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Goldman Sachs and Malcolm Southwood were Wrong About Rare Earths

May 11, 2011 5:14 PM ET
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Goldman Sachs hires only the brightest and most adept of highly paid analysts. When Goldman speaks – people listen. Goldman’s opinions are carefully followed so when a story is reported, investor’s ears perk up.
Sorry Malcolm but if there was ever a case of clumsy journalistic misinformation this is the poster child for this case. A couple of days ago there was an inane article on the front page of the Wall Street Journal that cited that Goldman Sachs analyst Malcolm Southwood reported there was a surplus of rare earths. He said that rare earths are growing less rare. What he focused the article on was Molycorp and Lynas both producers of light rare earths. Sadly, Mr Southwood, who was speaking for Goldman Sachs did not do his homework. Southwood cited that there were major deposits, twice the size of Mt Weld and Mountain Pass put together in Greenland Minerals. What he didn't mention, however, was that Greenland Minerals is located in an isolated mountainside just south of the Arctic Circle. I have often said that you can have the biggest deposit of REE's in the world but getting them from point A to point B is a tremendous capital expenditure that cuts dearly in a company’s profit margins.
The article states that Goldman’s opinion, “matches the outlook of many other market participants who believe the current boom is overdone… we envisage some softness in the 2013 – 2015 period.” Malcolm Southwood, Goldman’s analyst adds, “The rare earth price boom is nearing its peak. The supply deficit will peak this year before the market slips into surplus in 2013…rising into 2015.”
Unfortunately, Southwood’s analysis focuses on one company, the Lynas Corporation, which skews the rare earth universe into one company to represent the entire field. Southwood omits any differentiation between heavy and light rare earths and dumps the rare earth “universe” into the Lynas basket.
Maybe Mr. Southwood was asleep during his freshman high school geology class because he also omits some very important distinctions. Mr. Southwood, there is a difference between heavy rare earths and light rare earths. Mr. Southwood also gives no consideration at all to the fact that it is very difficult to extract rare earths from its ores. Mr. Southwood also never mentioned that the Lynas Corporation is facing severe opposition from the environmentalists in Malaysia as they attempt to build a separation plant because concerned local residents fear a repeat of health problems associated with a Mitsubishi refinery, which closed in 1992 after years of demonstrations by citizens protesting its polluting effects. A clean-up process is still under way at that site. Currently there is no other separation facility of heavy rare earths  outside of China. This alone would put a premium on the end products which we know are used in many high tech areas and which have been labelled as critical by the U.S. Government.
China, which has been the exporter to the world until two years ago, are themselves becoming a net importer as the supplies for their own needs grow scarcer. Maybe Mr. Southwood forgot that China tried to acquire the assets of Lynas but were rebuked by the Australian Government. I would not be surprised to see China intensify their search for heavy rare earth deposits globally.
While the price of rare earth oxides has been on a tear, the rare earth stocks have certainly lagged. I believe that this may well foreshadow the eventual breakout of the stocks and I believe that this breakout should begin shortly leading to ample profits for the companies that Mr. Southwood excluded from his less than scholarly essay.
Mr. Southwood, again speaking for Goldman, erred in citing Lynas and Molycorp as the “main actors on the stage” which I can only characterize as a gross misrepresentation.
As I have written many times in my posts, I see incredible opportunity in Ucore (OTCQX:UURAF). A look at the chart will show that Ucore has pulled back to major support and is reaching historically oversold levels. Mr. Southwood’s report showed a surplus in light rare earths, not in critical heavy rare earths such as dysprosium, terbium and europium which are used in the production of permanent magnets that are placed into hybrid engines and wind turbines. Ucore’s Bokan mountain project, which is in a mining friendly part of Alaska with no residential or indigenous population within proximity and has a road three miles form a harbor which has direct access to the Pacific Ocean is unique in that it is rich in critical heavy rare earths and is the only asset of its kind on US soil.
Not all deposits are created equal. Tasman Metals, Ucore and Avalon are three heavy rare earth deposits which should see gains as investors (and possibly Mr. Southwood) begin to see the difference between light and heavy rare earths. I also see partners entering this market to build a separation facility outside of China within the next 3 to 6 months to supply heavy rare earths to the West.
If this post sounds like I am upset at Malcolm Southwood and Goldman Sachs it’s probably because I am. When Goldman Sachs speaks people listen and Malcolm Southwood, with his cursory knowledge of rare earth miners, single handedly destroyed what could have been a profitable trading week not to mention the turmoil and jobs that he cost people. Maybe the next time the Wall Street Journal wants to publish and article on rare earth elements the will verify their sources.

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