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Do investors understand the REE markets and Molycorp & Lynas?

I think not and here is why, please remember that some of these numbers are rough estimates because there seems to be very little research about part of this out there.

The REE market is about 125 - 130.000 tons. A rough estimate says that 85.000 of those tons are Cerium and Lanthanum that are the bulk light REE´s that frankly according to us at have less than great fundamentals the coming years. The Chinese have plenty of them but their current export quota system of "number of tons REEs" rather than individual metals favors export of the more valuable HREEs like dysprosium & terbium before the light bulk ones.

The result is amazing. The price of Lanthanum and Cerium are 5-8 times lower in China (which is the largest REE market in the world..) than in the rest of the world. In other words, the current system gives us oversupply of Ce and La in China but extremely high prices in the rest of the world.

Molycorp and Lynas will in respectively two phases add 20+20+11+11=62.000 tons of new REE supply the coming few years. Let us look closer at that supply: 83% of Molycorps new supply or 33.000 tons will be Cerium & Lanthanum. For Lynas 73% or 16.000 tons.

So you have an addition in the international arena of 49.000 tons compare to the total world market of maybe 85.000 tons.

Given the Metal Pages prices as of last week Molycorp would recieve 74% from Cerium and Lanthanum and Lynas 58%. What do you think would happen if those prices are cut in half or worse as the international supply picture outside China is being completely revolutionized?

We feel that investors in especially Molycorp ignore this because of ignorance. Why brokerage firms ignore it we can only guess something in the line of huge capital raisings for these two projects. Some say that this will never happen because there will be delays and failures. We then kindly ask, why would you then want to own these companies with that risk?

Let us look at something more fun our one and only preferred REE vehicle for 2011 - 2014 and the fundamentals behind that company called Dacha Strategic Metals.

If it is difficult to get a hold on proper numbers for the current production and consumption of Lanthanum and Cerium it is even harder to find it for Dysprosium and Terbium so you should understand these numbers as +-20%.

Terbium 2011: 300 tons
Dysprosium 2011: 1200 tons

What will will Lynas and Molycorp add to these markets? Well if we assume that they both manage both phases and increase world supply of REEs by a combined 62.000 tons annually.... they will add 15.4 tons of Terbium and 26.4 Dysprosium. If you believe they will only manage one phase you cut it in half. By the way, all above is Lynas.

All the cool things like making electronics small and getting nice LED colours in your I-Pads, lap tops etc as well as wind turbines, the modern light bulbs and electric cars that is with one exception NOT done with Cerium and Lanthanum (the Prius batteries do use those but the trend is as most know for Lithium in the industry and that metal is plentyful from future brine sources) no, the cool stuff is all about Dysprosium and Terbium and the reason why Molycorp and Lynas can even have pictures of it is the Neodymium content in their ore, a light REE with both surging demand and supply.

These very small markets of the Dysprosium and Terbium with their 10% annual growth, is what all the promotors of REE companies want you to get the impression that they have exposure to. Looking at the fundamentals for 2011-2014 that is very easy to understand.

The truth is that very few of them have that exposure, they are actually future Cerium and Lanthanum producers. Looking at the fundamentals of Cerium and Lanthanum, is that what you want to invest in? Further, do you understand that the processing of these metals is a very complicated process with high risk of failure, delays and cost overruns for future producers?
In the precious metal sector the trend has been to own the physical metal and producing those metals is MUCH less of an adventure compared to producing oxide and metal REEs...

And even if the juniors succed at their timelines of 2014 - 2016. What if all those promises of great heavy REE properties in production come true? Hundreds, of new tons of supply to these very small markets... Do you want to own that junior when the market start reflecting the new supply or do you bet on only your junior being able to enter production on time?

If you read this far you probably are in two categories by now, you either shut off and don´t want to listen or you dedide not to own that "REE bubble".

Well we suggest to re-focus... The terbium and dysprosium market most likely has falling supply from the worlds only producer China, especially the clays in southern China where the government is rapidly closing illegal as well as too small mines. That supply situation will last until 2015 when another district starts adding supply.  

The growth in demand is very inelastic (price is not much of an issue) and around 10% annually from users like Prius (and other brands) hybryd cars (motors and break system, NOT batteries), computer hard drives (would be much bigger and not work warm without), the modern kind of light bulbs, all kind of electronics that is made smaller and has nice color dispalays.

We know that a Prius use 0.1 kg of these metals which would be maybe 150 usd we can guess that an I-phone weighing maybe 100 grams has 1-2 grams or maybe 2 usd worth of Te & Dy in it at current prices.

In other words, prices has to go alot higher to choke off a market that wants to grow 10% annually at static supply and this is what we see every week so far during 2011, very logical.

So finally lets get to our investment vehicle of choice. Dacha Strategic Metals (Venture exchange Canada V.DSM) is not complicated at all. They have basically bought the physical metal Dysprosium and Terbium + a few others carefully chosen (no Cerium, no Lanthanum..) and stores it at LME approved storage facilities in South Korea as the supply demand thing works itself out.

Look at the NAV value/share of their metals this year:
January C$ 0.45
February C$ 0.51
March C$ 0.58
April C$ 0.68
May C$ 0.71
In a few days we expect them to report a new NAV of C$ 0.91

The current stock price is C$ 0.55

O B Research is a group of Swedish private investors that invest in and write about commodities and the companies owning or producing them. Combined, we currently own ~ 7% of Dacha Strategic metals at the moment because we believe it to be the best way to get exposure to the few rare earths that are actually rare.