November 20th, 2020 | 10:59 CET
E.ON, RWE, Defense Metals: Energy investments - from boring to speculative
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"[...] Recovery rates of more than 90% rare earths are another piece of the puzzle on the way to the economic viability of our project. [...]" Craig Taylor, CEO, Defense Metals
At home in Southern Germany, the passionate stock exchange expert has been accompanying the capital markets for about twenty years. With a soft spot for smaller companies, he is constantly on the lookout for exciting investment stories.
E.ON: Network operator with a future
E.ON's stock has been anything but a yield booster over the past few years. The share price moved sideways at best. Nevertheless, the Company has precisely what is needed to deliver returns in the future. Years ago, E.ON outsourced conventional energy production and is now primarily a network operator. E.ON is thus well positioned for the future. Assuming that digitization will affect more and more areas of traditional industry, the demands on the networks, in particular, are likely to increase. E.ON is already issuing green bonds today and is therefore profiting from the boom in this asset class.
While the share price is not very attractive, the dividends are convincing: at almost 5%, a share certificate currently yields a return of nearly 5%. In the future, the payout could even increase. Thus E.ON is a stable share, which has future, but currently still trades under the radar. Broad jumps are not to be expected from the share.
RWE: thick ship without much imagination
The situation is similar for competitor RWE. RWE's share price has risen more strongly in recent years but offers a lower dividend yield in return. RWE focuses entirely on power generation and is making a breakthrough, especially in renewable energy. For this purpose, parts of E.ON were recently taken over. Additional projects may be added in the future. This market power should pay off for RWE in the long term. Looking to the future, investment experts such as Clearbridge Investments expect energy consumption to rise. Profiters could be companies that are currently trading under the radar of the market, like E.ON or RWE.
The market for rare earths is getting tighter and tighter
When you think about the energy supply of the future, storage is just as important as the production and distribution of electricity. Capacity peaks could thus be balanced and any energy produced, for example from renewable sources, could be stored. In this context, the Clearbridge Investment House also points to the expected increase in demand for industrial metals up to 2030. Critical metals, in particular, such as rare earths, are used in batteries or electronic devices. Only recently, the Fortress Value Acquisition Group took over the rare earth producer, Mountain Pass, for USD 1.4 billion. The project is considered one of the few promising ones in North America. China has dominated the rare earths market for years.
Defense Metals: Micro-Cap in a promising position
The young rare earths Company, Defense Metals, recently demonstrated the prospects of these critical metals as its share price rose significantly. Defense Metals operates its Wicheeda project 80 kilometers northeast of the city of Prince George in the Canadian district of British Columbia, making it one of the few projects on North American soil. The Wicheeda project is accessible by road all year round and has infrastructure such as electricity.
The Company intends to announce further details on the profitability of the planned project by the first quarter of 2021. The Company is currently valued at only around EUR 6.5 million, making it a micro-cap. However, if there are any indications of possible commercial production of rare earths at the Wicheeda project, this valuation should be a thing of the past. In return, there is a risk that the bet will not pay off. At the current valuation level, the risk/reward ratio still seems favourable for speculative investors. Although standard stocks such as E.ON and RWE should also benefit from investments in electricity grids and the growing demand for renewable energy, rare earths remain the more versatile investment.
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