MIDAS SHARE TIPS: Rare Earth Minerals well placed to benefit from big demand for lithium

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Driving seat: Some observers reckon Rare Earth boss David Lenigas may forgea tie-up with electric car firm Tesla, which is building a massive battery factory in Nevada

Lithium is in big demand. While doctors prescribe it as a treatment for bipolar disorder, the metal is also a key constituent of long-lasting batteries, the need for which has grown exponentially.

Used in items ranging from pacemakers to power tools, lithium batteries are also an essential part of electronic devices, such as computers, tablets and mobiles. They are integral to electric cars as well, and as more hit the market, demand for lithium is expected to soar.

Rare Earth Minerals is well placed to benefit from this trend. The company owns a third of a new lithium project in Mexico, which has already discovered 3.3 million tons of the metal – equivalent to 10 per cent of current annual supply worldwide.

The shares are trading at just 1p, but there are 5.7 billion of them, so the company is valued on the stock market at £57 million. The price – and the valuation – should increase from here.

Rare Earth is chaired by David Lenigas, an ebullient Australian mining engineer. Lenigas as attracted controversy in the past, but he has also had some notable successes on AIM, including Cambrian Mining. Supporters hope that this latest venture will be another feather in his cap.

Most big lithium mines produce the metal either by extracting it from hard rock or through a complex process involving copious quantities of brine. The former is very costly. The latter is environmentally controversial. Rare Earth’s Mexican mine is a shallow clay quarry, which means production should be simple, environmental damage should be minimal and costs should be relatively low.

The site is also located in a part of Mexico that is well disposed to the industry and has good transport links to the US. Crucially too, Rare Earth’s mine is relatively close to a new battery factory being built by Tesla, the US electric car company valued on Wall Street at $27 billion (£16.9 billion).

Tesla’s Gigafactory, as it is called, will be built in Nevada and by 2020 is scheduled to make more lithium batteries than the entire world produced last year. Its proximity to Rare Earth’s mine could prove fortuitous. For small miners, finding good deposits is just the first step on the road to success. Taking mines to commercial production is where the real challenge often arises.

These days, when bank finance is in short supply, many entrepreneurial miners enter partnership agreements with larger firms that could make good use of their end products.

These deep-pocketed potential customers will agree to fund some of the upfront costs of a mine in return for cheap metal when production starts.

From this perspective, a tieup between Tesla and Rare Earth would make sense. And some canny observers believe such an agreement might happen relatively soon.

Meanwhile, Rare Earth is in the middle of a drilling programme, as early indications suggest its mine could yield significantly more than 3.3 million tons of lithium. The group is also planning and designing its production plant, which is due to be up and running in 2017, with annual production of at least 50,000 tons.

Lithium is now £4,400 a ton, but the price is forecast to rise to more than £5,000 over the next three years. Hard rock processing costs about £2,800 a ton, the brine process often costs more than £1,000 a ton and Rare Earth’s costs are likely to be £900 or less. That means it could shake up the lithium market – considerably increasing supply at a cheaper rate than most rivals.

The company also has 30 per cent of a mine in Australia and another in Greenland. The Australian venture in particular looks encouraging. Recent exploration showed good grades of neodymium oxide, a mineral with exceptionally strong magnetic properties.

Midas verdict: Rare Earth Minerals is a true penny share and it has been buffeted by weak market sentiment over the past few days. The long-term outlook is sound however.

At 1p, this is an attractive prospect for the adventurous investor.

Traded on: AIM Ticker: REM Contact: rareeearthmineralsplc.com or 020 7440 0647