There are two components needed to profit from this type of situation. Awareness of the macro-economic dislocation is the first. In this case the world is using over 100,000ktn of rare earth elements annually and 97% of that supply currently comes from China. Usage is growing at 10% per annum. Once this has been accepted action must be taken in order to establish a position making profit from discovery possible. Most people notice a change and then carry on with the same behaviors as events begin to unfold.
Notice in this article that the New York Times reporters are identifying the problem but still unsure how to address it. http://www.nytimes.com/2011/05/03/business/03rare.html?pagewanted=1&ref=business (Thanks to one of our Indian clients for sending earlier this morning) While reading this remember that early in the bull market we were forced to read articles on how recycling would meet the worlds needs. As the article accurately points out that plan is not working. We insist that increased supply is the only strategy that should be considered.
There are two blue-chips in this sector, one American and one Australian. Both of these companies stand to be in production during 2012 but their production alone will not meet increasing world demand. Also, there are two accepted categories of elements and both of these companies lack one making them unable to fully service the free world's demands.
The chart below shows how one of those blue-chips has performed since offering shares publicly last summer. This morning the price target on these shares was raised to $85-125 advising that their true value has not been realized. While the move in these shares has been profitable for us, there are several smaller companies in mid to late stages of development who are much more exciting. These two companies will be forced to make acquisitions, likely in 2012.
- Industry primer
- History of the elements
- Explanation of the manufacturing markets that rely on these critical elements
- Analysis of world demand and the current supply shock driving it
- Projection of when new supply will meet that growing demand
- A recommendation of which 9 companies to own in the space with a focus on the most valuable deposits controlled by firms with proper share structures, focused management teams and a true shot at early development in an effort to benefit from the consolidation phase
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New readers will want to review these articles on Rare Earths: