“More Precious than Gold: Technology Metals” (Leeb)

by Travis Johnson, Stock Gumshoe | December 22, 2009 11:01 am

Dr. Stephen Leeb[1] is jumping on the rare earths bandwagon, already crowded with newsletter pundits of every stripe, and promising that these “more precious than gold[2]” elements will “outperform the hottest stocks.”

The argument is a fairly basic one, and we’ve heard it many times: China[3] controls most of the world’s supply of rare earth metals, and essentially all of the refining capacity for these elements. These elements are crucial for everything from hybrid cars to consumer electronics to precision optics and oil[4] refining and guided missiles, among other things.

And he makes the point, as others have also done, that “The Green Revolution Depends Upon Rare Earth Elements!”

Here’s a bit of his argument:

“China needs its reserves of REEs for its own industry. Which makes the remaining supplies of these critical resource incredibly valuable. And with talk of China’s ban on exports… a surge in worldwide demand… and an impending supply shortage… conditions look better than ever to reap quadruple-digit gains in the next few months.

“Few substitutes exist for these unique and critical commodities, making them attractive long-term prospects. And demand will be increased by the worldwide move to tighter emissions standards, growth in defense and modern medical technology, and the digital revolution which will continue to bring forth a fast-changing array of new iPhones and flat-screen TVs.

“When supply of REEs dwindles, it will stifle promising new technologies in wind, solar[5] and hybrid cars…prompting a huge wave of money to be spent to get more of them out of the ground. That’s why the money to be made in these metals can be breathtaking. They’ll be among the best bets in the years ahead. The coming gains to be made in Technology Metals will make the oil investments of years past look like the runt of the commodity litter, and the sweet profits that investors have reaped in sugar[6] taste sour by comparison.

“The demand for rare earths is expected to increase at around 10 percent a year for the next few years. With marketable supply of the rare earths falling, we expect prices to soar. However, because China lays claim to the overwhelming share of the rare earths, investing in the rare earth minerals is difficult. That’s why I’d like to send you a FREE Report, More Precious than Gold: How to Dig up Meteoric Profits in the Age of Technology Metals. In it you’ll find details on some of the most interesting REE investment plays in the small/microcap, non-Chinese rare earth space. Here’s a glimpse of some publicly-traded stocks we like …”

He then goes on to tease us about five Rare Earth Element mining stocks, and he’ll share the special details if you’ll be so kind as to subscribe to his The Complete Investor[7] newsletter. If you just want to find out the names and get yourself started on some research, though, your friendly neighborhood Stock Gumshoe can probably help … let’s look at them one at a time:

“Rare Earth Play #1 —An Australian mineral exploration company developing its mining facilities in Mount Weld, Western Australia and constructing an Advanced Materials processing plant in Kuantan, Malaysia. Importantly, Mt Weld contains one of the world’s largest undeveloped deposits of rare earths. During 2008 the firm was able to secure $310 million worth of firm sales contracts, with a delivery target of 2010.”

This is our old friend Lynas (LYC in Australia, LYSCF on the pink sheets). They do indeed own the Mt. Weld project in Australia, and they are in the process of re-starting their Rare Earths project there — they did an initial phase of mining at the site, and the very first steps of building a concentration operation there (they need to concentrate the ore a bit to transport it), and they began work on a refinery in Malaysia, but that all fell apart when the financial crisis hit and construction was stopped on both projects, with the mined ore just sitting there and waiting.

They initially planned to sell a controlling interest to a Chinese company as, effectively, a financial rescue/takeover, but the Australian government made that very difficult (Lynas’ raison d’etre, after all, was the creation of a strategic non-Chinese REE supply chain). Thankfully for them, financing markets cleared up again and they were able to raise a big chunk of cash this fall to recommence operations. They were and probably still are the most advanced new Rare Earth Elements mining project, but it’s still going to be quite a while before the get all the construction restarted, finish the refinery and concentrator, start shipping concentrated ore to Malaysia, and can actually sell pure rare earth minerals to their customers. Lynas is a stock that I still owned shares of until fairly recently, and it remains a favored play on this theme because of the relatively advanced status of their projects compared to many others, but there’s no guarantee that the shortage in REE’s that we all see coming will actually materialize, or that governments won’t step in with large boots to modify the marketplace further.

Oh, and, of course, the economy has a huge amount to do with any of this — these are strategic metals, to be sure, but they’re bought and sold in the marketplace, and prices in this most recent quarter were roughly half what they were a year ago. No one has spent the past year hoarding, apparently — and when I first wrote about Lynas for a tease that started running almost three years ago[8] (and when it was teased by another newsletter last year as a “monazite metals” play[9]), the same predictions of dire strategic shortages and price spikes were also on the tongues of the marketers. Still could certainly happen, of course, and I definitely see the logic of it and the likeliness of it, but there’s definitely no guarantee that Rare Earth Elements will become dramatically more valuable by this time next year.

