“PANIC AT THE PENTAGON! PLUS: How the Coming Battle for This Resource Could Hand You Gains of 2,106% in as Few as 24 Months”

By Travis Johnson, Stock Gumshoe, July 26, 2010

Just from that headline, experienced investors and teaser-readers might well know that we’re looking today at rare earth minerals — you might also call them rare earths, rare earth magnets, rare earth elements or lanthanides (they’re usually pulled out of the period table and grouped separately on the bottom if you want the actual names and symbols), but whatever term you use these are the rare elements and powerful magnets that are present on the earth’s crust almost everywhere in trace amounts, and that are critically important to all kinds of high tech products.

Including missile guidance systems and other high-tech military applications, which may be why this teaser from Michael Robinson gets the “Panic at the Pentagon” title. You see, for those who haven’t been around for our half-dozen investigations of other rare earth teasers, the core argument for investing in most rare earth explorers, producers and miners is that China has the market locked up, and those who either have access to China or who have non-Chinese assets that are of strategic value to Western governments and companies will see the value of their resources skyrocket as prices for these rare elements climb.

And the argument certainly makes logical sense — China did intentionally go about taking control of the rare earth market starting decades ago, acknowledging that they had great resources at home and perhaps presciently seeing a huge upside in the market for these minerals in the future. They effectively kept prices low and drove other producers out of business, and bought up a few rare earths companies in other countries and more or less shut down their local production and moved it to China.

So now that the market for these elements is much larger — huge hybrid car batteries, flat screen TVs, hard disk drives, all kinds of products require more and more of these rare earths of various kinds — China is really in a prime position with control of the vast majority of producing rare earth mines, and, perhaps more importantly, essentially all of the global refinery capacity for the processing of these minerals. China has had export quotas for years for their rare earth output, largely in order to encourage their customers to move the manufacturing and research operations to China, and they’re now in the process of cutting those quotas — which has most of the rest of the world a little bit worried, and investors everywhere sniffing out rare earth investments for what they think will be a big price boost when supplies get really constrained.

So that’s the backdrop, a story with which I know many of you are familiar. We’ve seen teases recently coming through for these “rare earths” and “technology metals” from Stephen Leeb again, too, but the ad that caught my eye today was from Michael Robinson for his American Wealth Underground, which is the new(ish) name for the old Breakaway Investor newsletter. So that’s where the “Panic at the Pentagon” bit comes from — what are the stocks he’s teasing for us today?

First he’s got to throw out a few opening pitches to get us warmed up:

“Forget About Laptops and ‘Clean Tech’… Our National Security Depends on Technology Metals

“Technology metals are not just vital to our economy. They are 100% mission critical to our military. So forget about your flat-screen TV for a moment.

“The supply of these resources is VITAL to national security.

“Without technology metals, military contractors could not make radar, sonar or night-vision equipment. We couldn’t manufacture jet engines or the guidance systems for weapons.

“Even worse, we could not make the systems that detect and defend against attack.”

And a bit more …

“The United States currently has zero production capacity. That leaves us 100% dependent on foreign suppliers for our own national defense!

“It’s hard to believe that this is even possible. But it gets even worse…

“Why Our Dependence on Technology Metals Is Far More Troubling Than Our Dependence on Oil…

“Oil is crucial to modern civilization and the Middle East is clearly in control.

“But OPEC produces only about 40% of the world’s supply. And there are also more than 150 types and grades of crude oil. When it comes to oil, choice is abundant.

“But there are NO substitutes when it comes to technology metals. As for supply, there is only one source — CHINA!

“And China doesn’t just have control… it has a monopoly!”

So that’s all more or less true — though, of course, not everyone would use as many capital letters and exclamation points in the description of the current marketplace for rare earths. And heck, we’re also dependent on China and a few other suppliers for essentially all textiles and manufactured consumer goods these days. Which is more important, a monopoly on the supply of precise navigation instruments, or a monopoly on underwear? I do sometimes wonder.

The key chokehold point is coming, according to Robinson (and others) — Chinese domestic demand for rare earths is expected to match or exceed domestic production within the next two years, so we are fast approaching the key time for development of both new mines and processing capacity (and yes, these explorers and miners have an eye on this timeline, too, and have been mentioning the 2010-2015 timeframe for years.

But anyway, here’s the last bit of preliminary exposition before we start looking at the specific stocks:

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“There is an urgent global need for technology metals produced outside of China.

