For all companies, having appropriate financing is a key consideration. After all, if they did not then they would not be able to exist and operate as a going concern. However, for smaller companies in the resources sector, financing can prove to be an even greater issue. That’s because their outlook can change so rapidly that the availability of capital can change very quickly and their requirements for cash are also subject to a high degree of volatility, too.
Furthermore, with the price of commodities such as oil and various metals having fallen dramatically in the last year, lenders are scrutinising potential investments much more closely than they once were. That’s understandable, since previous ‘worst case scenarios’ are fast becoming a reality with, for example, the price of oil being below $50 per barrel and on its way down. As such, demand for capital from resources companies may be on the up, while lenders and investors are becoming increasingly choosy about to whom they lend their cash.
For example, LGO Energy (LSE: LGO) continues to make excellent progress with its 2015 drilling programme. Its key Goudron project in Trinidad continues to be economically viable even with the price of oil enduring a weak period. Furthermore, it continues to update the market on a very frequent basis regarding its production potential. However, its share price has fallen by 39% in the last six months and a reason for this could be concerns that a placing may be around the corner, since it has a relatively ambitious drilling programme planned over the next 18 months.
This, then, could be a great time to buy a slice of the company, since unlike many of its peers, most of the news flow coming from LGO Energy has been positive. Certainly, a falling oil price is likely to put its shares under pressure in the short run but, as mentioned, its management team remains confident regarding its viability as a business during a period of low oil prices and, with it having a strong track record of raising new financing, it should continue to appeal to lenders and investors over the medium to long term, thereby offering capital growth potential.
Of course, the same could be said for Rare Earth Minerals (LSE: REM). It operates within a much more appealing industry than LGO Energy, with demand for lithium set to rise at a double-digit rate in future years and it not suffering from the same degree of demand/supply imbalance as oil at the present time. Furthermore, the world is moving towards the use of cleaner fuels, with fossil fuels such as oil being gradually replaced by battery power and other greener energy sources.
However, Rare Earth Minerals continues to have a relatively uncertain future. Part of this is because the results of a pre-feasibility study at its key Sonora project have not yet been completed, with the availability (and cost) of financing likely to hinge upon how positive the findings are. As such, its future appears to depend significantly upon one item of news flow which could be positive, negative, or in line with expectations.
And, while LGO Energy’s future is also dependent upon the progress made with its drilling programme, it appears to be further down the line with its development and maturity. As such, it could prove to be the more appealing buy at the present time, although Rare Earth Minerals is well-worth watching.
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Peter Stephens does not own shares in any of the companies 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.