Are Rare Earth Metals the Next Bubble – In the Tradition of Tulips, Dot-Coms and Housing?

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There, I said it! I feel better already.

I’ve been thinking about it for over a year, but the “rare earth scare has prevented me from saying so. I have a vested interest in wanting to see the rare-earth community develop and flourish after all, many of our loyal readers are key buyers of these materials.

Okay, go ahead and start throwing your tomatoes. I’m calling it froth, bubble, hype, hysteria, whatever. This is, of course, “my opinion (see header above commentary).

I’ll give you three reasons why I think this is a bubble. First, we’re talking (particularly the WSJ, the NY Times) about export bans on rare-earth metals more than we are talking about, say, the Chinese hacking into our nation’s computer systems (we’ll save that story for another time). Second, every Tom, Dick and Harry has a tin cup out looking for investment money (with all due respect to those with valid mining resources). Third, we are starting to see cheesy investment pitches like this one that are designed to get you on the investment bandwagon (after you fork over at least $1k) to hear about their “hot little stock (spoiler alert: the company they are talking about is Greenland Minerals and Energy; you can thank me later for saving you the money). The pitch also refers to a metal — vanadium, though the voice-over repeatedly pronounces the metal as “vanandium.” Well, that never bothered some people, so, anyways…

Look, I didn’t seek to go out and write a piece talking about a frothy rare-earth metals market. In fact, MetalMiner has covered the rare-earth sector in earnest for over two years now. We believe there is a critical rare-earth shortage that must be rectified so that all of us can continue to enjoy the iPods, Prius cars and defense technology so vital to our security. We aren’t suggesting that the sector is not worth investing in (in fact, we’re sure people are going to make a huge killing on the sector). I’m just calling it like I see it frothy. Truthfully, we’re finding it difficult to identify new angles and new stories on the rare-earth markets that haven’t been previously covered, ad nauseam.

That said, a colleague forwarded this piece from Wealth Daily (which linked to the cheesy stock pick pitch that got me sidetracked) with one very interesting comment in it: “Just days after China announced it was cutting off rare earth exports to Japan, Europe, and the United States, the WTO said it needs another six months to rule on the rare earth complaint issued against China. The move makes no sense. Under the WTO’s own rules, a panel is supposed to publish its dispute ruling within six months of being set up; since it was set up in December 2009, we should have seen a ruling by May 2010. The writer brings up an interesting point regarding the delay  — this will continue to exacerbate any material shortages (though we have been unable to verify the writer’s claim about the WTO delay, which isn’t to say it isn’t true, just that we can’t verify it). Our own discussions with end-users of rare-earth metals suggest they are seeing rising prices, but as of yet, no actual material shortages.

In trying to verify the six-month WTO review delay, we did come across an extremely well written speech on raw material resource trade given by WTO Director-General Pascal Lamy, at the Third BDI (Federation of German Industries) Raw Materials Congress in Berlin on Oct. 26, 2010, where he argues that “carefully crafted cooperation on rules for resource trade is the only alternative to economic nationalism and conflict.

Lamy makes several interesting points and walks through an example of the current conflict over China’s rare-earth export quotas (note: we have refrained from using the word “ban, as this is currently in dispute):

“Say a government chooses to rely on an export tax to reduce extraction rates for environmental reasons, or to preserve resources for future generations. Other governments believe that this approach is inappropriate. They argue that the export tax creates a wedge between the domestic price of the raw material and its price in international markets. This price dispersion, in their view, bears two negative consequences. First, they argue that the lower domestic price of the resource may encourage an excessive level of domestic consumption. The result, in their view, is a trade measure that affects an inefficient conservation policy. Second, those who oppose the export tax argue that the increase in the international price of the resource lowers the welfare of foreign countries that need to acquire raw materials on world markets.

This conflict will not be resolved in any post we can write. But it sure does highlight the argument in a more rational way than we have seen previously.

As for rare earths being a bubble market, what do you think? Leave a comment!

–Lisa Reisman

Comments (8)

  1. KW says:

    Agree, nothing earth (no pun intended) shaking here. However if you have worked in military-industrial complex as long as I have you definitely see the evolution of technology that depends on rare earth elements evolve. And now that most of the ‘ducks’ are in line to make the technology more available to everyone, we have a bottle neck developing.