“The GREAT news is that a select few companies are prepared to meet the call.

“And I’m going to show you the safest ways to play this for maximum profits. Early investors (like you, if you act today!) could easily turn every $5,000 into as much as a $100,000 windfall.

“And I’m not asking you to take my word for it. I’ll PROVE it to you…

“In the Next Five Minutes, You Will Discover….

“Four North American companies sitting on a combined horde of technology metals worth at least $52.6 billion… and how they are prepared to smash the Dragon’s monopoly!”

So … if we’d like to smash the Dragon’s monopoly, what stocks do we buy? Now we need to get into the clues for each of these companies, we’ll do ’em one at a time if you don’t mind:

RARE EARTH GIANT #1 Vast American Deposits (With a HUGE Gold Kicker!)

“Rare Earth Giant #1 is the ONLY publicly traded company with significant resources in the United States. According to the U.S. Geological Survey this company controls “one of the largest occurrences of […] rare earths in North America.”

“The market cap for the entire company is just $103 million. Yet, it controls a deposit with 9.8 million tonnes of total inferred resources. Based on recent prices and the rare earth contents in those rocks, the value of this resource in the ground is $4.9 billion!

“And that’s not all… this stock offers a double play on gold!

“Right next door is a gold discovery that closely matches the geology of Cripple Creek in Colorado — an area which has produced more than 21 million ounces! The company has partnered with Newmont Mining for this side of the project. And Newmont doesn’t get involved in a joint venture unless it has the potential for at least 5 million ounces. At today’s price of gold, that would equate to $5.75 billion!

“That’s more than $10 billion potential upside for a company priced at just $103 million!”

Hmm, OK, looks like the clues are a little bit out of date — this one is Rare Element Resources (RES in Canada, RRLMF on the pink sheets), but Newmont gave up on the gold deal about two months ago. Their property is around Bear Lodge Mountain in Wyoming, with the rare earths project called Bear Lodge and the gold project called Sundance, and Newmont had the right to acquire a 65% ownership stake in the gold project by spending $5 million drilling and exploring, and 80% if they had also completed a positive feasibility study.

Newmont did spend close to $3 million in drilling over the past four years, but apparently they decided not to exercise their ownership right by spending more — it may well be that the project just isn’t big enough for Newmont, or that they had other things they would prefer to do with their time and money, but it strikes me as pretty surprisingly bad news that Newmont wasn’t willing to spend another $2 million or so to get ownership, if you’re just strictly looking at the numbers that would tell you that the Sundance gold project is worth less than $3 million (since Sundance could have acquired 65% of it for about $2 million and opted not to do so). That’s not a lot, even for a relatively small company with a market cap of roughly $100 million.

Of course, you can spin this more pleasantly, too — as the company did, with their press release that is headlined, “Rare Element maintains 100% interest in gold…”.

But of course, gold mines are a dime a dozen, even relatively appealing sounding ones like this — and yes, the company does draw the comparisons to the successful Cripple Creek mine. What we’re really interested in here, though it would probably take longer to produce, is the rare earth stuff. The company is saying that over the next month or two they’re planning to complete the scoping study that they began last Fall, and to continue a bit of drilling, but that the next steps, assuming that the scoping study is positive, will be to start permitting and begin the process of developing a prefeasibility study.

So … that’s one possibility. I can go out on a limb and say that they won’t be producing rare earth oxide from Bear Lodge within five years, since these things tend to take forever, but it may well be that the value will attract another deep-pocketed acquirer if rare earths get more investor attention again.

RARE EARTH GIANT #2 ‘The Cadillac of Rare Earths’

“Rare Earth Giant #2 controls one of the largest undeveloped rare earth deposits in the world. And it’s a deposit with a very high percentage of heavy rare earths. The “heavies” are in high demand for green technology. And they are about 30 times more valuable than the more common “light” rare earths.

“This has led some to call this deposit ‘The Cadillac of Rare Earths.’ And it is HUGE. With more than 64 million tonnes of inferred resources, the rock in the ground is worth an estimated $16.7 billion!

“That’s quite a carrot for a company with a market cap of just $208 million. And this is just ONE of the company’s FIVE properties. Here’s what other analysts have said about Rare Earth Giant #2:

‘… is going to produce huge quantities of rare earths ultimately. They have one of the largest if not the largest rare earth ore body on Earth…’
‘… a property of global importance.’
‘… will probably be acquired by a large company at much higher prices.’

