If your timing was good, backing entrepreneur David Lenigas’s two most high-profile current projects could have made you a fortune over the last year.
Shares of UK Oil & Gas Investments (LSE: UKOG) have risen by an astonishing 388% over the last 12 months, while those of lithium mine investor Rare Earth Minerals (LSE: REM) are up by 170%.
These are incredible returns — but I believe both firms’ are now reaching a critical point, meaning that now could be a good time to consider locking in some of your gains.
Crunch time
Both companies own stakes in potentially valuable assets; they now need to deliver solid evidence that these assets could be commercially viable, in order to justify further appraisal and development.
For UK Oil & Gas, the next big news will be the results of the Horse Hill flow test, which needs to deliver a decent flow rate without fracking, in order to back up the firm’s claims for the find.
This flow test is being planned for a “secret” date later this year, according to a tweet by David Lenigas on 28 April.
At Rare Earth Minerals, the next big step forward will be the completion of a pre-feasibility study for the Sonora Project. This will be used to demonstrate the commercial viability of the proposed mine in discussions with potential funding partners.
Size + cash
Although UK Oil & Gas and Rare Earth Minerals both have stakes in potentially large assets, they don’t have any cash to develop them.
UK Oil & Gas’s most recent reported cash balance was just short of£1m, with an additional $10m debt facility. Since then, the firm has raised a further £423,196 by issuing new shares.
Rare Earth Minerals raised £2.5m in a share placing in January and reported a £7m in an equity swap fundraising deal in December. Prior to that, the firm reported cash of £4m at the end of June 2014.
These cash levels will keep the companies going and fund small-scale activities, but that’s all.
For example, Rare Earth Minerals has estimated that the cost of developing the Fleur-El Sauz asset would be around $666m, of which the firm’s 40% share would be $266m.
Profits could still be high
I’m not suggesting that both companies will not go on to deliver further gains — they may do.
However, there is a risk that Horse Hill and Sonora won’t be as profitable or successful as investors are hoping. Even if they are, the timescales involved are likely to be much longer than we’ve seen until now.
The share prices of small cap resource stocks often peak well ahead of production starting. At this stage, there’s no way of knowing whether UK Oil & Gas and Rare Earth Minerals will follow the upward path of Randgold Resources, or decline like Gulf Keystone Petroleum, whose share price has fallen steadily since peaking in 2012.
That’s why now might be a good time to sell enough of your shares to cover your original purchase costs — so that the remainder of your holding is pure profit, and you’re guaranteed not to lose any money.
