The rising global demand for rare earth metals – the elements needed to make items like hybrid electric cars and laptop batteries – have caused the value of rare earths mining companies to soar in just a few months.We’ve told you about one company, Rare Element Resources, that saw its stock surge 1200% in the last year.
But China’s outright monopoly in the industry, along with fears that it will cut down on its rare earth exports, are driving plenty of other stocks higher too.
But some of these companies have not even generated any revenue yet or lack the adequate facilities to even mine rare earths.
So what’s the reality? A lot of these stocks are rising right now based on a narrative. That narrative is as follows:
- China, which controls the rare earths market, decides to export less.
- Demand continues to rise globally for the good at the same time.
- Hey, we have this land! With rare earths in it! And we’re gonna mine it.
- But it’s not open just yet, you have to trust us, it’s going to be great.
So, there are clear macro problems with this thesis.
- China doesn’t cut off supply, and many of these mines can’t break even on their mine investments because prices don’t go high enough.
- Demand declines due to a global slowdown.
- There’s rare earths all around the world, and if production ramps up quickly, prices could easily collapse, just like it has before.
Many companies also have serious problems on a micro level. So if you believe in the thesis, you may want to look deeper at each company and see what the truth about their mines looks like.
Headquarters: Greenwood Village, CO
Value: Surged 144% since raising $394 million in a July initial public offering.
Mines: Mountain Pass Mine in Mojave Desert in California
Rare Earths: Bastnasit, Cerium, Neodymium
Projects: Molycorp plans to restart the Mountain Pass mine in the second half of 2011 and produce about 20,000 metric tons of rare earth oxides by the end of 2012.
Problem: While Molycorp plans to mine almost 20,000 tons of rare earths annually by late 2012, it doesn't yet have the capacity to refine the raw elements into metals.
For Real?: Molycorp is for real, and planning on undercutting Chinese rare earth metals producers and charging half for their product. The company's CEO expects China's quotas on exports to rise, which will open up space for Molycorp in the market.
It's one of two legit producers coming on-line, according to Hunter Hillcoat of Investec Bank Australia.
Source: Molycorp Prospectus
Headquarters: Toronto, Canada
Value: Stock is up 30% YTD.
Mines: Has properties in China, Thailand and North America. Is a producer of various rare earths, rather than a miner or explorer.
Rare Earths: Neodymium-iron-boron, terbium and dysprosium
Projects: The company is also working to process rare earths in Minsur's tin Pitinga mine in the Amazon, where terbium and dysprosium concentrates have been found.
Problem: The Pitinga project will cost about $100 million to develop, including building a new facility.
For Real?: Neo is some distance away from getting the product out of the mine in Brazil. But the company also produces a large amount already, utilising facilities in 10 different countries. It has an established revenue stream. So, if you believe in the long-term China cutting exports story, then it may make a good investment.
Headquarters: Quebec, Montreal
Value: Stock has more than doubled since July.
Rare Earths: Preliminary findings indicate the land surveyed has total rare earth oxides and heavy rare earth oxides.
Projects: Quest Rare is exploring for rare earth elements in Strange Lake and Misery Lake located in northeast Quebec.
Problem: Still in preliminary stages of exploration with feasibility studies getting under way now.
For real?: Quest Rare Minerals changed its name from Quest Uranium Corporation in April. That should be a warning. But the company is in Canada and so are its mines, so getting the product to market should be somewhat simple.
Source: Quest Rare Minerals
Headquarters: Denver, Colorado
Value: Stock has quadrupled from July.
Mines: Bear Lodge Property in northeast Wyoming.
Rare Earths: Cerium, lanthanum, neodymium, and praseodymium.
Projects: Largest drilling project to date started in June in order to expand rare earth deposits and explore targeted areas.
Problem: Still has not earned any revenue yet.
For Real?: Publicly traded in the U.S., REE has some good stuff going for it. But, according to Benzinga, the situation is a bit more tense in Canada than the U.S., so Molycorp may be a better bet.
Source: Rare Element Resources
Headquarters: Baotou, China
Value: Baotou's shares are up 243% since January.
