Wednesday, March 9, 2011

Rare Earth Elements......

As your complementary education on the Rare Earth Element space rolls on we continue to use this site as a megaphone in our attempt to help you wake up and harmonize with reality.

Molycorp NYSE:MCP is the only major US Rare Earth Element miner currently in operation.  As previously stated, this firm will likely be used as an acquisition vehicle.  Their mine is established and quick to market but the deposit is not as desirable as others in development.  There are 17 elements in this sector and some are dramatically more valuable than others.  They are given the names "heavy" and "light" although that is not entirely correct but we are trying hard not to rock the boat of the mainstream press any more than necessary.  MCP is currently sporting a market cap in excess of $4bil.  Some of the development stage deposits owned by other smaller companies are set to have a product mix more than 4 times as valuable per/kg and currently have market caps in the $100-500mil range.  Either MCP is overvalued or these smaller deposits are undervalued and the logical trade is to be long the best small miners.  We have posted a detailed description of how to do this and what to look for when picking the best out of the more than 200 that claim to be in this business.  Good luck, you will need it.

Here are a few excerpts from MCP's earnings release that came out after the close of US trading:

  • The Company realized an average sales price of approximately $34.02 per kilogram, compared to an average sales price of $16.10 per kilogram in 3Q 2010, and an average sales price of $4.72 per kilogram for 4Q 2009 (Please see my post on current market value per/kg)
  • “Rising demand and reduced Chinese exports have created extraordinarily tight market conditions,” Smith explained. “In 2010, China exported approximately 30,258 metric tons, which compared to demand outside of China in 2010 of about 55,000 tons. This gap in supply and demand is expected to worsen in 2011, as independent forecasts predict that full year 2011 export quotas will total less than 30,000 metric tons, compared to total demand outside of China of about 60,000 metric tons. That points to a high likelihood of shortages of many rare earth products.”  Smith noted that senior government leaders in China consistently stress China’s intent to continue to restrict rare earth exports, and the possibility of China becoming a net rare earth importing nation by 2015.   (Demand was 100,000tns in 2010 not 55,000.....Mr Smith should read this blog!)
  • “These dynamics are why we believe rare earth pricing will remain robust for the foreseeable future,” Smith added. “It also is why Molycorp recently committed to expanding its production capacity from 19,050 metric tons per year in 2012 to 40,000 metric tons per year, which we expect to achieve in 2013. That will position Molycorp to capture new markets and customers, and benefit from continued strong pricing.”  (They are producing the least demanded elements......they will use their inflated stock to buy a more valuable deposit then ship concentrated ore to their facility......the investment bankers have not figured this out yet!)
  • Business Outlook-For the remainder of 2011 and for the foreseeable future, the Company anticipates that the Chinese government will follow through on its announced intent to continue to limit the quantity of rare earth oxides available outside of China. In addition to reduced export quotas, the Company believes that the following factors and expected actions by the Chinese government will further restrict production and supplies available for export:
    • China will continue to successfully curb the illegal export of rare earths;
    • China will enforce production quotas because of concerns about limited reserves;
    • China will continue to coordinate pricing at the federal level in an effort to shore up rare earth prices;
    • China will continue to force industry consolidation;
    • China will continue to increase environmental oversight and enforce tougher environmental controls over rare earth producers; and
    • China’s internal consumption of rare earths will continue to increase as it Gross Domestic Product increases.   (How can we possibly add anything to this list of reasons that we have yet to enter Phase 4 of this super major bull market move?)
Well, there you have it.  Now we await the event that sends us into Phase 4.  It will likely be a sovereign nation unable to procure oxides necessary for production of defense related equipment or a multi-national manufacturer being forced to shut an operation due to lack of supply.  When it hits, you will know.

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