REEs Developing Leadership
Industry is quickly evolving, prospects looking bright.
For those paying serious attention to the rare earth sector,
it probably has not escaped your notice that a consolidation is taking
place. Part of this is due to the ‘Aegean
Contagion’ fears plaguing Europe and the fear of a double dip here in America. The fear in the market today is keeping rare
earth stocks down, however I am not one to buy into the end of this young bull
Our view is that nothing has changed regarding the big
picture for the industry, in fact in our opinion the news has been good. China continues to crack down on
their domestic rare earths industry, the world builds more high-tech gadgets
that are groundbreaking (think Apple’s new iPad), the
world continues to develop, and all of this results in higher demand for rare
earths. Each day the long-term
supply-demand situation tightens and those companies with current deposits
should be the biggest beneficiaries.
Currently the market has a few upcoming events that could
really light a fire beneath these highly leveraged plays. First off, Molycorp’s
IPO should bring many new investors into the ‘know’ regarding the industry and
its prospects, and when Americans catch wind of a new investment theme, it can
really set off a frenzy. Think uranium
and potash, two industries found in North America
where Canadians were certainly first on the scene, with both experiencing
tremendous gains as more investors rushed in.
This could be a significant event for the market and most certainly
those really moving forward big projects.
We think that, in no particular order, that the big winners will be
Avalon, Quest, and Rare Element.
the current 800-pound gorilla in the industry, recently announced the beginning
of a stockpiling program. Most likely
this will be a strategic stockpile which should be equal to, not months’ worth
of the country’s current output, but rather years. Like uranium, one has to imagine they will
want to have somewhere in the neighborhood of 2-3 years of consumption on hand
allowing them to control their own destiny while also exerting their influence
on others who have not had (or will not have) the foresight to create their own
is a big wild card, however unlike in past cycles where they flooded the market
to kill off competition and solidify their monopoly on the industry, this time
is different. They understand how
important it is to control resources (they hate being pushed around by the iron
ore producers BHP, Rio and Vale) and will not
squander their REE resources in the future to close foreign producers’
mines. The Chinese have added their own
twist to capitalism, and rather than using core competencies and the like, they
would rather be vertically integrated and control all resources they need to
fuel their manufacturing sector (Note: The US and European leaders asked the
Chinese to purchase green tech from them by opening up for competition, but
they don’t need to do it because they have developed not only the resources for
what they need, but also the technologies!).
They need to keep people employed while creating new jobs for the huge
influx of peasants who have migrated from the rural interior of the country to
its urban coast.
The other good news we see for investors should be coming
out of Quest soon, and it will be regarding their B-Zone and the metallurgy
from the one ton sample they sent to the lab to test. If this comes back positive, we should see a
rally in the shares, and by no means does this mean Quest is the sole winner,
rather we see it as an industry-wide impetus, much like the Molycorp
IPO. This is an industry needing
leadership and good news for one is good news for all. Uranium had Cameco
and Areva as the purebloods with BHP Billiton and
other major miners also lending credibility to the sector while potash had
Potash Corp., Agrium, and Mosaic leading the way. The rare earths need leadership, those
companies deemed ‘investable’ by the big money managers for their clients. When big funds are able to move in, then the
real frenzy will begin, and the big money will be had by today’s investors in
the likes of Avalon Rare Metals, Inc., Quest Rare Minerals Ltd., and Rare
Element Resources Ltd.
We should also see some news regarding what the United States
plans to do regarding a strategic reserve of rare earths. It should be an easy bill to pass as the rare
earths are dear to both Democrats and Republicans, for they can be used for
green technologies and national defense.
Over the next 6 to 18 months we should certainly see some big news
regarding what will happen with current proposals now being investigated by
members of Congress. Our bet is that you
see development incentives for American production and quite possibly some
buying of the physical ‘stuff’ in the near-term. What could really move the market and lend it
some credibility to lenders would be for some production contracts guaranteeing
federal government would purchase future production from any mines built. This would certainly enable firms to get the
required financing to construct the mines needed to extract the materials of
These are uncertain times for the world’s equities, yet for
patient investors who are willing to be diligent and strict in regards to their
buying parameters, it appears that the rare earth industry offers tremendous
upside. The bull market thesis for the
industry remains intact and shall continue to do so, so long as the entire
financial system does not have a relapse to the depths where we have come from.