Rare Earth Minerals (LSE: REM) has spent another $1m to increase its stake in the Megalit Lithium Joint Venture, in Mexico.
What’s happened?
The payment was the final instalment of the $1.5m required for REM to exercise its option to increase its direct interest in the Megalit concessions from 10% to 30%.
The money was paid to Megalit owner Bacanora Minerals (LSE: BCN), which owns the remaining 70% of the concessions.
Is this good news?
This was a logical decision by REM, as the Megalit concessions surround those of Bacanora’s other joint venture with REM, the Sonora Lithium Project.
Recent exploration activity on the Sonora project has resulted in an indicated mineral resource of 3.28 million tonnes of Lithium Carbonate Equivalent, which is a key requirement for the fast-growing lithium-ion rechargeable battery market.
REM believes the Megalit concessions are highly prospective, and the new money will be used to fund exploration drilling.
The situation remains highly speculative, but REM chairman David Lenigas’ decision to invest now could multiply the potential returns available in the future, if Mr Lenigas achieves his goal of selling REM’s stakes in the Sonora and Megalit concessions to a larger trade buyer.
Are there any risks?
REM and Bacanora are both small companies, with limited financial firepower.
The biggest risk for REM shareholders, in my view, is that Mr Lenigas will fail to agree a trade sale that will lock in big profits on the cost of REM’s assets, ahead of the substantial cost of developing the mines.
Failure to do this could mean that REM would be forced to bring in substantial new investors to meet its share of the cost of developing the assets, which would result in significant dilution for existing REM shareholders, and a much longer timeframe for shareholder returns.
What does REM own?
REM’s interests in Bacanora’s Northern Mexico lithium assets fall into three categories:
1. c.12% shareholding in Bacanora Minerals
2. 30% direct interest in the Megalit concessions (San Gabriel, Buenavista and Megalit).
3. 30% direct interest in the Fleur-El Sauz lithium joint venture — Fleur and El Sauz account for around 60% of the lithium resources identified in the Sonora Lithium Project.
These numbers highlight the second risk for REM investors: Bacanora Minerals retains majority ownership and control of all of its Northern Mexico lithium concessions, so REM cannot control the pace or direction of Bacanora’s activities.