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Rare Earth Elements: Who is Poised to Takeover?

|Includes:ARAFF, Avalon Rare Metals Inc. (AVL), LYSCF

COMMENTARYProspectingJournal.com – January 14, 2011 – While the embargo against North America and Europe for Rare Earth Elements (NYSEMKT:REE) was dropped after a short period in October, the impact on prices for REE companies had already been seen. High-tech electronics producers flinched madly, as the need for REE in the manufacturing of their products was briefly held hostage, especially for those companies in Japan which had an even longer embargo placed upon them from mid-September to late-November. Another spike at the tail end of 2010 resulted from the announcement that China (which controls 95% of the world's current supply of REE) would be restricting rare earth exports by 35% for the first half of 2011. Not even a month after the dust cleared from that announcement, now reports are coming out that hold implications into the future, as stricter environmental guidelines will be enforced upon China's producers in the near future.
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In the aftermath of such changes, we are looking at everything from potential catastrophic shortcomings of supply by 2012, to at the very least a surge in price that will benefit all foreign companies that have amassed operations in the leadup. Already we've seen a surge from $70.52/kg from the end of 2010 to $75.23/kg in current prices. That's nearly 7% in two weeks. This jump doesn't read as anything alarming, but the average Nolans value over 2009 was $11.17/kg, which shows a jump of 673%. Something is obviously happening here.

But, while the spectre of a massive price increase in these elements looms, I feel it necessary to quell the fears of my tech savvy friends out there who love their gadgets. Rare earths only represent a small fraction of the cost of a finished product in the tech world, thus Steve Jobs and his ilk can continue to sleep soundly on their money covered beds. If anything, the manufacturing costs will not increase sharply, but supply runs could cause longer lineups by the next Black Friday.

So with the crackdown coming on 95% of the world's supply, we need to look elsewhere for who will pick up the pieces and run with the profit opportunity. Sifting through the many names out there, including many of which are penny stocks trading in North America, we believe that there are still some great jumping points out there.

That said, with all the talk of this being an investment bubble swirling about there with the rest of the pro-REE articles, let's take a second to make sure that we're careful first. To start, before engaging this sector, be sure to speak with your professional financial advisor before making any moves. Next, since we don't know what the future of the sector is beyond 2012, be sure to set up stop orders if this is indeed a bubble. If they're right, and it is a bubble, the “pop” moves the price much more drastically than the inflation did. That said, there is a lot of room to make profit left, if played carefully. But, keep in mind that the needs of rare earths cannot be met elsewhere, and demand for tech items isn't dropping anytime soon. As volatile as the sector currently seems, over the next few years, this is bound to move away from being purely speculative.

So without further adieu, we have a list of REE entities we are following across North America, with picks trading from within the USA and Canada together. Who will be the company to benefit the most and/or the quickest?

Lynas Corporation [LYSCF – PNK]
Current Price: $1.98
52wk Range: $0.37 - $2.39
Mkt Cap: $65.56 million
If and when the other shoe drops, timing will be everything, and for Lynas Corp., their advantage could be a crucial few months before the next frontrunner in the REE race, Molycorp. [MCP – NYSE].  While Molycorp is destined to bring REE mining to California, Lynas is ahead of the game, with its mining already on the books. The wait for Lynas is in the development of a processing plant in Malaysia. The Lynas Advanced Materials Plant (LAMP) is set to be completed in the third quarter of 2011. As well, the proximity to the Asian manufacturing core makes this the clear frontrunner of the rare earth world. The prices are already looking great for Lynas' product, with an average current price of its product from its Mt Weld project yields $70.75/kg. We will be keeping our eyes on the development of LAMP, as when the doors open there, the price will respond at a rapid pace.

Arafura Resources [ARAFF – PNK]
Current Price: $1.54
52wk Range: $0.31 - $1.76
Mkt Cap: $447.59 million
Based out of mining-friendly Australia, Arafura is touting that it will have its aptly named Nolans Project on production in 2013, dependant upon whether its financing efforts through 2011 hit their mark. So far 2011 looks to have started off right for Arafura, as it produced a commercial quality of separated cerium oxide and commercial quality of neodymium/praseodymium oxide at Nolans. But it is still hard to judge where the price of REE will be by 2013, as the management of Arafura have already had to adjust their business models for the 50% price increase since releasing its business modelling update in October. But, if all goes according to plan, there's a lot to like here. First off, Arafura would be raking in $1.5 billion in annual rare earth revenues alone, should the price stay the same. If it takes off further, that number balloons.

Avalon Rare Metals [AVL – TSX, AVL – AMEX]
Current Price: $5.70
52wk Range: $1.09 - $8.20
Mkt Cap: $526.66 million
A whirlwind year for Avalon in 2010 saw its price triple from the summer onward in the aftermath of the first signs of China's restrictions being placed. Though the hype has recently cooled off a bit since surpassing the $7 level at the end of the year, there is still more ride left in this pony. Its Nechalacho Project in Northern Canada isn't going to be cheap to bring into production, with a pricetag of $1 billion being attached. But, unlike the competition from the frontrunners Molycorp and Lynas, Avalon will derive its REE value from the more valuable heavy REEs versus the light rare earths such as cerium and lanthanum set to be produced by the big two. Though its nearly 5 years away, and needs that $1 billion to go through before production, Avalon is the nearest-term heavy rare earth producer outside of China.

Pele Mountain Resources [GEM – TSX.V, PMNHF - PNK]
Current Price: $0.56
52wk Range: $0.09 - $0.67
Mkt Cap: $72.37 million
A favourite on this site, especially since we picked them at $0.32 to go up, all while they seem to be holding steady on the verge of a breakout run. Canada's answer to the pending REE crisis, Pele Mountain is touting the potential of its Eco Ridge Mine that has withstood plenty of poking and prodding already (130 holes drilled, 30 gaining detailed REE analysis). All drill intersections that have been analyzed for REE have shown significant REE to date. Coupled beside valuable uranium which is also on site, the Eco Ridge Mine shows the full range of REE, including the ultra-valuable heavy REE which represents about 50% of the total REE recoverable. The location of the project is also exciting, due to the 40 year life of production from similar deposits mined by Rio Algum and Denison mines from the 50s to the 90s.

 

We will be continuing to update on the developments of the rare earth sector throughout the year, as the story is just too interesting to look away from. The rare earth race has already started, but who will win at this stage is anyone's guess.


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G. Joel Chury

Editor in Chief

ProspectingJournal.com

 

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DISCLOSURE: No fee has been paid for the production and distribution of this article and as such should be viewed in the context of a commentary. The author does not currently own any shares of the companies referred to within the article.
 

 

 

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November 5, 2010   - Silver's Big Week and the Road Ahead
November 4, 2010   - BHP-Potash Bid's Dramatic Finale: The Aftermath
November 3, 2010   - More on the Case of Silver

October 29, 2010     - Rare Earth Scare Over for Time Being
October 21, 2010     - China's Rare Earth Embargo Hits North America



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: AVL, LYSCF, ARAFF