Rare earth stocks and the bubble that wasn’t
Rare earth metals are attracting plenty of attention, says this analyst, but how can there be a bubble when there is still so much work to do?
Rare earth metals sound a bit like some prize fought over by wizards and goblins in a fantasy epic.
Well, rare metals are prized, all right. The question is how big is the prize and who benefits?
These are metals of the future. The media has played them up to the extent that many think there is already a bubble in rare earth.
And yet outside of China, there is almost no production of these minerals at all!
For junior rare earth stocks in the rest of the world, there are promising deposits, but miles to go before production gets under way.
The most prominent Canadian name is Avalon Rare Metals (TSX-AVL), which is diligently working at “one of the largest undeveloped rare earth elements resources in the world” at Thor Lake in the Northwest Territories. The stock, which rose as high as $4.50 in the fall, is now trading at $2.76.
No one has a clearer perspective on rare earth stocks than Mr. John Kaiser, editor of the Bottom-Fish Action Report. A transplanted Canadian, he follows junior mining stocks from his home in California.
The Chinese gorilla
Rare earth metals consist of 17 elements with names like dysprosium and neodymium. They fit neatly into today’s technology, with uses in superconductors, cathode ray tubes, optical fibre communications and as batteries and magnets in hybrid cars, to name a few applications.
And 97 per cent of the rare earth metals in use today are produced in China. The “gorilla” of Chinese production is the Bayan Obo deposit in Inner Mongolia, which holds several billion tonnes.
In 2009, the rare earth sector had a strong rally (as seen in the spike in Avalon’s price last fall). This was its “awakening,” Mr. Kaiser says.
But others have called it a bubble, similar to the “uranium bubble” of 2004 to 2008. But prices in the so-called rare earth bubble were a mere fraction of those generated by the uranium craze, the analyst points out.
Mines to be made
The price of uranium, states Mr. Kaiser, was manipulated from $10 a pound to a dizzy $140 “by hedge funds who raked in profits by blowing off their positions in juniors supposedly poised to benefit from soaring uranium demand as all those drawing board reactors came on stream.”
The slacking off of rare earth prices is not the collapse of a bubble, he says, but a natural progression in the development of the sector.
The rise of the rare earth juniors was a bit too much, too soon. When big players looked for advanced rare earth projects to “slip into their shells” they came up empty-handed.
“The relevant question is not about a bubble popping,” explains this analyst, “but whether or not interest in the rare earth sector will progress to the next level where the market starts treating the more advanced rare earth projects as ‘mines to be made’ rather than flavor of the month promotional vehicles to be pumped and dumped.”
The size of the sector
The toughest objection for rare earth juniors to overcome, says Mr. Kaiser, is the small size of the sector. The estimated value of the annual rare earth oxide market is $2 billion.
Stack that up against the $440 billion total value of the 2009 metals market based on spot prices and production estimates. Copper and gold alone were worth $81 billion and $73 billion, respectively.
Gold and copper juniors do not have to worry about whether a specific project is economically workable at the prevailing spot price. They are banking on future commodity prices.
And they certainly don’t have to worry about whether production from a mine of theirs will affect the price of copper or gold.
“Rare earth juniors have to worry about the size and value of the future rare earth market and what impact each mine’s supply will have on prices,” says Mr. Kaiser.
What’s more, the need to separate and process complex rare earths further boosts the minimal scale of the operation, he adds. Indeed, the complexity of rare earth mines “rules out the small scale mining operations gold and silver juniors can entertain.”
There are many more chapters to the rare earth story. One is in its military applications and whether this will push the U.S. government into promoting further development in the face of China’s virtual monopoly on production.
Another is its role in the expanding field of green energy, of which the hybrid car is but one example.
It’s a fascinating story, but still a very speculative one. Rare earth stocks are not for cautious investors.
And yet the work goes on in promising deposits around the world and, as this analyst insists, the real bubble hasn’t even started yet.
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