It's Not Too Late to Buy REEs

by: Joseph L. Shaefer

A lot of people are buying the stocks of rare earth companies today — most because they have read that this is a “hot” industry and because most trade as penny stocks and are therefore highly “toutable” by the kind of newsletters that use copy like:

We expect a minimum return of 10,486% on this Secret Stock we are willing to divulge to you alone!!

(And, of course, anyone else who ponies up $395 to discover the name of the stock that is already well-known to those who’ve actually done their due diligence. PS – I understand the hype of 10,000%. But I wonder how they come up with such certitude that it will be 10,486%?)

So herewith, a quick primer and my answer to the question “Is it too late?”

First, rare earths are anything but rare. What is rare, however, is finding them in commercially viable quantities. Even if you find a great ore body, you still need to jump through the environmental and regulatory hoops to get at it, hire highly skilled people and buy expensive technology to extract and isolate it, and have deep enough pockets to get it extracted, milled, processed, refined, transported, and sold to those who actually need these elements to make lighter-weight or more-durable or some-other-unique-quality they possess to gain a competitive edge in the marketplace.

Who needs REEs? We all do. These elements have a number of special qualities that make them essential in electrical and electronic, chemical, optical, fluorescent, magnetic, catalytic and metallurgical applications. The strength to weight ratio of these elements, versus more traditional metals, makes them ideal for making smaller, lighter, and quieter motors with less vibration for uses like wind turbines, MRIs, LEDs, iPods, hard disk drives and cell phones — to name just a few.

As recently as 1990, the US was the largest producer of REEs. But China, which is desperately reliant on them for its own manufacturing businesses, made it a national priority to mine so much that prices plummeted (see: Econ 101, “supply & demand”) and most producers elsewhere dropped out of the business. There are those who believe this was some vast and inscrutable conspiracy by the Chinese. I say, “Why seek conspiracy when necessity is a simpler answer?”

But what about those, like assorted Congressmen, who say the Chinese are hoarding this essential resource and want to “force” them to trade some to us. What a waste of time and, if they had any to start with, intellect. Of course the Chinese are hoarding what they have. The best estimates are that they only have something like 15-20 years of commercially viable (using current technologies, anyway) REEs remaining.

If their rush to embrace wind power proves out, or even if it doesn’t but they use 30-50% of their reserves building the necessary turbines, that doesn’t leave a whole lot for the rest of the world to buy. Hence the new gold rush into REEs. I see the best of these companies as well-deserving of purchase. After all, they have something of great value locked in the ground. The catalyst is clear: there’s more demand than supply and China, the current producer of 97% of the world’s REEs, is planning to keep virtually all of them at home. I can list two dozen companies that “might” hit it big in this space but I’d rather talk about my top three.

  1. Lynas Corp (OTCPK:LYSCF), and its US ADR representing 10 ordinary shares (OTCPK:LYSDY), owned by some of our clients since last October, is my absolute favorite. It owns the richest deposits in the world, expects to begin production in the shortest time of all non-Chinese producers (this year, as early as this month), and has the mining, milling and processing side dialed in and the financing completely lined up. Lynas is a class act built on the fundamentals of a difficult but potentially incredibly profitable business. It is among our and our clients’ Top 5 Holdings. They don’t hype anything; they just quietly build a real business.
  2. Next comes Great Western Minerals (OTCPK:GWMGF). Great Western aims to be the first vertically integrated REE producer in N. America, from mine to market. The problem is, they have, as yet, no production. And their pockets aren’t deep enough to bring their South African properties – which may well be every bit as rich as Lynas’s Australian holdings. They must find a JV partner to develop those properties. Frankly, I don’t see that as much of a problem. It may not happen this week or this month, but I see3 Great Western giving up a piece of their action in exchange for much-needed capital. What they do have is the ability to process for others what they themselves can’t yet afford to mine. Great Western is already processing REEs from other firms’ feedstocks at their Less Common Metals subsidiary in England and their Great Western Technologies subsidiary in Michigan. All they need now is dedicated feedstock of their own and (what else!) more capital, and they are off to the races...
  3. Not exactly what we think of as an REE producer, but as a more speculative play on molybdenum, I believe General Moly (NYSEMKT:GMO) may find lots more than just molybdenum at their properties. And I like the fact that deep-pocketed Korean giant POSCO (NYSE:PKX) is a junior partner (20/80) in their joint venture right here in Nevada. It looks as if the Koreans, who depend hugely on imported REEs, molybdenum, titanium, lithium and numerous other elements to keep their Asian Miracle fully charged, are willing to actually support American companies financially rather than demand that China open up its markets!

One final comment in this area: I’m not sure why anyone would chase Molycorp (MCP) and ignore Lynas (perhaps because Lynas is Australian and the US has more people on food stamps than Australia has people) but I cannot share their enthusiasm. Molycorp has a long-closed mine, outdated equipment, a just-purchased Soviet-era processing facility in Estonia, and one heck of a PR machine. If their CEO sneezes, it hits the news wires. I’m used to seeing this from some penny stock operators but my hat’s off to MCP – they do know how to hype. My hat’s off but my wallet’s closed. I only open my wallet to companies that build businesses, not just a stock following!

My short answer? No, it's not too late to buy REEs. As long as you choose the ones with the greatest likelihood of success.

Disclosure: We, and/or those clients for whom it is appropriate, are long LYSDY, LYSCR, GWMGF, and GMO. We look forward to having the opportunity to add to these positions on any decline.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

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