Earth Company that Wasn’t
January 6, 2011
Matthew B. Smith
Over our years of investing and covering hot resource plays,
one thing has become blatantly obvious to us; the unbelievable amount of
untruths prevalent out in the marketplace. Usually these ‘untruths’ are lies
based upon enough fact to be believable to day-traders and the fast money crowd
for a short period of time. Almost always we have learned that the big news
media usually pick up on the ‘untruths’ and expose them for what they are, or
at least their guests in-the-know will do this.
Rare earths have to be the most exciting resource play out
there for investors right now. It reminds us most of the uranium go-go days of
a few years ago when it seemed 10% or more was guaranteed daily. Unfortunately
the disinformation has begun early, this time affecting China Shenzhou Mining
& Resources Inc. (AMEX - SHZ) as investors in America look for liquid rare
earth plays trading on US exchanges.
SHZ has had a spectacular run, unfortunately the price
movement has been based upon investors’ belief that the company is in the rare
earth mining and exploration business. Adding further to our disappointment is
the fact that many news agencies, including CNBC, thestreet.com among a host of
others have gone along with what was probably some day-trader’s planted rumor
to boost the shares.
We have been following the industry in depth for quite some
time now, developing a database of many companies engaged in the exploration
and production of rare earths, another database of various rare earth projects
and both of these are regularly updated as new projects come to our attention.
The one problem we noticed when looking to add SHZ to our databases was the
fact that we couldn’t find the rare earth project to add to the database from
the company’s website. Also setting alarms off for us was the fact that very
few rare earth element companies are listed on Hong Kong’s H-Shares, and not
one to our knowledge was listed on overseas exchanges, so this was most peculiar
We spoke with David Elias, the company’s Investor Relations
contact on their website, and we asked about the rare earths link and which
project the company had focusing on this critical area. We were informed that
the company did not have rare earth focused projects, and Mr. Elias was not
aware of any of their resource targets (which by the way consist of fluorite,
copper, lead and zinc) qualifying as rare earth elements (which they do not) or
rare earth metals (again we could not find the connection). Although we were
told that the shares have performed very well lately, he did not know why
traders and news agencies were touting it as a rare earth play.
The best guess we can come up with is that the half-truth
that makes this all believable to people is the fact that in some cases REEs
can be associated with fluorite production, but that is not the case here.
Further confusing investors may be the company itself when
they responded to the NYSE AMEX (the AMEX) request for information relating to
the dramatic increase in the share price. That would have been a really good
opportunity to debunk the ‘untruths’ circulating the trading desks and media
outlets. Unfortunately they stood by their policy of not commenting on market
activity, however they cannot be faulted for that. We are in no way blaming
the company, their news flow was simply hijacked by what we can only describe
as unscrupulous characters.
We are not sure when investors are going to discover the
truth regarding the company’s rare earth exposure, but when that event does
occur we expect to see a dramatic decline in the shares as the rare earth money
runs away. When investors look back they will probably notice a link of just
another Chinese company listed on the AMEX being manipulated by unscrupulous
day-traders and the like. Simply look at China GengSheng Mienrals (AMEX –
CHGS) to see what happens when the investment community discovers that a
company actually is not involved in the rare earths sector.
There are a few great rare earth element plays available to
US investors, and they are included in the rare metals (note these are two
separate categories) ETF called Market Vectors Rare Earth/Strategic Metals ETF
(NYSE - REMX) by Van Eck Global. The rare earth plays available to investors
within that ETF are Molycorp (NYSE – MCP), Rare Element (AMEX – REE) and Avalon
Rare Metals (AMEX – AVL). One would also notice that Van Eck did not include
China Shenzhou Mining and Resources Inc. in their ETF, for what to us are
blatantly obvious reasons.
We remain bullish on our rare earth choices and believe that
US investors will have a new listing to invest in within the next 90 days as we
expect to see Quest Rare Minerals (QRM – Toronto), a company included in the
REMX ETF by Van Eck, to be granted a listing on AMEX much like their peers Rare
Element and Avalon have done.