Is Rare Earth Minerals PLC Showing Us A Buying Opportunity?

The good news keeps on coming at Rare Earth Minerals (LSE: REM), the mineral exploration company, yet the share price continues to hang back after retracing from a peak around 100% higher than today’s 1p.

Back in July the share price spiked up, and now the chart looks like it’s set in longer-term uptrend with periods of ‘up-thrust’ followed by periods of consolidation. Anyone familiar with Nicolas Darvas’s box theory will recognise the pattern.

Why talk charts? We’re investors!

The salient point here is that the firm doesn’t yet produce any rare earth minerals, but it does seem to keep discovering them in the ground. So there are no profits and no revenue, but there is the potential for income in the future — discovered resources have some value, even though the cost of extraction and production remains uncertain.

That kind of set-up leads to wild share price swings as investors constantly re-estimate and re-evaluate the firm’s worth in light of each new nugget of information the company shoots at the market. As long as the news remains positive, and keeps implying further value creation, the uptrend in the shares seems likely to hold firm.

There’s no getting around the fact that sentiment drives the share price, and the share-price chart measures and displays that sentiment. If we want to know where the combined weight of investor sentiment sits at any time, we need to look at the chart. Just take a deep breath and grit your teeth. You’ll be fine.

Keeping the kettle boiling

The key to getting the share price up in this kind of situation is a strong flow of news. Rare Earth Minerals knows how to play the game. Since I last wrote about the firm in mid-October, we’ve seen six bubbly announcements about assay results, upgrades, appointments of consultants and plans for drilling, among other things. That’s good for sentiment and, sooner or later, we could well get an announcement that propels the share price up again, if we are lucky. Looking at the chart, energy seems to be building, I’d say. It wants to go up, it really does!

The biggest threat to investors’ interests is lack of news flow, or news of setbacks, delays, extra costs and the like, or even that all the high expectations come to nothing in the end as the firm starts proving up the resources — we’ve certainly seen that before with other firms. Such negatives would likely send the shares crashing back down to earth with a sickening thud, and that’s why it pays to be agile with this type of speculation. If we find ourselves sitting on a large capital gain thanks to a risen share price, it makes a great deal of sense to take profits by selling some, or all, of the shares. After all, who knows what the next news release will bring?

Watch the cash

Perhaps the biggest risk of all for investors is Rare Earth Mineral’s precarious cash position. The firm has no income, so relies on cash flow from finance to keep it going. That means raising funds by issuing new shares or by borrowing.

The interim results released in August revealed that the firm had around £4 million cash on its balance sheet on 30 June. However, the company spent about a million during the half year to keep operations going and raised £5.252 million by issuing new shares. The cash will run out over time and new investment opportunities will probably come along for the firm. Both situations could see the company stage a placing of new shares, or conduct a whip-round with existing investors, or both. Such dilution could limit the upside potential for those holding Rare Earth Minerals shares.

What Next?

Companies such as Rare Earth Minerals, at this early stage in their growth, can be both fun and lucrative for the nimble, speculation-minded investor/trader. Right now, the share price seems to present something of a buying opportunity, but I wouldn’t bet the farm on it, just a small part of my portfolio and money I’m prepared to lose if necessary.

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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.