Increased Rare Earth Demand Bodes Well for Molycorp

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 |  Includes: MCPIQ, REE
by: Michael Bryant

As China continues tightening exports of rare earths, these metals' prices, along with shares of rare earth miners, have been surging. Since these elements vital to smartphones, nuclear shields, windmills, solar panels, and defense systems, the trend higher will likely continue as long as supply stays tight.

The smartphone industry has ballooned in recent years led by Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) android. Nowadays smartphones can do all the features of a computer. This trend will likely continue, meaning more rare earth demand. Microsoft’s (NASDAQ:MSFT) Bill Gates once said if you want to give Africans technology, give them a smartphone.

Defense, missiles, and lasers are not going anywhere either. In fact, Asia has been going through an arms race. As China grows its military, surrounding nations rush to build up their military, too. In fact, the Chinese navy and Indian navy have been scrambling to protect trade routes. All of this also raises demand for rare earths. And interestingly, could this have been why China is raising rare earth quotas to start with?

But the biggest opportunity I see in rare earths is its importance for green technology. The Toyota (NYSE:TM) Prius uses rare earths. All hybrid cars use rare earths. Each windmill uses a ton of rare earths. Multiply that by the number of windmills being built gives the total demand from just the wind energy industry. But also the nuclear disaster in Japan has caused some governments to turn to different sources of energy. Japanese TV noted that Switzerland and Germany stopped their orders for new nuclear power plants. This is bad news for uranium stocks such as Uranium Resources (NASDAQ:URRE), UR-Energy (NYSEMKT:URG), Uranerz Energy (NYSEMKT:URZ), Denison Mines (NYSEMKT:DNN), and Cameco (NYSE:CCJ). However, this is good news for the solar industry and such players First Solar (NASDAQ:FSLR), Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), and Canadian Solar (NASDAQ:CSIQ). As for wind players, the best play would probably be Otter Tail Corporation (NASDAQ:OTTR).

So which rare earth miner should I buy? I like to buy miner stocks that actually have known assets such as Molycorp (MCP). It will also be in production in 2012, three years earlier than competitor Rare Element Resources (NYSEMKT:REE). MCP was the largest producer of rare earths in the world until China flooded the market in the 90s. I know there are rare earths in the mine. REE’s mine seems fishy, with some people doubting the estimates the company publishes. And as the chart below shows, at least MCP has some revenue vs. none for REE. In short, MCP seems the less speculative play of the two.

As shown below, MCP seems to have crossed resistance after a long consolidation period on decent volume. The last time it did breakout after consolidating, it surged higher. I predict it will do the same again.

(click to enlarge chart)

Click to enlarge

Further, MCP’s recent purchase of a processor that nearly doubles the company’s processing capacity raises its value.

Other miners include Avalon Rare Metals (NYSEMKT:AVL) and China-based China Shen Zhou Mining & Resources (NYSEMKT:SHZ) and Qiao Xing Universal Resources (XING). SHZ, however, mainly mines fluorite along with zinc and copper.

Crosshair Exploration & Mining (CXZ) is an interesting play because is mines uranium, gold, and vanadium. Vanadium is mainly used in steel making. Also China GengSheng Minerals (NYSEMKT:CHGS) makes materials used in uranium shielding, which as noted above, could see increased demand from Japan’s nuclear crisis.

G%

year over year revenue quarterly growth (%)

P/B

price/book

tPE

trailing PE ratio

PEG

price/earnings/growth

fPE

forward PE ratio

R/S

revenue/share

P/S

price/sales

%

% short

Click to enlarge

Stock Mentioned:

Price

G%

tPE

fPE

P/S

P/B

PEG

R/S

%

AAPL

335.06

70.50

18.69

12.56

4.08

5.70

0.76

83.52

1.2

CHGS

3.05

21.80

277.27

--

1.23

1.49

0.75

2.57

3.8

CXZ

1.20

--

--

--

--

1.33

--

--

1.7

GOOG

578.16

26.50

21.97

14.42

6.36

4.03

0.93

92.00

1.5

MSFT

26.07

4.90

11.13

9.41

3.30

4.54

1.00

7.71

1.1

TM

77.88

-11.70

20.98

29.28

0.53

1.01

0.76

147.26

0.9

Rare Earths

AVL

9.28

--

--

--

--

11.1

--

--

6.5

MCP

67.19

897.30

--

27.42

160

12.6

--

0.56

17

REE

14.42

--

--

--

--

8.17

--

--

23

SHZ

5.71

332.00

--

--

14.3

6.89

--

0.42

65

XING

2.11

--

45.87

--

1.06

0.40

--

2.32

3.8

Uranium

CCJ

29.85

2.20

22.01

16.49

5.32

2.16

0.48

5.63

0.4

DNN

2.49

26.30

--

--

7.01

1.12

--

0.38

0.9

URG

1.74

--

--

--

--

2.37

--

--

0.6

URRE

2.17

--

--

--

3535

7.03

--

--

11

URZ

3.29

--

--

--

--

5.71

--

--

2.5

Wind

OTTR

22.69

18.60

--

15.33

0.73

1.30

1.21

31.27

3.9

Solar

CSIQ

10.52

78.10

9.07

6.01

0.31

0.87

0.36

34.91

12

FSLR

147.32

-4.90

19.18

13.33

4.99

3.70

0.69

30.20

28

TSL

28.85

104.90

7.21

6.71

1.11

1.75

0.40

27.30

12

YGE

12.25

60.70

8.84

7.95

1.01

1.51

0.36

12.61

12

Click to enlarge

Source: Yahoo Finance



Disclosure: I am long MCP.