I believe that spreading out risk between FTSE 100 dividend shares and hot UK mining stocks is one way to ensure I can make the most of my time and money.
Picking future mining stars can be tough. But I can give myself the best chance to increase my future earning power by investing in high-demand commodities.
UK mining stocks risk/reward
Two UK mining stocks have caught my eye. Neither is a household name. But if successful, both could easily become massive companies. The first has an £85m market cap and the second weighs in at around £187m. So neither are fly-by-night minnows with no chance of financing their projects.
UK mining stocks require huge amounts of cash to run costly drilling programmes and employ scientists to help pick the best locations. And neither company has yet posted a profitable year.
I could get diluted if they run out of money and need to go back to the market to fundraise. A poor result in one project or another could crash the shares as analysts mark down the future earnings of the company. So there is high potential, but also high risk here.
Why to buy these UK mining stocks
AIM-listed BlueJay Mining (LSE:JAY) has gained around 40% over the past 12 months.
We heard on 25 May that Bluejay had started its first 3,000m drilling programme targeting nickel, copper and cobalt at Enonkoski in east Finland. The company also announced a crucial $20m joint venture deal in November 2020. Partnering with Rio Tinto here has reduced its future share of earnings, but also its ongoing costs.
Nickel and cobalt play an important role in rechargeable electric vehicle (EV) batteries. Higher nickel content helps increases battery energy density to extend vehicle range. With everyone from NIO to Volkswagen now pumping out EVs, the dash for nickel is definitely on.
I’m keen to buy now because the higher-risk stages of identifying targets and finding funding are already complete. BlueJay’s bosses expect to announce Enonkoski results by the autumn.
New nickel discoveries are also fairly rare, and daily nickel price have jumped 42% since May 2020, which would make a Finnish find particularly valuable.
Rare earth metals
The second UK mining stock I’d buy is Pensana (LSE:PRE). It is one of the only UK mining stocks targeting rare earth elements like neodymium and praseodymium (NdPr). One of its main projects is a 35-year licence at Longonjo in Angola.
NdPr is key for making magnets in EV traction motors, as well as manufacturing wind farm turbine magnets. Prices have rocketed from £41000/tonne last June 2020 to £66,000/tonne this year. And investment bank UBS said in recent research that prices could double as soon as 2024.
Pensana is not just a miner, either. It has won government support for what will be the UK’s first rare earth metals processing plant at the Saltend Chemicals Park in Hull. The company plans to “create the world’s first fully sustainable magnet metal supply chain” here. None of this cash-creating work is yet under way, so it could be a while before any profits hit Pensana’s balance sheet.
Still, I say diversification is key for any serious investor. And I think I can do it by picking the hottest UK mining stocks out there.
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TomRodgers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.