Recently the governments of both China and the U.S. have begun stock piling rare earth metals. China has been building up strategic reserves of rare earths for months, having gone as far as to pass a tax on shipments of rare earth metals starting April 1st. China, which controls 95% of the export market for rare earths, has been bolstering its domestic supplies of the materials used in dozens of high-tech gadgets even as it slashes exports, in turn boosting prices.
On the flip side of the issue we have the U.S. who has been mulling over the issue of whether or not to stock pile these rare earth metals on the grounds of national defense. This is one the biggest questions surrounding the global response to China’s tight control over rare earths. Future outlook in this sector should take into account Japan. They are expected to replace old nuclear facilities and rebuild infrastructure, rare earth metals are likely to play a growing role. Rare earth metals are used in cell phones, cars, fiber optic devices, wind turbines, night vision goggles, and many other devices and applications. Here are 5 rare earth stocks we think will benefit from the impending rare earth standoff:
Molycorp Inc. (MCP) is an American mining corporation headquartered in Greenwood Village, Colorado. It is currently the largest U.S. based rare earths miner. It was created in July 2010 when its parent company Molycorp Minerals sold 28,125,000 shares in an initial public offering for $394 million. It owns the Mountain Pass rare earth mine in California, a currently inactive mine which it proposes to reopen in 2011. The mine once supplied the majority of the world’s rare earth elements (REEs). The mine has attracted increased attention in recent years as rare earth elements have become increasingly in short supply. China, now the world’s leading supplier of REEs, has restricted production and exports since 2006. In December 2010, Japanese firms Sumitomo (SMMLY.PK)and Mitsubishi (MIMTF.PK) signed agreements to be supplied with rare earths by Molycorp.
Research earnings estimates for 2011 and 2012 on Molycorp (MCP), the largest U.S.-based rare earths miner, following the company’s announcement on Monday that it will acquire 90% of Estonia-based AS Silmet for $89 million, a deal that will allow Molycorp to double its annual output of rare earths oxides to 6,000 tons from 3,000 tons. After Monday’s big move higher, shares of Molycorp are lower by 2% and the Rare Earth Stocks Index is down 1.6%. Equity research firm Dahlman has raised its 2011 earnings estimate on Molycorp to $2.15 a share from $1.20 while bumping its 2012 EPS estimate to $6.20 from $5. Both estimates are well above consensus. In January, Dahlman Rose placed an $85 price target on Molycorp. It is currently trading at $67.91.
For Rare Element Resources Ltd. (REE) calls are the options of choice, with about 21,000 contracts trading so far -- representing about four times the norm. The most active strike is REE's April 15 call, where 4,205 contracts have crossed the tape. The majority of these calls traded closer to the ask price, indicating they were purchased, and implied volatility on this front-month option is up 2.8 percentage points at 72.8% REE had $67.12 million in total cash and no debt for the latest quarter. In the past 52 weeks, shares of Rare Element Resources have traded between a low of $1.15 and a high of $17.92 and are now at $13.68, which is 1090% above that low. As of 4/7/11 REE was trading at $14.98.
China Shen Zhou Mining & Resources, Inc. (SHZ) saw its shares soar 15% to $4.86 after it reported a four-fold jump in revenues to $4.9 million, up from $1.1 million, in the year-ago quarter. The gains were driven by higher commodity prices, particularly fluorite, and higher processing of a larger amount of fluorite ore in the fourth quarter to develop greater tonnage of fluorite lumps and powder. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and generally poor debt management. It is currently trading at $5.14.
Market Vectors Rare Earth Metals ETF (REMX) is easiest way to buy into rare earth metals. It's an ETF that holds about 25 different rare earth companies and returned more than 4% in the past five sessions entering March 29th’s trading, according to Morningstar. That same day Market Vectors Rare Earth Strategic Metals ETF gained 3.00% as Molycorp, Inc. spiked 7.46%. Molycorp closed the day at $59.65, and it had a volume of 11.89M traded shares. REMX is up more than 1.6%, to post a new high of $27.60.
Freeport-McMoRan Copper & Gold Inc. (FCX), often called simply Freeport, is the world's lowest-cost copper producer and one of the world's largest producers of gold. Copper futures rallied to a nine-session high on Wednesday as stronger manufacturing data fueled already bullish sentiment about the metal's demand prospects. China's hunger for copper continues unabated despite its fiscal tightening, and that the country's copper inventory will be depleted in the coming months. Copper support also was coming from expectations that the U.S. dollar will stay weak for some time. Like other commodities, copper draws strength from a weak dollar. Commodities are generally priced in U.S. dollars and become a better deal for foreign buyers when the currency falls.
Currently, Freeport even sports a forward P/E of 8.7. That represents a discount to mining competitors such as BHP (12.2), Newmont (12.0), and Southern Copper (10.6).
Freeport-McMoRan is currently above its 50-day moving average of $53.22 and above its 200-day moving average of $46.79. Look for these moving averages to climb to confirm the company's upward momentum. FCX is trading currently at $57.09, with a dividend yield of 1.00 (1.80%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.