“The company has already proven huge resources, so the exploration risk is gone. As they continue to clear hurdles toward production, this stock should soar!”

This is another one that we’ve heard tell of before, the Thor Lake project (now called Nechalacho after a First Nations naming ceremony) that’s owned by Avalon Rare Minerals (AVL in Canada, AVARF on the pink sheets). This is indeed one of the most massive rare earth ore zones that anyone knows of, though it’s relatively low concentration compared to some other high profile sites, but Nechalacho is also unusually rich in the heavy rare earth elements, which are currently more valuable. This is probably the most important site in Canada and the second most important in North America (after Molycorp, which is private but has filed for an IPO — Molycorp owns Mountain Pass, which was the major US rare earths producer before China’s price cutting closed them down, and they’re already back in business processing previously-mined ore).

That first quote, that this firm “is going to produce huge quantities of rare earths ultimately,” is from Jack Lifton, who covers this industry very closely and writes a lot — some of his recent commentary is available in an interview you can find here.

RARE EARTH GIANT #3 A Rare Earth Strike 20 Kilometers Long!

“Rare Earth Giant #3 was one of the world’s best-performing stocks in the last 12 months — rising 8,400%. But the shares around $3.50 and there’s a LOT of room to run!

“The company has a market capitalization of just $131 million. However, the in-the-ground value of the company’s primary discovery is around $16 billion.

“But get this! They recently discovered another deposit, with a footprint FOUR TIMES LARGER and a potential strike length of 20 kilometers! The inferred resources discovered so far in this deposit would be worth an additional $13.9 billion!

“And did I mention that this company offers a valuable double play on uranium!”

This one is not all that recent, the discovery of the potential extension of a strike to 20 km on the south side of one of their projects was made last November — but yes, this stock made a truly massive fun from pennies to the $3 range (it’s fallen back a bit from $3.50, but still trades close to three bucks … this was actually the single best performer on the Venture Exchange in Canada in 2009, up about 5,000% in that calendar year).

Oh, and the name: This one is Quest Minerals, which was called Quest Uranium up until a few months ago (ticker is QRM in Canada, QSURD on the pink sheets). And yes, they do still have a uranium project, but their core focus seems to be on the rare earth properties in Newfoundland. This company, at least, makes clear in their materials that they’re an explorer — their description is that they are an “exploration company focused on the identification and discovery of new world-class Rare Earth deposit opportunities.”

So … more power to ’em, but the real problem with this sector isn’t that we can’t find rare earths deposits elsewhere in the world, the problem has historically been that there wasn’t enough money in it for anyone else to have a go at production, the Chinese were so good and cheap (and strategic) that no one else could afford to compete.

What’s really needed in the US, according to Jack Lifton and others, is a focus on production of rare earth oxides and the refining of those oxides into magnets or other products, the reclaiming of a high tech industrial heritage that we essentially gave up on because it was, at least temporarily, unprofitable. So it’s great that this company is exploring and identifying resources, and they may have even found some remarkably good targets, but they’re not going to be producing anything anytime soon — they’re far, far behind companies like Avalon, which itself is way behind Lynas (Australia) or Molycorp (California) in terms of developing a resource and actually moving forward with feasibility studies, financing, permitting, construction and production … let alone processing or marketing the actual end materials.

Which brings us to the last teaser target in this ad:

RARE EARTH GIANT #4 The World’s Only ‘Mine-to-Market’ Rare Earth Producer

“The Chinese don’t just have a monopoly on the elements. They also control nearly 100% of the processing. To avert a crisis, we need to build the supply chain too! And this company is leading the way…

“This is the ONLY company in the world with the ability to mine the material AND turn it into high-value magnets and alloys. It is also expected to be one of the first companies outside China to begin producing. And by controlling every step of the supply chain, the profit margins should be spectacular!

“The company’s resources aren’t huge, but they are extremely rich. One is said to be the highest-grade rare earth deposit in the world.

“Two of this company’s five deposits have rock in the ground valued at a combined $1.1 billion — yet the entire market cap is only $34 million and you can buy the stock today for just $0.20 a share!”

This one is Great Western MInerals (GWG in Canada, GWMGF on the pink sheets)

Great Western is integrated, with subsidiaries in Michigan and in the UK that focus mostly on permanent magnets, and they’ve recently refocused their mine development on an asset in South Africa called Steenkampskraal — this is a formerly producing mine that closed down about 50 years ago, and it seems to be permitted and have a feasibility study that was done in 2000 before rare earth pricing collapsed, so they think they could build and produce from this mine within about two years. They’re focusing on this mine largely because it could be brought into production very quickly and supply their downstream facilities with the raw materials they need to supply their customers.

