Global Politics Will Keep Rare-Earth Stocks in Orbit

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Includes: ACH, AVL, LYSCF, MCPIQ, REE
by: Mike Maher

In a little publicized move earlier this week, Aluminum Corporation of China (NYSE:ACH) entered the rare-earth space, forming a Joint Venture to develop resources owned by State owned Guangxi Nonferrous Metals Mining Group. While details of the JV are still lacking, it seems ACH will own 50% of the new company and also be in charge of operations. Reports say ACH was helped in this deal by its close ties to the government, as well as the Chinese government's desire to see consolidation of the rare-earths sector inside the country.

The decision of the Chinese government to bring more of that country's rare-earths mining under control of companies with close ties to the government is sure to continue to fuel fears of rare-earth hording by the Chinese. Just last week Congressman Mike Coffman (R-CO) introduced a bill to help restart the rare-earth industry in the US, and the press release cites the reliance on Chinese exports as a vulnerability to the US military being able to produce night vision goggles and guided missiles, among other things. The bill would help provide permits to miners and loans for mining operations, as well as selling up a rare earth inventory to supply rare-earths to the federal government's contractors. While no legislation is ever guaranteed to pass Congress, talk of the US setting up a strategic reserve should continue to attract investment into the space.

Investors have been bidding up shares of Molycorp (MCP), Avalon Rare Metals (NYSEMKT:AVL), Rare Element Resources (NYSEMKT:REE), and Lynas Corp (OTCPK:LYSCF) to lofty levels in the last few months, as China has cut exports and prices for rare-earth metals have skyrocketed. Skeptics are quick to point out that most of these firms are still in varying stages of production, and most are far from profitability, still spending hundreds of millions of dollars to develop mines and ramp up production. These points are valid, and the space is prone to sharp moves, both up and down. However, as the prices of these rare-earth metals continue to skyrocket, I suspect large miners in the Western World will begin to follow China's move of consolidating the industry. As the global mining giants continue to scour the earth for ever-harder-to-mine minerals, I doubt that they will sit idle and watch these tiny companies get rich as they develop new mines and ramp up production, Molycorp has a market cap of less than $6 billion, and Avalon and Rare Element both have less than $1 billion market caps, making them very reasonable acquisition targets. All it would take is one bid to ignite a further frenzy in the space, sending share prices of these firms further into the stratosphere.

With the run these shares have had, I'm hesitant to pile into any of the names above without a meaningful pullback. However, the possibility of waking up and having shares be up 50% on a takeover bid makes me hesitant to short the space. As the Chinese government begins to oversee the consolidation of the rare-earth industry in China, and US politicians talk of stockpiling, rare-earth names are sure to stay in the news. While the rare-earth stocks have already had quite a run, with no new supply coming online, the Chinese government restricting supply and the US government debating stockpiling supplies, these names will likely continue higher.

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

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