Share prices have tumbled down for many rare earth element miners, while the quality of certain companies has dramatically improved. Is now the right time for investors to strengthen their positions in the space, or to turn and run? Byron King, editor of Outstanding Investments and Energy & Scarcity Investor, discusses some new tax implications with The Critical Metals Report that could help investors time their gains or losses.
The Critical Metals Report: Byron, in your last interview with us in June, you said it was time to buy low in the rare earth elements [REEs] sector. Is it now time to buy lower, or should investors take their losses and come back later?
Byron King: The REE sector has declined over the summer with the rest of the junior resource space and stock market. While the share prices of the companies I follow may be lower than they were six months ago, the quality of the companies is actually dramatically better.
TCMR: Why should investors stay in this space?
BK: We had a sweet run in this space in 2010 and 2011. But for the past year or so, it's been brutal. So yes, many investors should consider bailing out, if they haven't bailed out already. This game is not for the timid. Actually, about two years ago, I got my readers out of Molycorp Inc. (MCP) at about $55/share. Molycorp was recently at $8/share. Many other rare earth players have taken similar hits.
But it's not hopeless. The REE companies that I'm following are true technology leaders, in my view. Each one has developed significant extractive metallurgical techniques to get the high-priced heavy rare earth elements [HREEs] out of the rocks and to turn the material into salable products.
TCMR: What are you telling your readers when they inquire about the performance, or lack thereof, of many of these REE juniors?
BK: There are fundamental disconnects between share price and the overall quality of these companies. My advice is to remain patient. I tell people that they should not be investing in this space with money that they can't afford to lose. You have to be willing to ride the roller coaster.
We're getting closer to the end-state breakthroughs, though, such as we've seen with the extractive triumphs -- and I mean triumphs! -- that some companies are making. So I anticipate share price increases over time.
TCMR: Is it possible to calculate the value of these companies without transparent REE prices from inside China?
BK: The China issue makes it more difficult. The day-to-day pricing out of China doesn't tell the entire story, in any long-term way. China has long-term REE supply issues. The Chinese are looking around the rest of the world for new deposits and technologies. The Chinese spent a big part of the last 25 years high-grading and exporting the good stuff from their deposits at low prices. It's only in the last two to three years that the Chinese have put a squeeze on exports. Now the country finds itself wrestling with issues of resource depletion. Within very few years, China will wind up being a buyer on world markets as opposed to an exporter.
TCMR: At least a buyer of certain heavies.
BK: Yes -- erbium, terbium, gadolinium, europium, lutetium and possibly yttrium.
TCMR: There's an issue looming that's even larger than the "fiscal cliff." Can you talk about that?
BK: It plays into the seemingly endless sales of shares across the entire junior resource space. Much of the U.S. tax code will dramatically alter on January 1. The popular news media keeps focusing on the expiration of the so-called Bush tax cuts. So will Congress and President Obama extend tax cuts for the middle class? That's the headline question.
Yet for investors of any class, capital gains rates are scheduled to go up dramatically. Capital gains rates will almost double from 15% to nearly 30%. Taxes on interest will also go up. Plus -- and this is really going to be a punch in the gut -- tens of millions of taxpayers are going to be subject to the alternative minimum tax, which is a completely parallel tax system to the one that everyone is used to with Form 1040. A lot of people who understand this have been moving money. They're cashing out of hedge funds -- which then sell their resource shares -- and changing structures now to avoid problems in 2013.
TCMR: So, if an investor sold a stock and made a $10,000 profit, they would pay a 15% tax on that money now, but it could be as high as 30% come January 2?
BK: If you sell on January 2 when the stock market opens and you make that same $10,000 gain, your capital gain tax would be about $3,000 versus $1,500. It would be almost double what you would pay now. If you want to take any capital gains, do it now, or sell something else and book a loss against it, and then buy it back next year.
TCMR: Are there REE companies that you still have faith in, Byron?
