Playing The Rare Earths Summit

by: Matthew Smith

The rare earth stocks have been en fuego as of late due to a myriad of reasons. First, Europe seems to be containing the brush fires rather well - the Germans are running lead and much of the bad news is behind us as the credit rating agencies have already performed their downgrades. Also, and this is more of a result of the first point, risk-on is back in fashion and risk assets are re-inflating across the board - tech, uranium, rare earths, oil and gas and other resource plays. One point many are missing is that the Fed plans to keep interest rates low through 2014, while Europe is essentially printing money and recapitalizing the banks.

Investors would be wise to watch the rare earths as they have been especially strong over the past two weeks with many rising nearly 50%. News flow has picked up in anticipation of REE World's Technology Metals Summit 2012, being hosted in Toronto starting Wednesday morning. This, on the back of analysts finally turning bullish once again on the industry, has the speculators' juices flowing again.

By our estimation, the conference will be the largest REE conference ever held in North America and should rival the summits held in Asia - important because it is bringing the world's brightest to the largest financial center for mining companies in the Western Hemisphere and quite close to the analysts in New York City (the financial capital of the world). All of the companies with significant footing in the industry will be represented by their CEOs, Chairmen, key personnel and partners.

So where should investors look to play the field?

Molycorp (MCP)

Molycorp, one of the two 800 pound gorillas in the industry, but the only one based in North America is still trading above the level where we initially recommended it to our readers, but is off of its highs set previously - as is the case across the industry. The company offers exposure to what is believed to be a project capable of getting into production before many of the other projects around the world, the only drawback is that the Mountain Pass Mine (it has historically produced) only possesses the Light Rare Earth Elements (LREE). Molycorp claims to have an HREE (Heavy Rare Earth Element) play located nearby which they can get into production in the next few years, but it is our view that without any drilling or metallurgical work having been done to this point that this project will take far longer than management is leading shareholders to believe.

Molycorp is what many of the pros use to trade REEs (Rare Earth Elements) as it is liquid and sports a market cap well north of the $1 billion range. Like Cameco is to uraniums, Molycorp is a barometer for how rare earths are trading - and now that the riskiest assets are being reinflated, so too shall Molycorp.

Rare Element Resources (NYSEMKT:REE)

Rare Element Resources is one of the most advanced in terms of their property development. Bear Lodge is a rare earth play, but also hosts gold. The company issued a Preliminary Economic Assessment which got the market excited early on, and because they used extremely conservative numbers, the project still has merit. Barron's did a horrible deed to the company by reprinting what some day trader posted while griping about losing everything trying to short the company's shares, but the comany still has plenty of money in the bank and a world class property.

REE is a favorite of the day traders and provides liquidity much like Molycorp, just to a lesser degree in terms of dollars due to its smaller market cap. At the conference in Toronto we suspect that the company will be mentioned favorably since most in the industry like the project, agree with the numbers in the PEA and recognize the proximity of necessary infrastructure to the project. This one could potentially be the top performer coming out of the conference as people fall in love with it all over again.

Quest Rare Minerals (NYSEMKT:QRM)

Quest is a personal holding of ours, in fact it was our first rare earth purchase. One has to scratch one's head at the current stock price and wonder what is wrong with the market. By our estimation, and many others' who follow the industry even closer, QRM has a great property in Quebec - one that carries less risk than Avalon's. On top of the risk factor, Quest continues to expand the deposit and should shortly release the pre-feasibility study. On January 12, 2012 the company released drill results which reaffirmed the previous drill results (note: this was infill drilling to help substantiate the resource base) and will help the company de-risk the overall project.

Since it began trading in the United States, Quest has lagged behind Avalon. What is ironic is that Avalon has performed share offerings and diluted current holders while Quest has increased the size of its deposit, continued to increase their knowledge on the metallurgy and protected their cash hoard. It is something we believe the market will eventually figure out, but until then it is quite frustrating waiting for this discovery. As one of the top undeveloped HREE projects, Quest should get plenty of attention at the conference among the presenters and the various panels lined up. As the presentations begin to pop up on YouTube, QRM could be one of the stocks that heat up.

Avalon Rare Metals (NYSEMKT:AVL)

Avalon's project is similar in size to Quest's. At this point it is actually a bit larger, but this is simply due to its resource calculation being newer. Avalon's HREE project will be similar to Cameco's uranium mines in that it will be underground and face water issues. Avalon has been developing this project for some time, and is actually one of the first companies we can remember that was on the REEs bandwagon. The company has excellent relations with the First Nations, and has included them in the entire process of bringing this project forward, thus minimizing any issues down the road.

The project is remote, but to save on costs, there has been some talk within the industry that AVL could partner with someone like QRM to process their REEs at the same facility. Avalon is highly respected on both Wall Street and Bay Street and they should have a good showing at the conference. The more the speakers talk about HREEs and CREEs (Critical Rare Earth Elements) the more traders will gravitate towards this name.

Tasman Metals (NYSEMKT:TAS)

Tasman is one of our favorite juniors, and the only rare earth play with exposure to continental Europe. The company is run by Mark Saxon, an excellent geologist by any measurement, who has been behind many successful ventures (including most recently Mawson Resources). The company's flagship property is the Norra Karr HREE project. To date the drilling results have been spectacular, and many in the industry are watching a handful of the eudialyte projects (Norra Karr is one) to see how the metallurgy is progressing. This topic should be broached at the summit and has the potential to move the smaller players in the industry.

With central bankers once again pushing easy money into the system, investors seeking out risk and Europe appearing to be under control, we think now is the time for rare earth stocks. The prices are higher than when we pointed out the opportunity available at the end of last year, but with the current summit in Canada there might not be a better time to get exposure to these plays as news and interest are at monthly highs. For those investors unable to attend and wanting to follow the conference, check in via YouTube where videos will be uploaded.

Disclosure: I am long QRM.

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