Investment adventures in the North West Territories
Rare earth metals are the wave of the future in mining, and this U.S. advisory flies north to visit the leading Canadian company in the field.
Rare earth elements may sound like something that was discovered in a galaxy far, far away.
In fact, they promise to be some of the hottest commodities of the 21st century.
Rare earth elements, or metals, are essential to such contemporary marvels as flat-screen electronics and electric cars. That is, they will only become more important — and presumably, less rare — as time goes on.
There are also a lot of high-wire never-mind-the-safety-net options that insiders and pros use. That’s not what we’re talking about today.
Not long ago, we passed on a recommendation for one of the most “advanced” companies in the field, made by a U.S. advisory that covers Canadian junior mining stocks (see Daily Buy-Sell Adviser, September 28).
Today we see the same company through the eyes of another U.S. advisory with a similar mandate. Doug Casey’s International Speculator specializes in precious metals and the junior Canadian firms that explore, drill and mine them.
The advisory sent its editor, Mr. Louis James, on a floatplane up beyond Great Slave Lake to visit the Thor Lake project of Avalon Rare Metals (TSX-AVL).
Before we board the plane, let’s see why rare earth has become not just a hot topic in the mining world, but also a hot potato in the political one.
90 per cent in China
There are actually 17 rare earth elements (RREs), Mr. James tells us. There are scandium, yttrium, both heavy rare earths, and 15 lanthanoids. Both heavy and light rare earths tend to occur in the same deposits.
What do they actually do? They are the “metal” in nickel-metal-hydride batteries, the editor explains, and they are used in specialty magnets that could put more electric cars on the road. They are already at work in hybrid cars, flat screen electronics and superconductors.
Over 90 per cent of the rare earth elements in the world are found in China. And there have been reports that China intends to cut or even ban the export of its rare earths.
These rumours helped push the shares of Avalon up several times this year, not surprisingly. It also gave a boost to three others — Rare Element Resources (TSX/V-RES), Commerce Resources (TSX/V-CCE) and Great Western Minerals Group (TSX/V-GWG).
A bubbly market
It is possible, Mr. James speculates, that any proposed Chinese ban may simply be an effort to support the price of rare earth elements, which have drooped lately. The same sleight of hand OPEC performs with oil prices.
At the same time, China has shrewdly offered a way around any such restrictions — come and set up high-tech rare earth manufacturing facilities in China. “These guys ain’t dumb,” comments the editor.
Since rare earth may also have military applications, the game will get all the more interesting as time goes by.
“All this make the RRE market look bubbly to us,” says Mr. James. That calls for caution when investing in this sector.
“That said, the rising demand for RREs is real and very likely to accelerate,” he adds. “Done right, we can see the logic of speculating in the best of the best RRE plays.”
So let’s get on the plane and see one at first hand.
A fountain of knowledge
Thor Lake is north of Great Slave Lake (and the lake is “great” says an impressed Mr. James) and not far from Yellowknife. Avalon intends to barge its rare earth concentrates 250 miles across the lake to a rail line that will carry it south. The rail line is not currently in use.
So there are a few challenges ahead. But one thing the editor likes right off the bat is the quality of the people involved.
“You know I don’t impress easily,” he tells his readers, but he particularly likes Mr. Bill Mercer, a veteran Noranda explorer, and Mr. Dave Trueman, a consulting geologist who “is a fountain of knowledge regarding the specific minerals in question.”
The project itself is intriguing, with a variety of rare earths in the ground, including a significant percentage of heavy RREs, which tend to go for much higher prices than the lighter minerals.
The current resource is huge, adds the editor, given the tiny size of RRE markets. He has little doubt that “Thor Lake’s resources will continue growing and upgrading.”
Good news, bad news
The good news is that this “rock” could be worth $500 to $600 a tonne, which could make this project very profitable, even this far north.
The not-so-good news is that Thor Lake is very far north. It will require a high rate of mineral recovery at low costs to make it work.
The bad news: there isn’t any heavy rare earth refining facility outside of China. That may change by the time the mining actually gets under way at Thor Lake, but right now “the chain of production from mine to finished product doesn’t exist outside of China.”
That means that when you invest in this stock, you are banking on its future possibilities, not its current production. And the stock is not cheap, as junior prospectors go. In reasonably short order, it has gone from a penny stock to its current level of $3.10. (For the sake of interest, Rare Element Resources is at $4.20, Commerce Resources at $0.63 and Great Western Minerals at $0.37.)
“That said, this company will be on my short list to watch,” says the editor. Investors would be wise to approach this stock gingerly as the rare earth market sorts itself out, he suggests.
But they would also be unwise to lose track of the profits that may be heading their way from the great white north.
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