In fact, what we’re seeing is the early stage of what should be a multi-year bull market. The recent drop in REE prospectors and future miners should be viewed as a buying opportunity.
That’s because with the continued drive for “green” technology as well as modern technology in general, the annual demand for REEs is going to continue building from 130,000 tons in 2010 to 200,000 tons in 2015. Meanwhile, available supply will not grow smoothly. That’s where the renewed opportunities for savvy and patient investors come in. What we saw in 2010 was the uninformed rush for quick profits before the hard reality of REE mining settled in.
Now is where the good long-term money can be made, if you’re willing to buy at what should be bottom-fishing prices. Let’s examine why.
There are several reasons for the supply/demand disparity:
1) Rare Economic Deposits: While REEs themselves are actually fairly abundant, economic deposits are few and far between. This makes those few deposits strategically important because REEs are critical for hybrid cars, wind turbines, low energy light bulbs, laptop hard drives, LEDs, LCDs, plasma screens and other electronic appliances as well as precision-guided weapons, night vision, radar systems and other crucial military technology.
Much of our modern technology (and the industries and militaries that rely on it) would not exist or else be crippled without REEs. While REEs can sometimes be substituted for in certain applications, the substitutes are frequently less efficient or effective in their chosen roles. REEs are absolutely necessary to run the modern world around us.
2) Restricted Supplies: No less than 97% of the world’s existing REE supply comes from China (mostly Inner Mongolia), which is steadily becoming more reluctant about exporting their strategic advantage. In fact, they’ve cut REE exports by 40% year over year to provide more material for their own factories to supply valuable finished goods rather than the simple raw materials. There are mine prospects outside China but many of them are facing serious development hurdles and often have the less in-demand types of REEs in their deposits. More about that in a moment …
3) Environmental Concerns: REE mining poses serious environmental consequences including mildly radioactive slurry tailings (REEs are commonly found with radioactive thorium and uranium ores) plus the toxic acids required in the refining process.
The stricter the environmental controls, the more difficult and expensive it is to start up and continue REE production. That has accounted for the relative lack of REE mining and processing in our environmentally-conscious Western nations. Even China (not traditionally a bastion of environmentally-friendly philosophies) is now cracking down on REE mining violations due to contaminated water supplies and other major environmental damage. This trend is not likely to reverse.
It’s ironic that the key metals required for “green” technologies are some of the most environmentally unfriendly around, isn’t it? But that’s the way things are.
4) Unequal REE Opportunities: The 17 different REEs are not found in equal quantities and usually cannot be substituted for each other. They can be divided into two categories. The LREEs are the light rare earth elements and HREEs are the heavy rare earth elements. Due to their relative scarcity, LREEs trade at generally less than $100 per kilogram and some of the HREEs trade at hundreds of dollars per kilogram. It’s very significant that of the two non-Chinese REE miners commencing production in 2012 (Lynas LYC:ASX / PINK: LYSCF) and Molycorp MCP:NYSE), virtually all their near-term production will be of the LREE variety and will barely impact HREE supply at all.
5) No Boom Lasts Forever, But … : REE metal and oxide prices went ballistic in 2010 and are very likely to remain permanently higher than historical prices. Most are still showing strong gains in 2011 so far (see the chart below, especially the % Year column as highlighted).
While it’s unrealistic to expect that we’ll see permanently increasing prices at this rate of appreciation, this year’s gains are real and likely to persist for the long-term. Even if prices temporarily drop from here (particularly in the LREE’s as more mines come online), REEs as a whole are still at a high enough price to generate good profits for a competent miner (and investor).
Where To Find The World’s Leading REE Producer?
The biggest example of such an opportunity is unfortunately one of the most difficult to invest in unless you have access to the Shanghai Stock Exchange. Boasting the unwieldy name of Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd (600111:CH), Baotou is the biggest of all the world’s REE producers. The US$9.7 billion company contributes nearly half of China’s REE production and also produces and exports rechargeable batteries and mineral products.
With a 25.7 P/E multiple and 14.8 price/book multiple, it processes some 55,000 tons of rare earths a year which is about 44% of global production. It expects its net profit for the first half of fiscal year 2011 to increase by at least 450%, compared to the same period last year. And it’s also received approval to develop China’s first rare earths reserves which should eventually grow to 200,000 tons of processed rare earths (equivalent to roughly 19 months of global production).
Well, not as rosy as you would expect. However, general Chinese market malaise is weighing on the company.
Baotou shares (purple line) have dropped 2.44% over the past year in comparison to the Shanghai Stock Exchange A Share Index (blue line), which dropped 15.45% over the same period. The company has outperformed the blue-chip Shanghai Index and looks likely to continue to do so based on its robust profit profile.
So does this mean Baotou is a buy? Not unless it’s convenient for you to purchase shares directly on the Shanghai Exchange. There are much more accessible REE investments, which we will be cover in Part 2 of this Oakshire Financial special report. Part two will also include”
a) a closer look at Lynas (LYC:ASX / PINK: LYSCF), Molycorp (MCP:NYSE) and their closest peers – and why they should (or shouldn’t) be a part of your REE prospects
b) a little-known company that’s discovered the world’s second largest NI43-101 compliant indicated (or better) resource in less than 10 months, and
c) a selection of the other best REE exploration and development projects outside of China.
Nicholas Jones, Oakshire Financial, Commodities Analyst, oakshirefinancial.com/