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.

Tuesday, May 3, 2011

Rare Earth Elements Update

More relevant information on rare earth elements is available on this site than from any mainstream stock broker in America.  The sector remains one of the most misunderstood in the market today.  This creates a tremendous amount of opportunity as people pile into the space and push prices higher.  That has not happened yet.

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.  (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.
We offer a research piece on this sector.  This piece has been designed to help investors or traders skip the learning curve and avoid the 95% of companies in this sector which we believe will never achieve profitable production.  This report includes the following:

  • 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
Contact your editor for more information.

New readers will want to review these articles on Rare Earths:

Monday, May 2, 2011

Silver Market Update

Most readers probably expect us to have something to say about the news of Bin Laden's alleged death.  Focus on being rigorously objective in the study of markets precludes us from political distractions.  The only thing that we wonder is after 3,000 dead on 9/11, 2,000 coalition soldiers dead in Afghanistan, 4,800 coalition soldiers dead in Iraq, 10 years of zero interest rate policy, strip searching citizens before allowing them to board commercial flights, net neutrality laws limiting freedom on the internet, requirements that precious metals purchases be fully documented due to alleged terrorist activity in the market, the severely un-patriotic patriot act, the creation of the massive department of homeland security and $1.2 trillion in military spending on the 2 ensuing conflicts, can't we at least see the body?

Physical silver markets remain unattractive.  Please remember that we advised readers to stay out of this rip tide over a week ago when the price was just shy of $50/oz.  Several emails have come in asking questions like, "What is going to happen to silver?"  Who cares?  This site is not your own personal crystal ball and we do not have a syllabus describing how the markets will move going forward.  What we do have is a strong aversion to losing capital.  When the physical market goes parabolic and the value of the stocks mining the product go down buy the latter.  Our shopping list of silver miners continues to provide plenty of excitement.

5 day chart of May '11 Silver Futures:
 Chart forSilver May 11 (SIK11.CMX)
As a reminder, we posted this in an article on how to own silver:

Finally, many readers might not understand how to invest in silver.  This is a good way to look at proper capital placement:

  • 20% PSLV Sprott Physical Silver Trust
  • 20% Physical Silver Bullion (Storage becomes an issue)
  • 30% Mid-Large Cap Silver Producers Properly Managed
  • 30% Small Junior Silver Miners (Future post will be necessary to help explain how to pick these properly as your broker will have no idea how to help you)

At this time, focus your energy on the 60% of stock related holdings and don't worry about the physical silver market.  A pullback to $41/oz would be within the realm of normal behavior in this type of bull move.  As a reminder, well run silver mining stocks are trading at valuations consistent with $30/oz silver.

Take the low hanging fruit.