Handicapping the Rare Earths Stampede
Over the past couple of months, we've learned plenty about the future of Chinese demand for rare earths. Bottom line is that the Chinese will likely become net-importers of rare earths within three years - certainly within five years.
What does this mean for rare earths? Chinese export volumes will continue to decline. Not only will there be less Chinese rare earths product for sale, but the Chinese will compete for at least some of the very same rare earths product as everyone else. Big problem, right?
Let me state it another way. There's not enough rare earths to go around! Not based on the current production numbers, and the future supply-demand trends. Hence the price will EXPLODE for some rare earths elements, particularly the "heavy" rare earth elements (HREE). Hold that thought.
Meanwhile, the US political class in Washington, DC is barely beyond waking up to the issue. Last fall, I heard a sitting Member of Congress - who serves on the Science & Technology Committee - say that he became aware of the rare earths issue when he "read about it in the New York Times." Oh really? How reassuring. (In my investment letter, Energy & Scarcity Investor, I've been analyzing the rare earths since March 2008, and have recommended numerous winning investment ideas based on those analyses).
Of course, there are people within the US Department of Energy, the Geological Survey and other agencies who've been following the problem for a while. But the point is that US rare earths policy is amorphous. It's still crystallizing. As a student of both Clausewitz and the Periodic Table, my opinion is that there's more of a US plan for bombing Libya than there is for dealing with the looming shortages and price spikes in the rare earths space.
Looking ahead, and to paraphrase The Mogambo Guru, "We're doomed." Over the next 24 months or so, the world will experience a bad case of rare earths sticker shock. We'll see space shuttle trajectories for rare earths prices, especially the "heavy" (HREE) product.
There are more and more news articles about rare earths. But you'll probably see even more. And everyone's going to be an expert. Your barber, the cab driver, the shoe-shine guy will tell you how to make money in rare earths. This coming rare earths phenomenon will attract more and more hot money into the investment space. Stand by for lots of stock market froth, and maybe a humongous bubble.
But that's not happening just yet...
If the Chinese are going to import rare earths product within, say 3 or 4 years, then the timeline is that non-Chinese producers need to do something NOW!
That is, non-Chinese players need to hold an assayed ore body, and plan mine operations - now. They need to be building facilities - now. They need to get the hydro-metallurgy nailed down - now. They also need to work out agreements with eventual users - like, not now but yesterday! There's no time to lose.
Thing is, the West is way behind the curve on all of this. Three years out, from now, is the blink of an eye in development terms. What's that tune? "Tardy to the Party?"
Over the past three years or so, the Chinese have tightened export quotas. The actual, physical volumes are plummeting. And, as I mentioned above, the Chinese are going to buy rare earths from non-Chinese sources. Yikes. This means there's a mad rush - a stampede! - by Western firms to come up with ways to get rare earths into production, the sooner the better. Let's handicap this race.
Some of the likely winners in this stampede are stocks I have recommended to the subscribers of Energy & Scarcity Investor. As such, I cannot divulge their names here in The Daily Reckoning. But I can discuss a couple of former recommendations, like Molycorp.
Early this week, Molycorp made a strategic move. Molycorp paid not quite $90 million for a 90% interest in a former Soviet rare earths plant in Estonia. This is a "leapfrog" kind of deal. It gives Molycorp an up and running facility - while Molycorp rebuilds its old facilities at Mountain Pass - in mining-friendly California. (I'm just kidding about that "mining-friendly" thing.)
This Estonian plant is the Silmet facility, which is optimized for light rare earths (LREE), which is coincidentally much of what Molycorp has at Mountain Pass. Silmet is also an important producer of the exotic elements niobium and tantalum - from Russian ore.
The Silmet plant is modest in scale - about 3,000 tons per year - but at least it's up and running. There's a long-term workforce. There's also something critical at Silmet, which is a strong history of making the hydro-metallurgy work. Sometimes, though, when it gets cold in the winter, the chemical equilibrium at Silmet goes out of whack. Then it takes weeks to get things working again. Whoops.
So Silmet advances Molycorp's game, in many respects. Still, I should note, for several years Molycorp has promoted itself as an "American" rare earths play. Molycorp management has racked up double-diamond elite status, flying to Washington, DC to plant Old Glory on top of Capitol Hill and trumpet the Mountain Pass redevelopment.
Yet now Molycorp is buying a former Soviet LREE plant, in Estonia that uses Russian ore? Go figure. Does this mean that Molycorp is hedging its bets? Things might not go as well as planned with the California schedule? It's possible. Again, time will tell.
Whatever happens in California - and ANYTHING can happen in California! - it's accurate to say that the Silmet news stunned the markets. Molycorp paid $9 million cash for the Silmet plant, plus 1,593,419 MCP shares valued at $50.21 each. Over the past week, Molycorp shares have soared from the mid-$50s to near $69 each, so the sellers are making out very well.
The rare earths sector is heating up very quickly. Watch this space!
Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor. Byron has made frequent appearances in mainstream media such as The Washington Post, MSN Money, Marketwatch.com, Fox Business News, CNBC's Squawk Box, Larry Kudlow, Glenn Beck and PBS Newshour. He also had a feature article written in the Financial Times, and has appeared on both CNN and Marketplace radio broadcasts. Byron has also been quoted in various international publications such as The Guardian and De Volkskrant, and has been a guest on Canada's CBC television broadcast.