Theres no denying thatRare Earth Minerals(LSE: REM) has plenty of potential. The companysunique lithium and rare earth deposits are some of the best around and are, well, unique to the company, giving it an edge over the rest of the industry.
However, the company is still in its infancy, and theres plenty to do before Rare Earth becomes a leading player in the mining industry.
Plenty of risk
Early-stage mining companies are notorious for dreaming big. But more often than not these companies fail at the execution stage. Even the companies with the best prospects, resources and potential for long-term growth,fail to find the financing they need for expensive mine development plans.
But Im not saying that Rare Earth will fail. The lithium market is huge and continues to grow. Whats more, production of lithium from current resources is limited, so Rare Earths projects are likely to find backers for development.
That being said, Rare Earth is still in its early stages and the company faces an uphill struggle from here on out to get its prospects into production. And right now, the market is moving against the company.
Indeed, commodity sector investors and backers are becoming increasingly cautious about which projects they commit their capital too. Falling commodity prices have made many projects, commissioned and funded over the past five years, uneconomic. Some of the worlds largest mining companies, such asBHP Billiton,Barrick GoldandGlencoreare cutting capital spending and writing down the value of projects as commodity prices fall.
If Rare Earth does begin production, it faces more headwinds to remain profitable.
The companys 38.4% owned,Fleur El Sauz project is forecast to have some of the lowest operating costs in the industry but this doesnt factor in items such as debt interest from the wider group. There are also costs such as inflation to factor in. Few mining projects move from planning to production without cost overruns, which can completely change the outlook for a mine.
Still, as I mentioned above, Rare Earth has some of the best lithium prospects around and, for this reason, the chances of the companys success are higher than average.
Nevertheless, the company is still a risky bet, and thats why Im staying away. The first rule of investing is dont lose money the second, dont forget rule one. Its impossible to tell right now whether Rare Earth will go to zero or become one of the worlds largest mining companies.
Diversification is key
However, only you can decide whether or not Rare Earth is suitable for your portfolio but if you like the look of the company a ‘basket approach’ will help save you from disaster if things go wrong.
Simply put, a basket approach uses a mixture of high-risk, high-reward stocks and trusty dividend payers, to reduce risk and help you sleep at night.
To help you find the best dividendstocks our top analysts have put together thisnewfree reporttitled”How To Create Dividends For Life“which is designed to help you discover the market’s best income stocks.
What’s more, for a limited time onlyyou can gettwo reports in one. Along with “How To Create Dividends For Life”, we’re throwing in a new report entitled “My 5 Golden Rules for Building a Dividend Portfolio”.
Justclick hereto download the free report double pack today!
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.