Shares in Rare Earth Minerals (LSE: REM) have made an excellent start to 2015, being up 22% since the turn of the year. Of course, the company continues to have no revenue and the volume of lithium deposits that it is able to eventually mine is very much a known unknown. But, in the meantime, investor sentiment in the company continues to improve; does this mean that it is worth buying right now? Or, is it still too risky to add to your portfolio?
Cash Burn
As mentioned, Rare Earth Minerals currently has no revenue stream and its annual cash burn is around £800k. That does not appear to be too excessive and shows that the company does have a reasonable handle on its cost base.
Clearly, for it to build and develop any future lithium mines would require considerable financing that the company does not yet have in place. As such, potential investors should be aware that even if news flow is positive regarding the drilling being undertaken by the company, shareholders may be asked to cough up or else see their stake in the company diluted.
Long Term Potential
Of course, while Rare Earth Minerals is a company without revenue, it remains a company with huge potential. The market for lithium is forecast to grow by around 10% per annum over the medium to long term, with its application in devices such as smartphones and also in the automotive sector helping to boost demand. And, with the macroeconomic outlook for the global economy being relatively upbeat, Rare Earth Minerals could tap into strong growth moving forward.
In addition, investor sentiment appears to be improving, with Rare Earth Minerals delivering upbeat news flow that is showing that it could prove to be a very sound investment over the long term.
Looking Ahead
The problem for potential investors, though, is that Rare Earth Minerals is not really a business in the normal sense of the word. While that may sound unfair, it has no revenue and the extent of its potential is simply impossible to accurately predict with, for example, the results of the pre-feasibility study at its Sonora project yet to be completed. Its outcome could have a major impact on the company’s share price, with its direction being impossible to foresee. Therefore, it is not possible to accurately ascertain Rare Earth Minerals’ current level of risk, although clearly the potential reward is very handsome.
As such, and while its shares are making good ground so far in 2015, Rare Earth Minerals is very much a ‘punt’ at the moment which, put simply, could be a roaring success, or a huge failure. Therefore, it remains a very difficult company to invest in unless you are very risk tolerant.