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.

[fool_stock_chart ticker=LSE:JAY]

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. 

Pensana’s robust news flow

Since listing on the London Stock Exchange’s main market in July 2020, the company has seen its share price increase from around 27p to near 167p today. And the move has been driven by a flow of positive news cementing the firm’s strategy.

The company is focusing on the development of its rare earth metals projects located in Longonjo and nearby Coola in Angola. But the directors’ vision extends to downstream operations as well. And the company recently submitted a planning application to establish a rare earth oxide separation facility at the Saltend Chemicals Park in Humber, Yorkshire.

If Pensana can develop its upstream and downstream operations, it would provide the UK with the “world’s first” sustainable magnet metal supply chain. And this is exciting because the industry is set to balloon. That’s because of burgeoning demand driven by Electric Vehicle (EV) and offshore wind generator production. However, Pensana reckons China has a near-monopoly supplying around 87% of the world’s rare earths. And the country sources much of it unsustainably.

Pensana’s proposed production facility at Saltend will have a nameplate capacity of 4,500 tonnes per year. And it will be one of only two major producers outside China. It will be “strategically located” on the UK’s busiest ports complex and gateway to Europe. But Lynas Corporation of Australia is the world’s largest non-china producer right now. And last year the company produced around 4,700 tonnes from its facility in Malaysia.

The sector looks set to grow

To put those figures in perspective, the company reckons the new Volkswagen (VW) range of EVs will consume the equivalent of Pensana’s entire production for the next decade. And VW is just one of many EV manufacturers. On top of that, there are the needs of the entire offshore wind industry to consider. And China is planning a 15-fold increase in capacity by 2060, according to Pensana. And the European Union expects to grow its offshore wind facilities by 2,400%.

The company points to forecasts from commodity research and analyst companies Roskill, CRU and Adamas suggesting “substantial” increases in magnet metal prices ahead as demand ramps up. It seems that Pensana has its operations in the right place and there’s a substantial tailwind in the sector to support growth. However, most of the development work is still ahead for both the upstream and downstream operations. So far, activities have been mainly concerned with proving resources in the ground and securing planning permissions.

There’s a long road ahead and a lot more money needed before Pensana begins supplying the world with sustainable magnet metals. And right now, the company is loss-making and spending millions in development costs. This is one of several stocks with a great story and bags of potential. But I reckon the road ahead for shareholders is risky. And I’m watching from the sidelines for the time being until the company’s projects are further advanced.