Should You Buy Or Sell Gulf Keystone Petroleum Limited, Sirius Minerals PLC & Rare Earth Minerals PLC?

Gulf Keystone Petroleum Limited (LON:GKP), Sirius Minerals PLC (LON:SXX) and Rare Earth Minerals PLC (LON:REM)

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Higher oil prices won’t help Gulf Keystone Petroleum (LSE: GKP), while a takeover is less likely than a cash call. Similarly, Sirius Minerals (LSE: SXX) — another high-risk profile investment — may deliver less earnings for the same amount of stock for a few quarters. 

On the face of it, Rare Earth Minerals could be the most appealing investment of the three, but I would be very cautious before taking any meaningful exposure. 

What’s Next? 

Brent hit the highest level for the year on Wednesday, so you may think I am going to tell you that Gulf Keystone Petroleum is a play on rising oil prices — well, it is not. Oil exports from Kurdistan, where its most profitable assets are based, don’t turn into cash but are uncollected credits. Whether the cash will ever make it to the bank is highly uncertain, and is going to weigh on its bottom line and its valuation until a solution is found. 

The stock is down 40% year to date, and is flat in the last four weeks of trading — it’s only a whisker away from its 52-week low. Is that an opportunity, though? 

If Gulf Keystone Petroleum clearly states its strategy, maybe threatening asset sales to seek fortunes elsewhere — management has proven to be really good in running the operations — then it may be worth a bet, a banking source told me today.

That works on paper but not in Kurdistan, I’d argue.

The problem is not only that Gulf Keystone Petroleum is finding it hard to collect its credits — counterparty risk is almost prohibitive where it operates. In fact, even if it’s paid, it may continue to press ahead at full steam, but to do that, it will likely have to ask support from its shareholders.

One caveat is that its debt load doesn’t offer room for error. Small tranches of fresh equity may be needed, and that would continue to push down the stock, which is currently overvalued by about 76% based on its liquidation value. 

Sirius Minerals & Rare Earth Minerals: Casino Stocks? 

I have paid attention to Sirius Minerals and Rare Earth Minerals for some time now and it’s highly unlikely, in my opinion, that either company will make it through the next three years without asking the backing of their shareholders at least once a year — but should shareholders commit additional fund to help them reach their goals?  

Sirius stock could be highly volatile even at the best of times, but could also deliver terrific returns, as its recent performance shows. In short, it’s all about expectations based on its York Potash project study, for which planning permission is pending. If it gets the green light, then the problem will be how to fund such a huge potash development, but it would be a very nice problem to have. 

Sirius is not one investment for me, I’m afraid, but you may want to consider minimal exposure to it if you are a risk taker.

Expectations and appealing prospects for the sector and its end markets are what you must bet on if you are considering to buy Rare Earth Minerals, which is a very risky bet, too — but one that may be worth taking right now if you are looking to make a fast buck. It’s incredibly hard to say, however, whether Rare Earth Minerals could actually offer long-term value. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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