Should I Invest In Rare Earth Minerals PLC Now?

Since entering the mining business in 2010, the share price of Rare Earth Minerals (LSE: REM) has jumped around like a flea on gin.

The volatility is a wonder to behold. The shares have moved from 0.2p to around 1.5p during 2010, back to 0.2p in 2012, from 0.05p to 1.2p during 2013, from 0.4p to 1.9p this year and back down to 0.9p today.

It doesn’t take Einstein to figure out that anyone clever or lucky enough to catch those ups whilst avoiding the downs will be doing well.

What drives the shares?

The firm isn’t actually producing any rare earth minerals yet, but it does seem to keep finding them under foot. As such, the firm doesn’t have any profits — or any revenue come to that. In fact, the company made a loss of £0.81 million during 2013.

Getting rare and valuable minerals out of the ground is quite different to merely discovering that they are there, and it is a thing that usually costs a lot to do. That doesn’t matter for the time being, though, because what drives the share price is sentiment.

As investors, we all get excited when it seems as if a mining company has discovered vast quantities of pay dirt on its licences. A wave of buying drives the shares up and the bull is in full charge. Take the latest announcement from Rare Earth Minerals, for example. Now, I’ll need to run up and down the stairs a few times before writing this to make sure I’m suitably breathless, so here goes:

The firm reckons that a discovery of a new Rare Earth Element deposit east of the world class Kvanefjeld REE project is orders of magnitude higher than previously reported resource grades on the nearby Tanbreez deposit. Some of the samples contain significant quantities of neodymium oxide, which is a critical rare earth oxide or CREO as defined by the US department of energy. The directors reckon that the news, along with the proximity of the finds to two of the world’s largest REE deposits, is very encouraging indeed.

Now then! Wasn’t that exciting? It’s just the ticket to drive the share price into the stratosphere.

Watch out for news flow lulls

Lack of news flow, or news of setbacks, delays, extra costs and the like, are all factors that can send the bull into retreat as the bear rushes out to meet him. Indeed, with ‘story’ shares like Rare Earth Minerals, particularly those without earnings, sentiment can change on a sixpence, and the shares can plummet as fast they took off as investor/traders dump the shares faster than they bought them in the first place.

So does that make Rare Earth Minerals a bad investment? Not to me. The prospect of turning a few hundreds or thousands of pounds into several multiples of the starting capital over just a few short weeks or months is appealing, and the taste is sweet when it happens.

However, shares like Rare Earth Minerals deserve to reside at the ‘punty’ end of our portfolios and, even more than ever, we should only speculate with money, that in the event of a negative outcome, we are prepared to lose.  

What next?

We can’t really value a firm like this in the traditional way: not on its earnings, because it does not have any, and not on the value of resources in the ground, because who really knows what it will cost to get the stuff out and to market?

Sentiment drives the share price, so I reckon my best option is to time my investment/trades by putting a finger into the wind of sentiment. What better way of getting a picture of that than to look at the share-price chart?

I’m going to look for periods when the share price is sitting flat and hopefully well down from previous highs, and enter a trade then, with money that I’m prepared to lose. With a bit of luck, another spike will be along and I’ll sell quickly to lock in a return.

It’s not the most elegant way to make money on the stock market but I’ve had successes with such tactics on other wrigglers!

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Kevin Godbold 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.