Why I Would Stay Away From Rare Earth Minerals PLC

There’s no denying that Rare Earth Minerals (LSE: REM) has plenty of potential. The company’s unique lithium and rare earth deposits are some of the best around and are, well, unique to the company, giving it an edge over the rest of the industry. 

However, the company is still in its infancy, and there’s plenty to do before Rare Earth becomes a leading player in the mining industry. 

Plenty of risk 

Early-stage mining companies are notorious for dreaming big. But more often than not these companies fail at the execution stage. Even the companies with the best prospects, resources and potential for long-term growth, fail to find the financing they need for expensive mine development plans. 

But I’m not saying that Rare Earth will fail. The lithium market is huge and continues to grow. What’s more, production of lithium from current resources is limited, so Rare Earth’s projects are likely to find backers for development. 

That being said, Rare Earth is still in its early stages and the company faces an uphill struggle from here on out to get its prospects into production. And right now, the market is moving against the company.

Indeed, commodity sector investors and backers are becoming increasingly cautious about which projects they commit their capital too. Falling commodity prices have made many projects, commissioned and funded over the past five years, uneconomic. Some of the world’s largest mining companies, such as BHP BillitonBarrick Gold and Glencore are cutting capital spending and writing down the value of projects as commodity prices fall. 

Many headwinds

If Rare Earth does begin production, it faces more headwinds to remain profitable.

The company’s 38.4% owned, Fleur – El Sauz project is forecast to have some of the lowest operating costs in the industry but this doesn’t factor in items such as debt interest from the wider group. There are also costs such as inflation to factor in. Few mining projects move from planning to production without cost overruns, which can completely change the outlook for a mine.    

Still, as I mentioned above, Rare Earth has some of the best lithium prospects around and, for this reason, the chances of the company’s success are higher than average.

Nevertheless, the company is still a risky bet, and that’s why I’m staying away. The first rule of investing is “don’t lose money” the second, “don’t forget rule one”. It’s impossible to tell right now whether Rare Earth will go to zero or become one of the world’s largest mining companies. 

Diversification is key

However, only you can decide whether or not Rare Earth is suitable for your portfolio but if you like the look of the company a 'basket approach' will help save you from disaster if things go wrong. 

Simply put, a basket approach uses a mixture of high-risk, high-reward stocks and trusty dividend payers, to reduce risk and help you sleep at night.

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Rupert Hargreaves 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.