The Rare 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 to us.

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.