Mines: Six mines in Inner Mongolia
Rare Earths: Neodymium oxide, dysprosium oxide, lanthanum metal
Projects: Expanding into southern China by buying equity into three rare earth processing facilities in Ganzhou.
Problem: The government of Baotou is actually giving Batou Steel Group a monopoly to mine resources in the region.
For Real?: If you want to get involved in the China trade, sure. This company has mines, it has a monopoly, and it has government backing. It would be wise to consider the threat of cheaper competitors coming on down the line and threatening Baotou's revenues.
Headquarters: Saskatoon, Canada
Value: Stock increased 50% this year.
Mines: Holds interests in eight rare earth exploration properties in the U.S., Canada and the Steenkampskraal Mine in South Africa.
Rare Earths: Neodymium, monazite
Projects: A furnace is planned for the company's subsidiary, Less Common Metals, in order to increase rare earth processing capacities by 50 per cent by the end of 2011.
Problem: Still has negative cash flow.
For Real?: Great Western's position on the South African Steenkampskraal mine is huge. The mine had to shut down because China's prices were too low, but could be back up and running, producing 1-2% of the world's supply, by 2013.
Source: Great Western Minerals Group
Headquarters: Sydney, Australia
Value: Lynas is up 165% YTD.
Mines: Mount Weld in Australia.
Rare Earths: The Lathanide deposit at Mount Weld is one of the richest in the world for rare earth oxides.
Projects: A concentration plant in Western Australia is scheduled to be finished by Dec. 2010 and a processing plant in Malaysia is being constructed for production by the third quarter of 2011.
Problem: Analysts at JP Morgan downgraded Lynas to neutral over concerns that the $535 million plant in Western Australia may be delayed.
For Real?: Lynas has the richest known deposit of rare earths in the world. If you believe in the underlying rare earths storyline, this is probably of interest.
Headquarters: Perth, Western Australia
Value: Shares tripled in value since July.
Mines: The Nolans Bore Mine and Whyalla Rare Earths Complex
Rare Earths: Neodymium
Projects: Developing Nolans deposits with production scheduled in 2014.
Problem: Has 6 employees and still operating in negative cash flow.
Headquarters: West Perth, Australia
Value: Stock is up 44% YTD.
Rare Earths The surface deposit has 4.9 million tons of rare earth elements plus yttirium, zinc, and uranium.
Projects: Currently exploring Kvanefjeld deposit in south west Greenland.
Problem: Construction may begin in 2013 with production by 2015 but only if they can pass the government's strict standards for mining and raise $2.3 billion.
For Real?: The company's CEO says it will only take 4 or 5 mines to open to meet global demand for the next 5 to 10 years. That doesn't sound great for a company not set to start production until 2015.
Source: Greenland Minerals and Energy
Headquarters: Vancouver, Canada
Value: Stock is up 14% YTD.
Rare Earths: Tantalum and niobium
Projects: Exploring The Blue River Project in British Columbia which contains three deposits rich in rare earth elements. Eldor Project in northern Quebec and Carbo Project near Prince George, Canada.
Problem: Has produced no revenue yet.
For Real?: No, this is an exploration company. It could be someday, but right now, it's more about speculation.
Source: Commerce Resources
Headquarters: Vancouver, Canada
Value: Stock is up 205% YTD.
Rare Earths: Exploring heavy rare earth elements
Projects: Exploring near Eden Lake in Western Manitoba, Canada and in southern Labrador, Canada.
Problem: Still operating with a negative cash balance.
For Real?: Another exploration company, but this one is locked up with Rare Element Resources in a project in Canada. Still, if you're concerned about risk, this one seems to have more.
Source: Medallion Resources
Headquarters: Perth, Australia
Value: Stock is up 117% YTD.
Mines: Peak Hill Gold Mine in New South Wales.
Rare Earths: Yttrium and other metals including zirconium and hafnium.
Projects: Dubbo Zirconia Project, Orange Joint Venture, Wellington Project
Problem: None; Alkane grew revenue 96.18% and poses little risk as the capital structure does not rely on leverage.
For Real?: A company with a mine, but little to show for it yet. Somewhere between the risk of a pure exploration firm, and a more developed mining company.