By Roger Choudhury
China produces approximately 97% of the global supply of the metals used in the production of various high-tech products (i.e. Blackberry, iPhone, aerospace components, wind turbines, and lasers). It announced in December 2010 that it will cut its export quota by 35 percent for the first half of 2011. This opens up opportunities for companies that could not compete before in order to meet demand. Rare earth metals are distributed across the world: proven reserves in China account for 43% of the total, and the best of the rest are the Commonwealth of Independent States (19%), the United States (13%), and Australia (5%). Here’s a link to a detailed map of reserves.
Seventeen chemical elements in the periodic table are deemed rare earth metals. The label is a misnomer because they are not particularly rare. Instead, many of these “rare” elements have large commercial applications. In timely fashion, at the end of December 2010, Bloomberg introduced its newly formed “Rare Earth Mineral Resources Index.” It should come as no surprise that it has nearly tripled in value since the announcement from the Chinese. The companies in the index are listed below.
Core U.S. Metals Plays:
Molycorp (MCP) recently announced that it planned to double its production in its California mine by the end of 2013. When it does so, it has the potential to control the non-Chinese supply. Also, the current ratio for the company is 23.1. Revenues increased by 169% in the first 9 months of 2010. Since late December, Molycorp shares are up 6 points, and up 220% in the past six months. The market cap is $3.5 billion.
Avalon Rare Metals (AVL) focuses on developing the Nechalacho Deposit in Thor Lake, Northwest Territories, Canada. Initial production is targeted for 2015. In addition, the Company has NO debt. Also worth noting is that from September through November 2010, revenues increased by over 300% compared to the same period in 2009. As a result, in the last 6 months, AVL is up 70%, and year-to-date, is up by over 20%.
Rare Element Resources (REE) has a 100 percent interest in the Bear Lodge property in Wyoming. Completed in September 2010, an economic assessment shows that the deposit has an internal rate of return of 40%. In 2011, we await the completion of a pre-feasibility study, pilot plant testing, drilling, metallurgical work, exploration programs and for general working capital purposes. Given the heavy emphasis on capital expenditures, expenses are up 134% from July to December 2010 compared to the same period in 2009. As of February 2011, the current ratio is 42.58. REE has increased four-fold in share price in the past 6 months, but it is down 20% year-to-date.
A conservative way to invest in all of these companies is through the Market Vectors Rare Earth/Strategic Metals ETF (REMX). Total assets are over $400 million. The fund started trading on October 27, 2010. The average price to book ratio is 2.5. The average market cap is $1.3 billion. Because all the companies are specialized in the same business, they will correlate together. The market price is up 27% over the last 6 months, and is up 3%, year-to-date.
Australian and Toronto-based Plays:
For more speculative fare, we uncovered these stocks listed on the Australian Stock Exchange and Toronto Stock Exchange.
Lynas (LYSCF.PK) aims to become a significant competitor in the supply of non-Chinese rare earth metals. In 2011, production is projected to start in Mount Weld, which is the richest known deposit of rare earth metals in the world. That is net income has been negative for the past three years. Forward P/E is 24.6, and the market capitalization currently stands at over $3 billion. In the last 6 months, the share price surged by 110%. Lynas also trades on the Australian Stock Exchange (LYC.AX).
Arafura Resources (ARAFF.PK) is currently developing its Nolans rare earths-phosphate-uranium project in Australia’s Northern Territory. Drilling will start a drilling campaign this month for a feasibility study, scheduled for completion in 6 months. Production is targeted for 2013. Share prices are up 80% in the past 6 months, but down roughly 17% year-to-date. Market cap is over $400 million. Arafura Resources also trades on the Australian Stock Exchange (ARU.AX).
Greenland Minerals and Energy (GDLNF.PK) does mining in Greenland. Its flagship project is Kvanefjeld in southwest Greenland. Pre-feasibility studies indicate that the project could potentially supply almost 20% of global rare earth metals demand. Recently, the company discovered more deposits in the Ilimaussaq complex. The goal for production is 2015. Share price is up over 300% over the past 6 months, and is up over 10% year-to-date. The market cap is over $350 million. The company also trades on the Australian Stock Exchange (GGG.AX).
Quest Rare Minerals (QSURD.PK) is developing several sites in Canada: the Strange Lake area of northeastern Québec, the Kenora area of northwestern Ontario, and the Plaster Rock area of northwestern New Brunswick. A feasibility study is slated for completion this year for the Strange Lake project. The company has a strong working capital position of $53 million. QSURD.PK has increased over 120% within the last 6 months, and is up 8%, year-to-date. Market cap is over $340 million. The company also trades on the TSX Venture Exchange (QRM.V).
Frontier Rare Earths (FREFF.PK) has extensive mining experience in South Africa. Its principal asset is the Zandkopsdrift rare earth deposit in the Namaqualand region of the Northern Cape Province in South Africa. Feasibility studies should be completed by 2012 with production starting in late 2014. As of September 30, 2010, the current ratio is 0.19. With little cash flow, the company is mainly functioning through capital raises. Share price is down 7%, year-to-date. The company also trades on the Toronto Stock Exchange (FRO.TO).
Alkane Resources (ANLKY.PK) has one rare earth metals mining project in New South Wales. From only this, revenues are projected to be $180 million per year. The construction of a pilot plant is estimated to start in the summer of this year. At the end of 2010, the company had no debt with roughly $4 million in cash. ANLKY.PK is up 17%, year-to-date. The company also trades on the Australian Stock Exchange (ALK.AX).
Tasman Metals (TASXF.PK) is engaged in the acquisition and exploration of unproven rare earth metals and iron ore projects in Scandinavia. Various feasibility studies are to take place in 2011. Before any production, the company must obtain regulatory and environmental approvals. The current ratio is over 100, and has over $5 million in cash. In 6 months, the share price is up 550%, and year-to-date, it is up 27%. Market capitalization stands at $300 million. Tasman Metals also trades on the TSX Venture Exchange (TSM.V).
Great Western Minerals Group (GWMGF.PK) has been around since 1983. The company owns, explores, and develops strategic mineral properties in Canada, US and South Africa with a focus on the rare earth metals. It is also the parent company of metal manufacturing companies, and seeks to become the first vertically integrated rare earth metals producer in North America. Production plans shall be mapped out over the next several years. The latest financial report indicates that the company is in good financial shape relative to the companies in this list. The share price is up 230% the last 6 months, and is up 34%, year-to-date. It currently trades under $1. Great Western Minerals also trades on the TSX Venture Exchange (GWG.V).
Navigator Resources (NAVZF.PK) has one rare earth metal deposit in the Cummins Range in Western Australia. The assessed value of the deposit is $10 to 20 million. A good chunk of this deposit has yet to be drilled. The company also possesses several gold mines, and generated $26 million in sales revenues. At the end of 2010, the company held over $13 million in cash. It has $12.187 million due in debt in June 30, 2011. Shares trade below $0.25. Navigator Resources also trades on the Australian Stock Exchange (NAV.AX).
Matamec Explorations (MTCEF.PK) has 1 rare earth metals deposit in Quebec, and several gold deposits. A preliminary economic assessment is under way for the rare earth metals deposit. The company received a steady flow of private placements in 2010. The share price stands right around $0.50, and has tripled over the past 6 months. The company also trades on the TSX Venture Exchange (MAT.V).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.