Bull markets climb a wall of worry. This is a saying we have constantly reminded our readers of over the years as we invested in bull markets such as uranium, potash and now rare earth elements. As the story becomes more prevalent in the investment community and the returns on investment are realized the bears start to come out of the woods.
Almost always they have their facts wrong, whether it be major issues regarding the market in general or company specific where sloppy research is usually the culprit. In every one of these bull markets we have been a part of we have noticed that the skeptics usually have their ‘facts’ wrong. The greatest lies have a kernel of truth to them, and sadly that is what is going on in the rare earth elements sector these days.
MYTH: These companies are scams because they share offices and management.
First, one has to understand the industry, which means you must have a firm grasp on the world junior mining sector. Around the world, the juniors employ few people, and run frugal operations. Many times the same management teams work among a group of companies (some would refer to these as sister companies) to spread costs and enable the group to work all year long on their projects as some are only accessible during certain seasons and then there is the funding issue.
The fact is, American investors need to understand that this is how business is done, and yes they do share offices, as they often share the same corporate secretary. Anyone having minimal experience investing in the junior resource sector north of the border, and having placed calls into investor relations or headquarters, knows how the corporate segment is assembled. This should answer the questions regarding Rare Element Resources (REE), their Canadian shareholders have known the office situation for some time, plus the company has had investment banks do due diligence prior to share offerings.
MYTH: Rare Earths are so common that the world will soon be flooded in supply.
Once you understand the sector then you can begin to understand the myriad investment opportunities that lie within. For the rare earths, one must be ready to get technical and complex as these metals are some of the hardest in the world to mine. They may not be rare in and of themselves but finding a deposit, which is economic in both composition and size and able to be separated as well is highly rare.
Think of the oil shale in Colorado in the western United States. If you drilled a hole within that formation, it would not be a rare occurrence to hit ‘oil’ but what would be rare would be to hit a large enough intercept in an area where it was easy to separate the hydrocarbons out. Fortunately for us all we can get oil from other sources, but rare earths we cannot!
MYTH: Molycorp (MCP) is selling for 3-4x the value of the entire market.
Another myth the naysayers would have you believe is that Molycorp is selling for 3-4x the value of the world’s entire REE production. This is not true. The number they use is from old news reports where the numbers are a year out-of-date, sometimes two! Using year old information is not the best way of making investment decisions. In 2009 the entire value of production in the industry was estimated at about $1.5 billion, fact. By 2010 that number had escalated to an estimate of between $7-8 billion!
So Molycorp, a company with a past producing mine and all the technological know-how to operate that mine (the formula for unlocking the REEs from the ore) based in the United States, has a market capitalization of half that. They will be one of two companies (Lynas based in Australia will be the other) outside China producing REEs as early as 2012, but definitely by 2013. These estimates are subject to understatement as no one really knows what is mined in the world and what is not due to the illegal mines and smuggled material coming out of China.
MYTH: Because of high prices, manufacturers will find substitutes.
Manufacturers THINK they can develop ECONOMICAL substitutes for rare earths. Are they trying? Yes. Will they succeed? Maybe. Manufacturers are not trying to develop substitutes because the prices are too high and thus making their products uneconomical. Rather they are attempting to find substitutes for REEs due to the lack of supply on the world market. This goes to reinforce the fact that bringing rare earths to market really is rare!
Toyota (TM) says they have discovered these technologies, however at the same time they have been scouring the globe for heavy rare earth elements (HREEs) and throwing lots of money and promises around in order to be included in projects. The separate Tesla agreement with the motor that is REE-free based on design and technology is a whole new motor, not a motor which has had REEs replaced with substitutes. Developing super-powerful magnets will be a whole different deal.
MYTH: China is just toying with the rest of the world, they can open the spigot whenever they want.
This is wishful thinking once again by those not doing their research. China recently realized that they were giving away REEs at very cheap prices and that this was a nonrenewable resource. Those in the industry have always questioned the reserves reported by the Chinese in regards to their largest mines and the Chinese finally confirmed that with their current output and the growth trajectory of their consumption that the days of readily available REEs are quickly coming to an end.
China has begun to scour the world looking for REEs, especially the HREEs. China tried to buy Lynas not too long ago, but the Australian government quickly killed that deal, thus securing REEs for the rest of the world. Rather than flooding from China expect hoarding, one can include Japan, Korea and the EU in that group too!
Investors wanting to keep up with the facts in the industry would do wise to track the CEO interviews of the industry execs. There is a lot of information they give out and it is always up-to-date. Not everyone has the opportunity to talk directly with the CEO of their company, but these days every interview is available to either be watched or read.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.