Great Western had been more commonly talked about because of their Hoidas Lake property in Saskatchewan, but they seem to have pushed that to the back burner a bit as they continue metallurgical studies of the processing challenge from that site and work instead to advance the South African resource much more quickly. Great Western seems to be a key player for future North American rare earths production if only because they really are one of the few companies that’s at all integrated and producing right now (using raw materials that they mostly buy from China), so they are set up with customers and a reasonable plan regardless of the fluctuating prices of rare earth oxides.

So those are the four stocks apparently being teased by Michael Robinson, and the basic rationale of the rare earth element investment case — there are a few things to keep in mind:

First, by far the most advanced non-Chinese producer is Lynas (LYC in Australia, LYSCF on the pink sheets), a stock I used to own but don’t currently — they are mining at the Mount Weld site in Australia and building a concentrator onsite and a big processing plant/refinery in Malaysia to handle the concentrated ore. This one went through crazy gyrations for a while and even came close to being bought out by a Chinese company if the Australian government hadn’t put a stop to that plan. They have the advantage of some highly concentrated ore and a head start on the other non-China producers, but the performance of their stock during the downturn should serve to remind us that this is not exactly a blockbuster, easy-win business, prices are not sky-high and they fall when the economy falters, and margins are not particularly remarkable for any of the development projects you’ll hear talked about. Rare earths are undoubtedly strategically important, and the economic case seems pretty clear with China cutting off exports and raising tariffs, but the economics of mining rare earths (to say nothing of the metallurgical challenges of producing refined products) are difficult for everyone.

And second, there are several other investments available in the rare earth sector — there’s a major Chinese refining/sorting/processing company you can buy if you so decide, that one was teased by Robert Hsu a while back and is still roughly the same price now, and along similar lines the old Magnequench business that was formerly a US rare earth magnet company (production moved to China) is now owned by Neo Materials, a Canadian company that’s really a Chinese business, so those are two other options that are a bit further along the supply chain — since processing and refining these materials might be as much of a bottleneck as mining, refiners might see the value of their assets increase if overall demand increases substantially.

There are also a few other relatively high profile companies in rare earth exploration, with the most prominent probably being Arafura Resources (ARAFF on the pink sheets) with their Nolans mine in Australia (production target: 2013).

But wait, there’s more! There is also at least one company that’s essentially setting itself up as a direct investor in actual rare earth minerals (and other similar “minor metals”), Dacha Capital, which actually is buying up actual stockpiles of stuff like Yttrium and Europium — I have no idea how this will work out, they’re brand new and still tiny, but at least for now they trade right around net asset value (at least according to this release). You can see an interesting interview with a Dacha officer here.

There’s also the potential for a “minor metals” ETF from Van Eck, though they’ll have to include stuff like titanium and cobalt to make it feasible, since I think the “index” of rare earths producers that most folks cite is ridiculously small (as far as I can tell, it’s comprised pretty much just the companies I’ve mentioned above).

And finally, the news coverage tends to dramatically move the shares of many of these stocks — there was a high profile article late last week about rare earths that really focused on the China connection and on Mountain Pass, and also noted another US firm that has gotten the attention of at least Alaskan politicians, Ucore Rare Metals (formerly Ucore Uranium — ticker UCU in Canada, UURAF on the pinks) and its site in Alaska.

So there you have it — I personally find the logic of rare earth increasing demand, limited supply, and a looming strategic crisis almost unassailable, but the world, at least so far, is too complex for that simple logic to assert itself, especially when governments are involved, and the economics of the business and the price of the raw materials don’t really seem to reflect that logic in any meaningful way … at least, not yet. I know that many of my readers are avid followers of the rare earths business, and I’d urge all of you to share your thoughts below (and, as always, correct any misstatements I’ve made above).

Oh, and P.S.: There are dozens of smaller explorers in rare earths, and production in Russia and India, but there’s one other fairly major “Western” rare earths investment theme that I haven’t repeated above: Greenland — we saw the rare earths potential there highlighted by at least one newsletter back in November … for what it’s worth, that stock and the other one focused on rare earths in Greenland have both come way down in price since then.



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July 26, 2010 8:25 pm