Is Now The Perfect Time To Buy Gemfields PLC, Rare Earth Minerals PLC And Hochschild Mining Plc

Are these 3 mining companies set to soar? Gemfields PLC (LON: GEM), Rare Earth Minerals PLC (LON: REM) and Hochschild Mining Plc (LON: HOC)

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The last month has been hugely exciting for investors in Rare Earth Minerals (LSE: REM). That’s at least partly because the lithium miner has signed a deal with car company, Tesla, to supply it with lithium for use in its batteries. As a result, Rare Earth Minerals’ share price has risen by 15% in the last four weeks, which goes against the performance of the vast majority of mining companies and the wider market.

In fact, Rare Earth Minerals appears to offer significant long term growth potential. The market for lithium has a bright future and it seems relatively likely that the company will be able to sign more deals to provide the commodity due to the increased use of batteries in electric cars and other products in the years ahead.

However, the deal with Tesla includes challenging performance milestones and, more importantly, may not be all that profitable for Rare Earth Minerals. Certainly, it may improve the company’s profile and show that deals can be done, but there could be disappointment ahead if the deal with Tesla does not pay off. And, with financing still yet to be confirmed and the results of a pre-feasibility study of its Yangibana deposit due out next year, it seems prudent to hold off buying until there is a greater degree of certainty surrounding its medium term prospects.

Similarly, silver mining company Hochschild (LSE: HOCH) may also see its share price come under pressure in the short to medium term. That’s because, while its bottom line is expected to move from loss into profit next year, much of this turnaround appears to already be priced in despite the company’s shares having fallen by 22% since the turn of the year.

In fact, Hochschild now trades at just 68p per share, having been as high as 657p in 2011. But, further falls could lie ahead for the business, since it trades on a forward price to earnings (P/E) ratio of 485. Certainly, its price to book (P/B) ratio of 0.4 indicates that it offers good value for money, but with a lack of profitability in the last two years and further losses due this year, it remains a highly uncertain stock. And, while a turnaround is very achievable, the rewards of this for shareholders appear to be somewhat limited.

One mining stock that does appear to be worth buying right now is Gemfields (LSE: GEM). It has been a star performer in 2015, with its share price rising by 34% since the turn of the year. This is at least partly because of the company returning to profitability in 2014 and being forecast to increase its earnings by 37% in the current year, followed by further growth of 144% next year.

This rate of growth is likely to continue to catalyse investor sentiment – especially since much of the mining sector is undergoing a period of financial decline at the present time. Furthermore, Gemfields continues to offer a relatively wide margin of safety despite its upbeat growth forecasts, with it trading on a price to earnings growth (PEG) ratio of just 0.1. This indicates that further share price gains are very much on the cards.

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.

Peter Stephens 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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