American Rare Earths: Speculative Investments

Includes: MCPIQ, REE, REMX
by: Kevin McElroy
  • When aluminum was worth more than gold
  • Because “common earth” doesn’t sound as good
  • Two companies that might be worthy of speculation

You literally can’t invest in rare earth metals.

But you might want to think about speculating…

To be clear, putting your money in a company that explores for or mines rare earth is a speculation-only venture by any definition of the word. There are simply too many variables to build a solid Graham-Dodd value investing type of earnings or cash-flow model for a company that mines rare earths, like you would with any blue-chip stock.

So, we’re only left with speculation. If you’re a geologist with an expert-level of understanding on the topics of mineralization, deposit formations, refining methods and mining techniques – maybe then you could accurately analyze rare earth companies like a regular old company. Maybe.

One of the problems with “investing” in rare earth metals can be summed up with the phrase: the Hall-Héroult process.

Before this process for refining aluminum was discovered, aluminum was more valuable than gold or silver.

That’s why the Washington Monument in the nation’s capital is topped with a 6 pound aluminum cap. At the time (1884), it was the largest piece of aluminum ever smelted.

So the price and quantity of aluminum available had nothing to do with how “rare” it was. In fact, aluminum is the most common metallic element in the earth’s crust.

The fact is: rare earth elements are not all that rare. Thulium and lutetium are the two least abundant rare earths, and yet they’re 200 times more plentiful than gold.

What’s stopping production on a mass-scale for many of these elements is the discovery of a “Hall-Héroult” process appropriate for each element.

I haven’t even discussed the types of mining techniques that might be invented which would deflate any sense of rarity for many of these elements. They’re still perfecting and making changes to mineralization study and mining techniques for gold – and it’s one of the first elements humankind ever mined.

So there’s lots of uncertainty in this field.

To provide some small semblance of certainty, on Friday November 19, The United States Geological Survey reported the results of their first-ever geological survey of rare earth metals in this country.

In short, we now have a better idea of how much rare earth we actually have. You can read the full article at Mineweb, but here’s the relevant information:

Estimated global reserves are 99 million metric tons with 36% of those reserves in China, 19% in the Commonwealth of Independent States, 13% in the U.S., 5% in Australia, 0.05% in Brazil, and 22% in other countries.

So we’re second to only China when it comes to rare earth reserves.

According to the USGS, “significant REE deposits can be found in 14 U.S. states, with the largest known deposits located at Molycorp's Mountain Pass California operation, Bokan Mountain in Alaska, and the Bear Lodge Mountains in Wyoming.”

Investing - I mean, speculating - in the American rare earth element sector is pretty easy. There are only a handful of companies that appear to lay any claim to actual rare earth reserves.

To get you started, take a look at two companies: Molycorp Inc. (NYSE: MCP) and Rare Element Resources (AMEX: REE).

Molycorp is a $2.5 billion company with very little debt. Little to no debt is definitely something to look for when you’re speculating.

Rare Element Resources is a small cap company of only $340 million, and again: no debt.

You’ll note that neither of these companies has any earnings to speak of, they don’t pay a dividend, they have negative cash-flow, etc.

But either one of these companies would stand to benefit from some new mining technique or a new refining process. They could substantially increase their reserves and output almost overnight.

That’s something to speculate about.

Disclosure: No positions

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