Despite falling by 32% over the last month, 2014 has still been a superb year for investors in Rare Earth Minerals (LSE: REM). Thats because shares in the mining exploration company are up by around 59% year-to-date, which is an astonishing performance given the disappointing returns of the wider index.
Indeed, sector peer, Rio Tinto (LSE: RIO) (NYSE: RIO.US), has endured a tough year alongside the FTSE 100, with shares in the Australia-focused mining company being down by 7.5% year-to-date. However, with the company having considerable potential, could it be worth buying a slice of? Furthermore, could a combination of REM and Rio Tinto prove to be a highly profitable mix moving forward?
Clearly, Rio Tinto is a far bigger company than REM and, as a result, has stronger finances and operates over a wider and more diversified geographic area. However, even Rio Tinto is still a relatively high-risk play and, for such a large company, relies very heavily on the price of (and demand for) just one commodity.
Indeed, over 90% of Rio Tintos profits from last year were derived from the sale of iron ore. Although the company has the lowest cost curve in the iron ore industry, an iron ore price that is at a five-year low means that its bottom line will inevitably be hit very hard. As a result, its share price has performed poorly as mentioned.
On the other hand, REM has less diversity when it comes to the number of mines it operates, but it has benefited from strong news flow at times during 2014. The most recent example was just this week when it reported that results taken from samples in Greenland had exceeded expectations. As a result, shares in the company have risen by 15% on the day at the time of writing.
This seems to be the key for REM moving forward, since the company has no revenues at present. So, while exploration updates and the results of tests such as those conducted in Greenland are nigh on impossible to predict, it seems to have the potential to deliver yet more upbeat news flow from its four 100% owned licenses, as well as the prospects in which it owns a stake.
So, while the short term progress of REM may be highly volatile and difficult to predict, it seems to be a stock to watch over the long term. Indeed, that seems to be the case for Rio Tinto, too. While the price of iron ore is difficult to predict over the short run, long term growth appears to be on the cards, with vast swathes of emerging markets yet to fully industrialise. Furthermore, trading on a price to earnings (P/E) ratio of just 10, it seems to offer great value for money.
With both companies, therefore, having considerable long-term potential, but likely to remain volatile in the short run, a combination of the two could prove to be a highly worthwhile investment.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.