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Are These 3 Small-Caps Uninvestable? Gulf Keystone Petroleum Limited, Rare Earth Minerals PLC And Sirius Minerals PLC

Gulf Keystone Petroleum

With the oil price having fallen dramatically in recent months, the future for Gulf Keystone (LSE: GKP) (NASDAQOTH: GFKSY.US) already looked decidedly uncertain. However, add to that the lack of cash receipts from the Kurdistan Regional Government (KRG), a debt pile of over $500m, and continued political instability in the company’s operating region of Iraq, and Gulf Keystone appears to be a very risky investment.

Of course, it does have excellent long term potential if tensions in the region ease and the oil price stabilises. That’s because it recently ramped up production to 40,000 barrels of oil per day, but this is not helping its bottom line, with the company seeing its loss widen to $248m in 2014 from $32m in 2013.

As such, and while it could perform well in the long run, Gulf Keystone is a stock facing a number of major challenges at the present time. Therefore, it does not appear to be worth buying right now.

Rare Earth Minerals

The major challenge for investors when deciding whether or not to invest in Rare Earth Minerals (LSE: REM) is its lack of revenue. Certainly, it has huge potential to benefit from growing demand for lithium, but its lack of income means that it is difficult to put a valuation on the company.

Of course, one way to go about this is to use the net present value (NPV) of the projects in which Rare Earth Minerals has a stake. However, the problem with this method is that it uses a number of different assumptions and this means it can be subject to major change even with only minor differences to its inputs. In addition, the pre-feasibility study confirming the level of deposits is yet to be completed, which provides yet more uncertainty regarding any NPV figure.

Furthermore, with Rare Earth Minerals expected to seek substantial financing to get its projects off the ground, current shareholders may find their stakes diluted, or else the financial risk borne by the company could increase over the medium term. As such, Rare Earth Minerals is a stock to watch, but not invest in at the present time.

Sirius Minerals

Sirius Minerals (LSE: SXX) was given a major boost recently when it was granted planning permission by Redcar and Cleveland borough council to begin mining for potash in York. This is clearly great news for investors in the company, but the reality of what still lies ahead for Sirius Minerals is likely to keep investor sentiment in check in the short to medium term.

That’s because the company still requires permission from the North York Moors national park, as well as the completion of an application for harbour facilities up the road in Teesside so the potash can be shipped. Then there is the small matter of securing financing for the project, with it being rumoured that around £1.5bn will be needed to get it up and off the ground.

So, while investor sentiment may be positive right now, there is still a long way to go for Sirius Minerals. As with Rare Earth Minerals, it has huge long term potential, but with no certainty regarding its future, no revenue and a sizeable financing package required, it may be better to invest elsewhere.

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Peter Stephens 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.