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Sean Daly is Associate Director of Global Strategy at Alpha Creative Capital, a New York-based investment advisory group. He has written extensively on Asian economic development, exploring issues as diverse as Chinese urbanization, CMI multilateral currency swap arrangements, energy geopolitics... More
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  • Ucore: About to Meet the General? 0 comments
    Jan 12, 2011 11:37 AM | about stocks: MCP, UURAF, GD, GRA, TM, CCJ


    Looking at the recent price action of Ucore (OTCQX:UURAF), I was shocked to see a sustained, pronounced rally over the past two days from .70 to .84.  When we last highlighted this company back in November, it was trading at .42.[1]



    Why the run-up on no news?  I have no idea.  But such run ups are often suggestive of insider purchases ahead of a buyout or an important news event. Keep your eyes on the news flow.  

    Who might buy? Why the spike now?  Especially after the late December run up of the REE industry on the news China will again be reducing exports? 

     
    A few thoughts come to mind:

    One possibility is the recent surge in uranium prices and Cameco’s (NYSE:CCJ) recent deal with China.  These two developments may be affecting any company with uranium wealth. 

    Another is that, with the new year of 2011 arriving, the political machinery is gearing up.  On the state-level, Alaska is gung-ho for rare earths mining at Ucore’s Bokan site.  Gov. Sean Purcell’s new budget allowance for REE mining and Senator Murkowski’s recent comments in the Alaska Dispatch certainly suggest such.[2]  Steve Borell, executive director of the Alaska Miners Association, has been reaching out to large US companies.  He would like to see “a major company” that has a need for REEs back a mining operation in Alaska:

    "I'm talking about somebody that sees a long-term strategic need -- a Boeing (NYSE:BA) or General Dynamics (NYSE:GD), for instance -- that can put together a processing facility, somebody that can withstand the challenges the Chinese are likely to bring to the marketplace." [3]

    On the national front, the Restart Act was tabled late last year post-Election day.  It had passed the House and should resume passage through the Senate this year.  The DoD also recently issued a requirement of only American-made solar panels for use at military facilities, suggesting a new "get tough" approach to sourcing from China. 

    It is clear that Defense Secretary Gate's trip to Beijing this week did not help relations. The “Stealth fighter” photo leak by the PLA hours before the trip was either an intentional effort to embarrass the Secretary, or suggests that Hu Jintao is not in full control of the PLA’s ambitious alternative agenda.[4] 

    Neither possibility bodes well for the “easy, breezy, just-in-time from somewhere” sourcing patterns that characterized rare earths distribution over the past 15 years.  Getting back to domestic sources for yytrium, neodymium, samarium, terbium and dysprosium –essential for US guided missiles, lasar gun sights, and sonar systems -makes sense, particularly in the wake of China’s stated goal of repulsing US forces in the Far East to the secondary island chain. Again, Ucore’s Bokan ridge property is the only place in the US where those specific "heavier" elements are so richly found. 

    Beyond the upturn in uranium and the American domestic sourcing agenda, there is a third possibility.   It is finally hitting companies that this new-fangled “rare earths crisis” is not going away, and that prices are sticking. 

    The WSJ published an article two days ago about the effects that the scarcity is having on the refiners which use the REEs for their catalysts. It suggests a frightening new trend.  The Journal quotes the National Petrochemical and Refiners Association: 

    Although rare earths account for only up to 4% of catalysts used in these units, their recent price increase has added as much as an extra 25% to catalyst costs. [5]

    For the first time in history, chemical companies --which supply catalysts to refiners-- have started indexing the cost of their product to rare-earth price movements. [6]  The extra cost is averaging $147,000 a month for one refiner.  


                                                      ----

    In light of these developments, the deal that US chemical provider W. R. Grace (NYSE:GRA) cut with Molycorp back in November on assured REE supplies for eight years looks downright prescient.

    Of course, oil refiners use the less pricy LREEs in their catalysts.  For tech manufacturers in Japan and Korea, this development may be making them very uncomfortable, as they are dependent on the even less abundant heavier REEs.

    According to Stratfor, the risk consultancy firm, if world prices were to go back to 1980s levels --a non-Chinese supply-- the developed world would be seeing a very different cost structure for many now pervasive products –including computer drives, compact fluorescent bulbs, electric cars, even those Apple ibuds.[2]

    Take, for example, the 13.5 kilograms of REEs in the Toyota (NYSE:TM) Prius battery system. In 2009, the elements were responsible for a mere .9% of the car’s total cost in 2009.  A year later, that percentage rose to 2.9% due to higher lanthanum costs. But most worrisome: that percentage would rise to 15.2% of the car's total cost if pre-China prices were applied.[7]

    As I mentioned in my November report, domestic Chinese demand for terbium and dysprosium will be huge in the coming decade due to its Green Revolution.  The price of Dysprosium FOB China went from $50.00 in 2005 to $290.00 in late 2010, and looks to rise further.  Back in October, China’s Ministry of Commerce voiced fears that the country would “run out” of its terbium and dysprosium within 15 years at the present rate of production.[8]

    Beijing may have no choice but to stop the export of these two modernization-critical HREEs.  In a classic example of disconnect, most Westerners see China’s export reduction as mercantile and a violation of free trade. Most Chinese, on the other hand, see it as a necessary push back on Western exploitation of their dwindling resources, a "sweeping back of the locusts.

    According to Professor Xu Guangxian of Peking University, “China used to have about 43% of rare earth reserves worldwide, but this may have fallen to about 30% now.”[9] Popular opinion inside the mainland is quite favorable of the export reductions.

    Like Molycorp’s (NYSE:MCP) Mountain Pass mine, Ucore’s Bokan Mountain site was a focus of US Cold War-related scrutiny and procurement. In 1989, the area was studied by the US Bureau of Mines for its heavy rare earths content. The study -- which proceeded NI 43-101 compliance -- estimated 37.8 million tons grading at .50 TREO, tilted highly to HREEs.

    This summer, the US Geological Society sent a team to Bokan, following the July 10th Chinese state intervention in its rare earths industry.  The field work was completed by September, and analyzed vein-type REE deposits throughout a number of areas including Sunday Lake –a zone which apparently yielded the highest HREEs on record for a North American location.

    The company’s own May 2010 drilling for two specific areas -- Dotson and I&L -- also suggest an impressive yield. The revised model generates 3.5 to 6.5 million tons with a grade ranging from .76% to 1.42% total rare earth oxides, 40% of which is heavy rare earth content.

    One distinguished geologist has voiced genuine concerns about the selective mining methods necessary at the site, but the increasing rarity of HREEs, the US location and the political nature of US federal subsidies are likely to make this less important.  Especially if companies continue to see REE prices sticking as they have for the refining industry this month. 

    Whether the future buyer is a big US defense name, a Japanese or Korea manufacturer, or even a fellow miner like MCP hoping to become the "one stop shop," the Bokan real estate is getting increasingly valuable.

    Like I said in November, highly speculative UURAF is a “call option on a geological fact meeting a geo-political imperative.”[10]  Keep your eyes on the news flow.  There might be a rendezvous.  

     



    [1] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us

    [4] latestchina.com/article/?rid=27316

    [5] online.wsj.com/article/BT-CO-20110107-710219.html

    [6] online.wsj.com/article/BT-CO-20110107-710219.html

    [7] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us

    [10] seekingalpha.com/article/234090-the-post-china-price-what-beijings-green-revolution-means-for-rest-of-us



    Disclosure: I am long MCP, OTCQX:UURAF, CCJ, GD.
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