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 market. 

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.

China, 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 stockpiles. 

China 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 the U.S. 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 the future. 

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.