“May you live in interesting times.” - Unknown.
Some would have you believe that this expression is meant as a blessing but we (like most) think the saying originated as an ancient Chinese curse that means “may you experience much disorder and trouble in your life.” Since our topic is rare earth element (REE) stocks in the current market environment the Chinese curse connection is apropos.
Confidence is a necessary ingredient in bull markets and in the proper functioning of the economy at large. Due to the actions (and inactions) of our government and that of the Eurozone, confidence has been eroding from the marketplace over the past six months. The result is a stock market on the verge of entering bear market territory and an economy on the brink of a double dip recession.
As a result of the foregoing, both the stock market and commodities have been hammered as the so called “risk off” trade prevails. While all commodity/mining stocks have suffered steep declines perhaps no sector has suffered more than the REE space.
Although we are “bowed and bloodied” from our personal exposure to the REE sector we think the REEs are just in a major correction within the context of a bull market. Not that that diminishes the pain in any manner. We have examined (and re-examined) our original reasons for our entry into the sector and feel they remain valid.
With the percentage increases in the underlying REE prices as well as the related stocks the correction isn’t really surprising in its scope or timing. If you were early to the space like we were you still have profits. With that reasoning in mind we think now may be an opportune time to average in to the REE space
While we are a firm believer that “a rising tide lifts all the boats in the harbor” (and its converse) we think that REE prices and the related stocks should not be impacted by a recession nearly as much as other commodities/metals (such as copper, zinc, lead and iron ore) which are more economically sensitive. The REE shortage is not going away anytime soon (although stockpiling by users may decline) and if we go into a recession the products that REEs go into will still continue to grow for the most part.
Query – does one think iPad sales will decline or that the military will dial back their need for smart weapons? We think the market will begin to recognize this after we work through the current “waterfall” stage that we are in. After all, markets are rational over the medium to long term.
With the “risk off” trade increasing and the impending sovereign and banking crises in Europe we think it best to concentrate on REE companies that have projects that look feasible from not just an examination of their ore body but its geographical location and required infrastructure needs.
That leads us to the six REEs detailed herein:
Molycorp, Inc. (MCP)
Molycorp – no discussion of REE stocks is complete without Molycorp. Molycorp is so well known to REE investors we do not feel the need to get into details about their Mountain Pass, California LREE project, suffice it to say Molycorp actually has both revenues and earnings from processing their old tailings.
Molycorp is believed to have enough cash on hand to bring their entire mining operation into full production. We feel this sets Molycorp apart from the rest of the field and while we have no financial interest in Molycorp we feel strongly that Molycorp should be the first choice of most REE investors now that the possible downturn in the worldwide economy and subsequent stock market decline threatens (or at least delays) project financing for the rest of the field.
Avalon Rare Metals, Inc. (AVL)
Avalon has the 100% owned Nechalacho HREE deposit located at Thor Lake in the Northwest Territory of Canada. The big draw here is the roughly 28% heavy REE component of their deposit. The drawback is the remote location and that it will have to be mined via underground. The company also has the advantage of having raised some cash via a secondary at much higher prices so the treasury stands at $70 million.
We are skeptical that Avalon will be able to arrange project funding for the projected $900 million capital costs of the project in the current environment. One additional positive for the stock is that Avalon is one of Jim Dines REE picks.
Rare Element Resources Ltd (REE)
Rare Element has the 100% owned Bear Lodge REE/Gold Project in Wyoming, USA. The property has a robust preliminary economic assessment that calls for a very modest capital cost of $88 million for a 1,000 tpd operation. The project received a boost early last month when rare element announced they had encountered some of the highest heavy REE grades reported in North America from three separate areas within the Bear Lodge Project.
This project with its favorable geographic location and low capital cost (and a possible gold credit to top it off) should receive more attention from investors if the financing environment continues to tighten thereby threatening the funding of competing capital intensive projects. Rare Element is also on the Jim Dines list of favorite REE stocks.
Quest Rare Minerals Ltd (QRM)
Quest has the 100% owned Strange Lake HREE Project located in northeastern Quebec. Major advantages for the project are its heavies, favorable political jurisdiction and that the deposit should be mineable via open pit. The Quest PEA calls for capex of $563 million with a 4,000 tpd operation.
Quest has a higher HREO as a percentage of TREO than Avalon. With the current market environment Quest appears to have the best in class North American HREE project but will face mounting doubts about its ability to proceed if the equity financing market closes. Quest is yet another Jim Dines favorite.
Stans Energy Corp. (OTC:HREEF)
Stans has the 100% owned, fully permitted Kutessay II HREE Project which is the only past producing HREE mine in the world outside of China. The mine produced the vast majority of the Soviet Union’s REEs from 1960 – 1991. The project benefits from good infrastructure and electrical power on site from its past producing days. Stans also owns the related Kashka rare earth processing facility and rail terminal.
A final feasibility study should be in place prior to year end. Perhaps this project’s greatest attribute is that the Soviets have already deciphered the metallurgical aspects. With all infrastructure in place including the processing facility and rail terminal the capital costs will be very moderate. We think this open pit project proceeds on its own merits.
The only drawback of course is the project is not located in North America but rather Kyrgyzstan (if the project was located here the market cap would be increased by a factor of 10). We see plenty of potential here. We would note that Stans is a favorite of Byron King/Agora Financial.
Ucore Rare Metals, Inc. (OTC:UURAF)
Ucore has the 100% owned Bokan Mountain HREE project which is located on the southern tip of Prince Wales Island, Alaska. Contained within the project is the former producing Ross Adams uranium mine. Ucore has among the highest known HREE vs. LREE skews. Other positives include that there is significant infrastructure in place and prior permitting is still intact as well as this is the only HREE project on American soil.
The project appears to have significant geopolitical support on both the state and federal level. Like Stans, Ucore is a favorite of Byron King/Agora Financial. We feel it is likely that Molycorp will purchase Ucore to secure the HREEs needed to complete their “mines to magnets” program.
So, although we may be residing in interesting times, we feel that the REE sector will provide significant financial returns to investors that have the fortitude to enter the fray. It should go without saying that Molycorp is the “safest” choice of the companies profiled here although Stans and Ucore may have the most explosive potential if they can see its projects through to production.
Please keep in mind that the entire sector is speculative in nature and that none of the projects (including Molycorp) would be economical if the Chinese reverted to subsidizing REE prices and production.