“Tiny Australian Miner Breaks China’s Rare Earth Monopoly”

By Travis Johnson, Stock Gumshoe, March 29, 2007

I’ve seen this ad in a few different variations, for a couple different related newsletters. The most detailed one was from Ann Sosnowski for the MicroCap HotSheet, which would like you to sign up for a subscription at around $1750 a year.

And of course, even if you want to pay that much, they want you to promise to keep a secret:
“You must be able to keep a secret. No blabbermouths. Sharing MicroCap HotSheet stock picks with people who are not within our private group is strictly prohibited.”

Thankfully, the Stock Gumshoe is not a subscriber … so I have no problem sleuthing out the company she’s talking about, and sharing it with my lovely readers.

The ad opens with many claims of past successes in microcap investing, including some that the author “would have” recommended to her other newsletter readers back when they were tiny, like Force Protection (a previous Gumshoe article sleuthing out FRPT is here, FYI), but couldn’t because of their size (thankfully, she doesn’t note any of the microcap flops and bankruptcies she would have recommended, too, or I would have fainted from the stench of honesty). And now, this new newsletter product means this advisor can finally tell you about all these hot microcaps.

The pitch for this one is thus:

China has a near-lock on “Rare Earth Elements”, which are a set of obscure fellas from the periodic table that are rare or difficult to find, but which are in significant demand for very particular products — like hybrid car batteries and lots of other electronic stuff.

If you’re like me, you’ve probably heard of “rare earth magnets” … but didn’t know much about all this other stuff.

So many things are dependent on rare earth minerals and elements that the author argues this is a national security issue — guided missiles and other defense technologies are particularly dependent on these elements.

And most of these elements are currently mined and produced in China, which strategically moved to slash prices and drive other producers out of the market in the past decade … and has taken steps to choke off export to the US. (again, according to the newsletter ad — there may be more to this story, I don’t know the politics)

Now, the ad says, there’s an Australian rare earth elements miner that’s just about to start digging — and the prices might shoot up incredibly fast.

The headline promises a move from .35 cents to five dollars … but later on, the sell gets sweeter:

“This tiny 35-cent company is hands down the single most lucrative investment I’ve seen in the last three years … I wouldn’t be surprised if it went all the way to $6.50 or even $7 per share.”

Here are the clues we get about this little Australian company:

They bought the mine site in 2001, and it is the only non-Chinese commercially viable rare earth element mine in the world.

“J.P. Morgan, Goldman Sachs and RAB have started building positions in the stock.”

She also supplied a chart, not sure if it’s in US or Aussie dollars, that shows the date she’s working from for the 35 cent price is December (I’ve seen more recent ads on this, too, but without specific prices it was harder to confirm from just those ads).

So … would you like to join the “exclusive” limited community of the MicroCap HotSheet? Or do you just want to know the name of the company so you can do your own research?

I thought so.

So your friendly Stock Gumshoe entered the researchitron chamber and came out with the knowledge that this particular Australian miner is …

Lynas Corp. (LYC on the Australian Exchange, LYSCF.PK on the US Pink Sheets)

Lynas was trading at just about 35 cents (US — closer to 45 cents AU) when this email was initially sent out. They have a mine in Australia called Mt. Weld, which they bought in 2001 from Anaconda Nickel. Their promotional materials claim that Mount Weld has “without a doubt the world’s richest Rare Earths ore body.”

They also have a processing plant for the ore in some stage of development in Malaysia (so that they won’t be subject to Chinese policies, as they would be if they sourced this work in China).

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But I’m not trying to sell you on this one — or sell you anything, frankly. I’m just telling you that you don’t need to spend $1,750 for an “exclusive” newsletter to find out what this company is, not when your friendly Stock Gumshoe is around.

(Though if you want to make a donation to the Stock Gumshoe cause as some of your fellow readers have, they’re always welcome — just click the donate button in the right sidebar.)

As I’ve said many times before, I don’t have any idea whether this is a good investment or will get to $5 by the summer as the ad predicts … and I don’t know if the story about the rare earth elements monopoly in China and the general demand picture for these unique elements holds water, though my basic understanding of the situation is that it does.

I don’t know if Lynas will run into any hitches as they develop their mine at Mt. Weld, or with their plant in Malaysia — the digging is supposed to start soon, I think, but the processing plant won’t be commissioned until the middle of next year.

I also haven’t looked in detail at Lynas’ financials, except to confirm that there is some investment bank interest as was teased, including institutional placements in the US — and that one of the major holders, a hedge fund called Ospraie, has been selling a bunch of shares recently. I don’t know if they’re prescient or idiotic to be doing so (or if this is just one of those “unwinding carry trade” stories for them). You can read all the filings and announcements yourself at http://www.asx.com.au if you’re interested. And if you promise to come back to the Gumshoe when you’re done.

As always, the Stock Gumshoe can’t tell you what to buy … but he can tell you what company the newsletter ads are telling you to buy. Now you’re on your own — enjoy!