Image source: Getty Images
Investing in the penny stock area of the market can be a risky endeavor. But finding the right market cap minnow has the potential to boost my portfolio performance.
Here’s a penny stock that looks like a smart buy to me today. However, it may take some time for this to develop. That’s why I would save some stocks for the long term.
rare earth minerals
rainbow rare earths (LSE: RBW) is a Guernsey-based mining company focused on the production of rare earth oxides needed to drive the transition to green energy. The firm’s projects include its flagship Phalaborwa project in South Africa and a high-grade project in Burundi. It is also investigating other sites in South Africa and Morocco.
The company focuses on the production of four magnetic rare earth metals: neodymium, praseodymium, dysprosium and terbium. These are essential for permanent magnets in wind turbines, EV motors, and much more.
Calling rare earth elements ‘rare’ is actually a bit misleading. They are widely distributed around the Earth’s crust, but are hidden behind other deposits of metals and minerals. This makes them difficult to extract because they are generally not found in commercially mineable quantities.
If they are extracted, then they have to be processed. Today, that almost always happens in China. In fact, China produces more than 80% of the world’s refined rare earth products. But Rainbow plans to build its own production facility downstream, where it will separate the rare earth oxides using IP and proprietary technology.
Alternative supply chains
In 20 years, the world is expected to need four times as many critical minerals for clean energy technologies as it does today. Therefore, the UK government wants to become less dependent on China and set up alternative supply chains for rare earth minerals.
He wants this to be ready by 2030, when all new vehicles made will be electric.
This is a very supportive backdrop for Rainbow Rare Earths, who hope to benefit from all of this. But how long do we have to wait?
Projects
The company plans to build a pilot plant at the Phalaborwa deposit early this year. This will probably be financed through debt. The company then expects to go into full production in 2026.
Rainbow expects to process 2.2 million tons of phosphogypsum a year for 14 years. This will produce 26,208 tons of separated rare earth oxides. Based on current average cost, management claims this will generate an EBITDA operating margin of 75%.
However, its Gakara Project in western Burundi remains on hold, pending approval from the relevant mining ministry. Since this is one of the richest rare earth deposits in the world, I hope that the government will finally give this project the go-ahead.
obvious risks
There is a significant risk here. The obvious problem is that production at these mines still needs financing, probably through a mix of debt and equity. But interest rates continue to rise, adding risk. And selling more shares means diluting existing shareholders.
The company has $4 million in cash, so it’s not at risk of going under anytime soon.
At 10 pence, the shares are down 13% since the company went public in 2017. Overall, I’m buoyed enough to start a small position in this high-risk, high-reward miner in the coming days.