    Sort of reminds me of the new invention that everyone decides to adopt, and discards the old one is now totally dependent on the ‘new’. Then the ‘new’ goes away or is controlled so you pay or else…

  2. Terry says:

    I do agree, there is no question in my mind that the RE market is experiencing a serious bubble. When the market capitalization of a single company †that does not yet account for even one percent of global production †is greater than some valuations for the whole industry, investors should start to be concerned. As with any bubble, mis-information leads the market. And there is no shortage to the lack of understanding about rare earth resource valuation, extraction, processing and the industry economics. Even the quote from Wealth Daily cited in this article is extremely mis-leading; Currently, there is no WTO case involving REEs. The dispute brought to the WTO by the US, EU and Mexico involves export restrictions on nine raw materials, but makes no reference to rare earth elements, and would therefore not apply to China’s RE export restrictions even if a ruling were made tomorrow favoring the complainants. The current case is only related to REEs in that it challenges whether China’s natural resource export restrictions are in accordance with WTO regulations.

    For more about the relationship between the current WTO case and the potential for a case involving REEs, I highly suggest this article:
    http://strategic-metal.typepad.com/strategic-metal-report/2010/08/china-resource-protectionism-the-wto.html

  3. loquacite says:

    I disagree that there is a bubble.

    The few stocks which have benefited from increased visibility of this issue have done so because they are easily accessible — not necessarily because they deserve the valuation, or because they have quality businesses.

    That being said, the aggregate market cap of this industry is still infinitessimal when compared to, for example, the petroleum industry. Do these two industries bear comparison to each other? My analysis suggests that they do.

    I have seen a lot of so-called punditry (or should I say pedantry?) on this topic of demand projections for REE, and as far as I can see, these people would do very well professing their meticulously-crafted models to a crowd of university students, or to Wall Street bankers. But they fundamentally ignore many obvious realities, which require less meticulousness, and more vision — something these “pundits/pedants” lack utterly.

    I cite official government statements from China, Japan and others delineating their wind mandates or automobile electrification mandates for 2020 and 2030 and beyond — and this is to say nothing of India, Russia, Brazil or a vast number of other places who shall do likewise — and the only conclusion to draw is that there will effectively take place a sector rotation from oil to REE.

    The oil sector will continue, but some portion of this $2.2 Trillion sector must be reinvested into the “New Energy” material — and that is REE.

    I prophecy that the mining, processing and separation of REE will develop from the roughly $6 billion sector that it is today, to a $80 billion+ industry by 2020, and $450 billion industry by 2030. And not forgetting that stocks trade at multiples of earnings, what follows is that the aggregate market cap of the sector should arrive at trillions.

    The price appreciation to experienced by companies with high quality REE businesses are duly warranted, however, the sector has not yet seen a company with a high quality REE business. Not one.

    The “pundits” are ridiculous with their utterly safe forecasts. I would remind them that there is no point in being an analyst if they do not accurately predict the future. They might as well go and work for the government.

    1. admin says:

      I would agree with you that the entire sector is not a bubble but a good portion is. The rare earth metal market is tiny compared to say the aluminum market both in value and volume, despite every available statistic on the growth of the applications that require these metals. I think we have to look at each mining concern via a range of criteria including actual demand for that particular metal (e.g. not all of the technology metals or REE’s are in short supply or are controlled by China only). But when we start seeing these cheesy videos encouraging grandma to invest, I can’t help but think we’re in some sort of bubble….LAR

  4. kim says:

    I agree entirely with your perspective loquacite.
    An excellent contribution.

    There is one little company in Australia, Alkane Resources, that I believe will very soon demonstrate that they have a high quality REE business. Their definitive feasibility study will be out mid next year.

    Molycorp and Lynas will be large vertically integrated conglomerates
    and their economics and path to profitability will be more complex.

    Alkane in contrast, is a relatively small company, but behind Molycorp and Lynas it is the most technically advanced and market ready company in the space, and it has an emphasis on heavy rare earths.

    If you take the time to go through all their releases on their DZP rare earths project and look at the conservative numbers they have published so far you will see the first example of what the potential profit can be for a well structured, technically advanced, small rare earths company.

    In summary, something like this – Capex 300 million dollars — revenue (at todays prices) – 250 million dollars / earnings around 130 million dollars.

    This company has already put in the hard work – ten years of R+D , pilot plant operation for three years to prove the flow sheet / product samples sent to customers etc etc etc etc.

    This preliminary work will take other start ups 5-10 years to complete. Barriers to entry ,the complexity of the metallurgy (the fine chemistry needed to separate the individual REE’s) and the creation of a business model that is the right size and has distributed incomes, are significant, and will exacerbate the supply squeeze and make the companies that have solved these problems all the more profitable.

    So if you want to see an example of what the first “small” quality REE
    business may look like, take a look at Alkane Resources.

  5. kim says:

    Further,
    While valuation for other rare earth hopefuls are arguably overextended
    Alkane is trading at he value of its gold reserves !!

    It is a very overlooked company.

    The current share price effectively offers a free option on the worlds most technically advanced and market ready heavy rare earths project.
    This really is good buying – because the technical risk in this project has been eliminated and because Alkane holds very significant gold reserves, the risk/reward ratio is excellent.

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