Many investors are attracted to junior mining and oil stocks for the prospect of achieving life-changing profits over a relatively short period of time. With a market cap of just £16m and significant upside potential, Rainbow Rare Earths (LSE: RBW) more than ticks the box.
A mining company focused on the exploration and development of the Gakara Rare Earth Project in Burundi, East Africa — one of the richest such deposits in the world — debt-free Rainbow is backed by well-regarded developer, Pella Resources. The low-risk, low-capex project is fully permitted with a 25-year mining licence being granted in 2015. Perhaps understandably, the company also has the full support of the Burundi Government and locals.
Rare earth elements are used in wind turbines, mobile phones and electric vehicles. It therefore stands to reason that demand is likely to soar over the next decade. Add to this the possibility of Rainbow’s shares rocketing if Donald Trump instigates a trade war with China (which owns the vast majority of rare earth assets) and the investment proposition starts to looks rather appealing.
In its recent operations update towards the end of March, the company revealed that a mining fleet had been ordered and was expected to be in operation in a matter of weeks. Assuming all has gone to plan, this month’s initial extraction of run of mine ore will then be stockpiled until roughly September, at which point it will be transferred to the company’s new processing plant.
Of course, mining a precious resource is one thing, selling it is quite another. Here however, Rainbow also offers a degree of security for investors. The company has already signed a 10-year distribution and off-take agreement for exclusive sales of 5,000 tonnes of concentrate with active worldwide metals trader Thyssenkrup.
Proceed with caution
Despite all this, it can’t be emphasised enough that buying shares in businesses this small is about as risky as it gets. Indeed, with its share price now standing 10% lower than when it came to the market in January, it seems many investors still need to be convinced of the company’s potential.
When compared to something like Rainbow, £1bn cap Sirius Minerals (LSE: SXX) is a different beast entirely. While other writers on the Fool are more wary of the polyhalite producer, I’ve never lost faith, particularly after it managed to secure the Stage 1 finance required to begin building its mine in North Yorkshire towards the end of 2016.
Following a positive construction update at the end of March, the share price has been on something of a roll, climbing 43% in just over three weeks. While some profit-taking from traders is inevitable, I can see this trend continuing when the company moves to the main market at the end of April. A full listing will force those operating trackers to buy in. Many institutional investors, previously restricted from adding Sirius to their funds, are also highly likely to take full advantage.
While the company still faces many hurdles over the next few years, the fact that construction is proceeding to plan gives me even more confidence that its shares will multi-bag from their current price. So, while Rainbow Rare Earths appears to have a lot of potential, I’ll be sticking with the substantially de-risked Sirius for now.
