projects.
Kibo has been busy during the first half of the year as well. Management signed a joint development agreement with SEPCOIII for its flagship Mbeya coal to power project in Tanzania. The deal is expected to close by December, with construction to start in the second quarter of 2016 and first power by 2019.
Risk/Reward
The third and final reason you should consider buying these miners is the attractive risk/reward ratio on offer. All three miners are trading at a significant discount to the value of their assets. If everything goes to plan, their shares could double, triple or even, in the case of Rare Earth, rise ten-fold from present levels.
Of course, there’s a chance that investors could lose everything, so these miners are high-risk investments that aren’t suitable for everyone. But if you think the risk/reward is attractive and want to take the risk, the best strategy is to use a basket approach.
