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Are Rare Earth Minerals PLC & Bacanora Minerals Ltd A Screaming Buy At Today’s Prices?

Shares in Rare Earth Minerals (LSE: REM) touched a high of 1.35p when markets opened this morning and have climbed more than 25% over the last week.

The reason? This morning, REM released a new report claiming that El Sauz and Fleur Lithium Project in northern Mexico, in which REM has a 38.4% stake alongside Bacanora Minerals, could be worth $2,023m.

This suggests that REM’s share of this potential value could be around $775m, a figure that dwarves the firm’s current market cap of around $100m.

Too good to be true?

There doesn’t seem to be much doubt that the lithium assets in which REM has a stake contain some good quality deposits.

However, today’s report is only a preliminary scoping study, not the kind of detailed feasibility study usually required to raise funds for a big project.

In my view, the net present value (the value of all expected future cash profits, in today’s money) of $2,023m provided in today’s report is quite optimistic.

Firstly, the current market price of lithium concentrate is $6,500 per tonne. This has risen strongly in recent years, but the NPV in today’s report assumes that the price will average $6,500 per tonne for the next twenty years.  

Secondly, the report uses a discount (interest) rate of 8% to calculate the NPV, rather than the more commonly used 10%. A lower rate has the effect of boosting the NPV.

Could REM be worth 3p/share?

Today’s report says that $422m would be required to build the mine and buy the necessary equipment, but the report says this is only an estimate, so let’s say that around $600m would be needed to get the mine up and running.

Of this, REM would have to provide $230m, based on its 38.4% interest. The company’s latest results showed cash of just $4m, so all of this would have to be borrowed or raised from shareholders, probably a combination of both.

Based on all of this, and the firm’s $775m share of today’s NPV projection, my rough calculations suggest that REM shares could be worth 3p, if things go to plan and the numbers in this report — which I feel are a bit optimistic — are proved to be correct when a more rigorous feasibility study is carried out.

Overall, I’d say REM still has the potential to deliver a 100% gain — but it’s a fairly risky and speculative buy, in my view.

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Roland Head 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.