Saturday, May 7, 2011

Rare Earth Mile Marker

The A students over at the Wall Street Journal were kind enough to post a much needed mile marker in the rare earth journey yesterday.  The article can be accessed using this link.  This reporter is excited about his big scoop from Goldman Sachs.

Let's first review some of the other statements that popular business newspapers have made about rare earths over the past year:
  • Rare Earths Are Not That Rare
  • Rare Earths Will Be Recycled
  • Alternatives To Rare Earths Will Curb Demand
  • Rare Earths Are The Next Bubble To Burst
When reading the newspaper always try to scan articles taking in as many pieces of information as you can possibly handle.  The processing of information takes time and requires dynamic thinking.  Always remember that there is no direct way to make money from reading a newspaper.  Everything that is written has already happened.  The author of the article is usually an ivy league English major with an editor to please.

Most people read the Wall Street Journal with a dutiful loyalty.  We read it with contempt.  Many readers are not comfortable with this statement but the truth offers a faster route to peace.

Now let's examine the role of Goldman Sachs.  The average WSJ reader sees a Goldman statement and thinks, "Well, if they are doing it then it is safe for me to do it too."  This is a sure way to be separated from your capital.  If they are buying something be assured they are not telling you about it.  If they are telling the newspaper about it they are probably hoping for a mass market reaction that will benefit them.  Just as a quick reminder, when you see Goldman research on a stock and they have a buy rating assigned that means they are trying to make something happen.  Usually they are moving a large block of shares or trying to persuade management to award them with investment banking business.

The article says that demand will be met by 2013.  Where will this supply come from?  We know of two free world producers that will be online at that time and they will provide at best an estimated 30-40k tons per year of light rare earths.  They have no heavy elements at this time and acquisitions are the only solution to that problem.  So, that leaves roughly 100ktn of unmet demand based on the article's estimates.  China is the wildcard but as a speculator we bet that relations with the US will deteriorate even more.

Several articles on this site discuss in detail the fact that the elements have outperformed the stock mining them.  The catch-up rally is coming and should arrive before the end of 2011.  This WSJ article could be a signpost telling the market that investment banks are beginning to notice lucrative trading opportunities in undervalued takeover targets.  The two producers mentioned above lack heavy rare earths but sport a combined market capitalization of over $11bil.  Our favorite sector picks have very rich deposits with attractive economics in place and should be in production before the end of 2015.  These stocks have small market caps and offer excellent upside.  Gaming the stocks of these small companies is a common practice.

As the public wakes up to the fact that the free world does not have access to the most essential ingredients required to make their their favorite gadgets a spectacular rally should unfold.  When the newspapers write articles about going to get rare earths and paying any price selling should be considered.

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