The race to turn rare earth metals into golden profits
As the demand for rare earth metals grows, the race to find more accelerates, and this analyst names seven promising Canadian stocks.
“Most people probably haven’t heard of rare earth metals.”
But you’ve probably used them.
They’re put to work in TVs, iPods, cellphones, magnets, lasers and X-ray machines.
But they certainly aren’t readily available, which is why there’s a race on to dig up more of them.
We get the story from Mr. David Chapman, the author of our opening quote. An investment adviser and technical analyst, he relates the story of rare earth metals in Investor's Digest of Canada.
We’ve heard of rare earth metals, which we have surveyed from the vantage point of Mr. John Kaiser, a specialist in junior mining stocks (see, for instance, Daily Buy-Sell Adviser, December 24, 2010).
From Mr. Chapman, we get a fresh primer on the metals themselves and a look at a tight world market in which China holds the best hand (what else is new?).
Not least, he looks at aspiring Canadian entries in the field — two “senior” rare earth stocks and five junior explorers.
Not all that rare
There are 17 rare earth elements in all, with names like lithium, terbium and promethium. And they’re not all that rare. These metals “are quite common in the earth and are often found together, when they are found,” says Mr. Chapman.
The trick is to find more of them together. They have a fairly short shelf life, says the analyst, and a growing strategic importance.
In addition to the uses mentioned at the outset, they play a big role in the “green” world, in hybrid cars, wind turbines, electric cars and the like.
They also have a number of military uses, which heightens their strategic impact considerably.
This makes it a matter of some importance that China produces over 97 per cent of the world’s existing rare earth metals. The rest come from Brazil, India and South Africa. But China obviously calls the shots.
Banned shipments
Over the past year, China has been putting in export quotas. The stated reason is environmental concerns.
“Many see military and economic implications and believe that the export controls are aimed specifically at Japan and the U.S.,” counters Mr. Chapman. Indeed, last fall a clash over fishing rights caused China to ban rare earth shipments to Japan.
That put a crimp in the hybrid car assembly lines at Honda and Toyota. It didn’t help Sony’s electronics production, either. When the ban was lifted, Japan’s orders shot up.
And while they’re never been officially cut off, companies like Ford and General Electric would like to see a freer flow of the metals.
China’s quotas are not hard and fast, the analyst points out, but they have helped to spur a search for new sources, especially in Canada and the U.S. This doesn’t happen overnight.
As with any metal, “it will take years from the time drills go into the ground to the establishment of a working mine. Ten to 15 years is not an unusual amount of time to get a mine into operation.”
Not sitting still
Even if they are far from production, Canadian rare earth stocks are not sitting still. A recent quota announcement from China caused several of them to jump more than 40 per cent in price.
They remain highly speculative stocks, cautions Mr. Chapman, and some of the biggest gains could come when these companies join forces and consolidate.
Two of the “senior” stocks in the field are Rare Element Resources (TSX/V-RES) and Avalon Rare Metals (TSX-AVL). They are “senior” in the sense that they have more advanced projects, says the analyst. Neither the senior nor the junior stocks pay dividends.
Rare Element has one of the largest disseminated rare earth deposits in North America at Bear Lake in Wyoming, and some gold. This stock has been up almost 290 per cent in the past year and is now at $13.28.
Avalon has what many believe to be one of the finest undeveloped rare earth deposits in the world near Thor Lake in the Northwest Territories. It is up over 115 per cent in the past year, at $6.15.
“But the biggest opportunities may lie in the junior exploration plays,” the analyst tells readers in Investor's Digest of Canada. He likes five juniors, all of them trading as penny stocks.
Five juniors
Hinterland Metals (TSX/V-MIN) has rare earth properties in Quebec, but it also has gold properties in the rich White Gold district in the Yukon. It trades at just $0.15. Quantum Rare Earth Developments (TSX/V-QRE) has rare earth projects in Saskatchewan and Australia and trades at $0.50.
Matamec Explorations (TSX/V-MAT) has rare earth properties in northern Quebec near Rouyn-Noranda and gold projects in the big Timmins camp. The shares are at $0.46.
First Lithium Resources (TSX/V-MCI), as its name implies, has lithium properties in Alberta, Saskatchewan and Nevada, gold properties in the Yukon and Ontario — and potash in Saskatchewan! It’s at $0.14.
Like First Lithium, ESO Uranium (TSX/V-ESO) has lithium properties in Alberta, Saskatchewan and Nevada. It also has gold projects in Ontario and B.C. and a huge tract of land in the uranium-producing Athabasca Basin in Saskatchewan. It trades at $0.13.
As you can see, most of these stocks aren’t putting all their reliance on rare earths, and neither should prudent investors.
But as big nations and multinational companies scrap for these metals, it may be time to get in under the ground floor.
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