A Rare Lift For Rare Earth Stocks - Trend Likely To Continue

by: Kevin Quon

Rare earth companies got a large boost on Wednesday, June 20, thanks in part to China's active over-watch of its rare earth supplies. As far as markets go, China is the dominant monopoly with ownership of over 90% of all rare earth production. The country also owns a significant portion of the total deposits around the world. According to the United States, China owns approximately 36% of the world's possible supply. However, China's most recent announcement debated this estimate and offered its own number of 23% of the world's total deposits.

This most recent episode of supply uncertainty is likely to filter down into higher market prices. Perhaps such an event may even have been done intentionally. In recent history, China has been taking increasing steps to regulate the supply of rare earths materials and to control the country's recognized dominance. China has also been buying up additional reserves outside of the country. Back in 2010, China also lowered its export quota by 40% from the year prior in a clear maneuver to regulate world supply. Additionally, as recent as early May of this year, China also began issuing value-added tax permits to rare earth companies in Sichaun and Inner Mongolia. This was largely viewed as a means to control capacity and resource drain.

With such attention in this particular space, China's efforts appear positioned toward taking an active role to lift rare earth prices to sustainable levels. In recent months, such prices have been faltering just as fast they once climbed. With such news suggesting an increased effort for control over the industry space, the market found it fit on Wednesday to increase the value of public companies representing it.

  • Avalon Rare Metals (NYSEMKT:AVL) rose 5.16% to $1.63.
  • Molycorp (MCP) rose 8.57% to $22.43.
  • Tasman Metals Ltd. (NYSEMKT:TAS) rose 11.84% to $1.70.
  • Rare Element Resources Ltd. (NYSEMKT:REE) rose 12.69% to $5.15.
  • Quest Rare Minerals Ltd. (NYSEMKT:QRM) rose 17.09% to $1.85.

Here's how the companies compare against themselves fundamentally. Many of these companies are still developing their capacity. All values were taken as of June 20, 2012:

Company Name Market Cap. Price-To-Book Ratio Fwd. P/E Ratio Beta
Avalon Rare Metals $168 M 1.38 N/A 3.00
Molycorp $2.16 B 1.62 6.03 1.53
Tasman Metals $101 M 6.97 N/A 1.85
Rare Elements Resources $229 M 3.56 N/A 3.66
Quest Rare Minerals $114 M 1.30 N/A 5.52

As evidenced by the lack of earnings for many of these names, production capacity is still in the early phases of coming online. The ironic notion, however, is that many of these 17 metals classified as "rare earths" are actually quite abundant in nature. The misnomer derives itself from the fact that these metals are quite difficult to extract and environmentally unfriendly to produce. It's for this reason that production has been so scarce to begin with.

Yet production capacity is the market. Estimates for rebuilding the US rare earth industry could take up to 15 years according to the Government Accountability Office. With China's inherent control over the market, their ability to enact measures to ensure favorable pricing control appears almost inevitable despite protests from the West. Even as companies begin to seek alternative resources away from rare earths in their manufacturing of goods, the fact remains that a single power is in control of a market that continues to be heavily relied upon by the rest of the world. China's demand for rare earths is just as vital as everyone else's, and increased control over the market's supply is becoming an increased priority for all involved.

Disclaimer: Please refer to my standard disclaimer statement found here.

Disclosure: I am long MCP.