BK: I would be remiss if I didn't give at least some favorable mention to Matamec Explorations Inc. (MHREF.OB), which is putting together a play in Quebec.
TCMR: What's going to drive the share price higher?
BK: Matamec needs some good news in the downstream metallurgy department. They need real, reproducible, chemical engineering news that demonstrates the viability of the metallurgical extraction.
To their credit, they are working in the HREE space, which is where the money is. The world markets will be more than glad to see more non-Chinese HREE plays.
Matamec is working with the Japanese and has support from Toyota. Overall, the demand is out there from the electronics, automobile and heavy industrial-type sectors. With the HREE players, there's much less risk of the kind of price crash issues we fear with the light rare earths lanthanum and cerium.
TCMR: Matamec has taken some heat for the deal that it did with Toyota Tsusho Corp. (TYHOY.PK). Did the company negotiate the right deal?
BK: Time will tell. There are a couple schools of thought. One is that this is a beneficial, cooperative agreement with Toyota, and a great partnership for research and development. There is another, more cynical view, that it was just a calculated move by Toyota to take a look at Matamec's technology.
Toyota went to several other REE companies and asked to see behind the magic curtain. Some companies actually turned Toyota down because they didn't see a quid pro quo. However, the idea that a big company like Toyota is interested in Matamec is a selling point.
TCMR: The graphite space has witnessed steeper declines than the REE sector. Has the space over promised and under delivered?
BK: The graphite hype has been unfortunate. In general, the space over promised on what graphite can do and what its uses are. Just about everyone who was promoting a graphite project, for one reason or another, failed to mention a couple of very important points. One is that over half the graphite that gets used is a synthetic product that's made out of petroleum coke from oil refineries. It's not something that anyone needs to dig out of the ground.
Another example is that many players dramatically overstated the case for future graphite uses in automobiles, lithium-ion batteries and electronics. Mined graphite can be used in those products, but people may have exaggerated how big those markets could be and how quickly they could reach those levels.
TCMR: Are there any other graphite companies you're following, Byron?
BK: I've been following Focus Graphite Inc. (FCSMF.PK) for almost two years. I've always liked Focus because its deposit at Lac Knife, Quebec, is among the highest-grade deposits in the world.
TCMR: Quebec has a history of graphite mining.
BK: It does. Focus has a great deposit in Quebec. But Focus is more than a mine with great ore. Focus management has a technology-based plan for what it wants to do with the graphite. I wish management would be more open about the actual details of the technology, but at this stage, it's all at a close-hold, highly proprietary level. Still, every company makes its own decisions on what it wants to keep close to the chest. I'm bullish on Focus and where it's going with its technology uses for graphite.
TCMR: Do you have some parting thoughts for us on the critical metals space?
BK: It's been a very frustrating space in the last couple of years -- along with much else in the resource space, to be sure. There was a lot of technology-metals over promising. There was a lot of under-delivery. The technology materials space has all the difficulties you encounter with traditional mining plays, but with the added difficulties of high-tech applications.
For example, when you're mining gold, silver or copper, there are two, three or four elements to separate using techniques that have been around for 100 years or more. When you mine REEs, you're dealing with 10, 12 or 14 elements that have annoyingly similar chemical properties, electrical properties and separation and filtration issues. And if you don't pull them all out at the time you're separating them, you're literally throwing good money into the waste pile or into storage.
TCMR: That's a problem, too, because these metals are not stable.
BK: That's true. You can store gold at Fort Knox for 60 years and it will be the same, whereas some REEs instantly start to break down. There's a decay factor involved. Yet, the world needs these materials for technology applications downstream. We're only going to need more of them, not fewer, as people improve their standard of living. There is a future for them, but you have to go in with your eyes open, be patient and read really good newsletters.
TCMR: Now, that's certainly some very good advice. Good speaking with you today, Byron.
Byron King writes for Agora Financial's Daily Resource Hunter. He edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University, and holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. He has advised the U.S. Department of Defense on national energy policy.
1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Byron King: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.