For investors in the mining sector, 2015 has been very challenging. Commodity price falls, a weak outlook for demand and declining consumer sentiment have combined to cause share price falls across the industry. As a result, many investors are understandably nervous about investing in the sector.
Add to this a fear regarding smaller mining stocks and their financial outlook and it is perhaps surprising, at first glance, that Sirius Minerals (LSE: SXX) and Rare Earth Minerals (LSE: REM) have been able to deliver a rise of 64% and a flat performance, respectively, since the turn of the year. After all, a number of smaller mining companies have come under intense scrutiny from investors who are concerned about the financial outlook while prices for most commodities remain relatively low.
Bright futures
However, in the case of Sirius Minerals, 2015 has been a superb year. It has gained approval for the potash mine near York and, while there is still a long way to go before it begins to generate revenue, its prospects remain bright. For starters, the crop studies which are being carried out on the polyhalite fertiliser that it hopes to sell are progressing well and, with the company sounding out potential buyers, it could experience strong demand in the medium to long term.
Similarly, Rare Earth Minerals also has a very bright future. Unlike Sirius Minerals, it has multiple locations and, as such, may offer greater diversity in case there is disappointment with one or more projects. And, with demand for lithium set to rise at a brisk pace over the long run as the world embraces more renewable forms of energy production, it appears to have excellent long term potential to post strong sales and profit growth.
Significant challenges
The challenges for both companies, though, remain significant. In the case of Sirius Minerals, it has not yet put in place financing for its potash project and, with investors becoming increasingly wary regarding the outlook for the wider mining sector, it could find it difficult to raise the £1bn+ that is estimated to be needed to developed the mine.
Similarly, Rare Earth Minerals has yet to fully complete its pre-feasibility studies at the crucial Sonora lithium project and, as a result, its appeal as an investment could be subject to major change in the short run if news flow disappoints.
High risk, high rewards
Clearly, both companies are towards the extreme end of the risk scale. However, they both offer high potential rewards, too. And, while the outlook for both companies can quickly change, at the present time Sirius Minerals seems to be the more appealing opportunity. That’s because obtaining finance for a project with such strong future potential should be achievable. Certainly, it may not be easy, but it appears to be unlikely that a lack of finance will hold it back and, with demand for potash being high and crop study results being impressive, the path to profitability may prove to be relatively smooth.
And, while Rare Earth Minerals also has huge potential, its short term outlook is highly dependent upon news flow regarding the aforementioned pre-feasibility study, which is very much a known unknown and could be positive or negative. Therefore, while very risky, Sirius Minerals may prove to be the stronger performer of the two.