So with that in mind, what are the other favorites from Dr. Leeb?

“Rare Earth Play #2 —Is an established processor of rare earth minerals. One of its divisions is the number one global producer of neo powder. Neo powder is used in the neodymium magnets found in hybrid vehicles, wind turbines and rechargeable batteries, and the company has a lock on about 80% of the global market. Given China’s recent moves to curb rare earth exports from the country, one of its strategic advantages is that it operates various processing units in China itself—allowing for direct access to China’s abundant rare earth resources and its growing internal market.”

This one is a Canadian-based company that’s does much of its business in China, callled Neo Material Technologies. The brand name that they are often known by is Magnequench, which became a bit of a globalization touchstone since it ran a US-based rare earth magnets plant that was effectively shut down and transferred to China. The stock trades in Toronto at NEM, on the pink sheets at NEMFF, and is the only one of these that’s currently a big producer of rare earth materials … but it’s also the only one that’s effectively under the Chinese thumb, with most of their assets in the Middle Kingdom.

“Rare Earth Play #3 —Owns a property in Wyoming which, according to the U.S. Geological Survey, contains one of the largest disseminated rare-earth deposits in North America, as well as significant gold occurrences. One attractive advantage, is that the company benefits from growth in demand in both rare earths and gold, providing some diversification and exposure to two markets with solid long term prospects.”

This one is Rare Element Resources (RES in Toronto, RRLMF on the pink sheets), owner of the Bear Lodge project in Wyoming, and they’ve been on a tear this year, up a couple hundred percent. They’ve sold off much of the gold resource there, Newmont has been investing in exploration in exchange for a controlling portion of the gold resource, but they are also moving ahead with continuing exploration of the Rare Earth Elements on site — and they do actually have a NI43-101 filing, though it’s all “inferred” (they’re doing more drilling to firm up reserves). The site is explained pretty nicely on REE’s website here[10]. They’ve released promising drill results recently, and they were able to raise a fair amount of money this year both from Newmont and in the markets, so if the REE story stays on the front burner this is likely to be an investor favorite, too — especially if the strategic nature of these elements grows in importance, since this is a US project.

“Rare Earth Play #4 —Is a Canada[11]-based company that owns five rare metals and minerals projects, three of which are at an advanced stage of development. What stands out about its resource base is that one of their projects, the Lake Zone deposit at Thor Lake has a higher than 20 percent proportion of heavy rare earths, which are much more valuable than their peers, the light rare earths.”

This one is Avalon Rare Metals (AVL in Canada, AVARF on the pink sheets), also up very nicely this year from those depressed levels of the financial crisis, when all the junior miners and explorers were left for dead. Avalon does own the Thor Lake project, though they call it the Nechalacho Rare Earth Element Deposit, up in the Northwest Territories in Canada — they have several other sites that they say are “advanced” too, but Thor Lake is really the company’s flagship. They’re hoping to be prepared to release a prefeasibility study early next year.

“Rare Earth Play #5 —Finally, a quick word about the only U.S. producer of rare earths. It owns a mineral facility in Mountain Pass, California, which reportedly contains the richest rare earth deposits in the world. Although previously taken offline for economic reasons, the company announced that due to new demands for REE, it plans to have its mining facilities fully operational again by 2012 and to expand output to around 40 million pounds annually. Interested investors already include Goldman Sachs and Pegasus Capital Advisors.”

This is MolyCorp Metals, which has a long history as a rare earths producer at Mountain Pass, going back to the 1950s. They were a publicly traded company for a while back then, but were bought up by an oil company (which later became part of Chevron). They stopped mining the site in the early 2000s, but have new permits in place and are processing the leftover concentrate now, apparently, with plans to start mining again in 2011. MolyCorp was sold by Chevron to private investors last year and is not currently publicly traded — but with several private equity firms holding shares and Goldman Sachs on board as an investor, it wouldn’t be shocking if they decided to go public again before too long.

Sorry for the quick glance at these firms today — I know that a lot of my readers are interested in these stories and these stocks, so feel free to fill in the blanks that I’ve left about these companies. None are profitable, but most of them have certainly run hot and cold over the last couple years.

Oh, and this also does not include probably the most actively marketed rare earths investment story of the past couple months, the tantalizing promise of Greenland’s natural resources — I wrote about those “Greenland’s Gift” teasers and the likely company here if you’re interested[12] (there were actually two pretty good matches).

So what do you think? Is Dr. Leeb leading us to the Rare Earth promised land? Have other favorite REE stocks to suggest? Let us know with a comment below.



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