Today we’ve got another “profit from the trade war pitch,” with Casey Research peddling a special report called “De-Fang the Red Dragon and Make 11X Your Money” as they troll for subscribers to Nick Giambruno’s Crisis Investing ($1,795 at the moment, no refunds… though you can transfer the sub to something else from Bonner, Palm Beach or Casey in the first 90 days). The ad is actually signed by Chris Reilly, an editor at Casey.
Sometimes, as in this case, the best summary of a sales pitch is on the order form itself — this is how they sum it up:
“Thanks to Nick Giambruno’s research, you can potentially make 11X your money starting with this one company… a tiny “defense supplier” …
“Who will soon be supplying the greatest military in the world—the U.S. Armed Forces—with rare earth metals…
“Thanks to new critical deal negotiated with the Pentagon.
“That’s because China is shutting down rare earths exports to the U.S. to retaliate this trade war…
“But let them…
“This tiny ‘defense supplier’ will soon kick-off a new rare earth refinery in Texas — the only outside of China and the first in the U.S.”
OK, so we’re dealing with another rare earth metals company — presumably a miner. We’ve written about those a few times over the past nine months or so, as newsletter pundits have been quick to recognize that another strategic move by China in the rare earths market could create another surge in junior rare earths miners stocks (as past moves did a couple times in the past fifteen years).
So far in the rare earth promo space we’ve seen Frank Curzio pitch Lynas starting last Fall and Alex Koyfman touting Hudson Resources in June for its Greenland rare earths project, and there have been a few others that I didn’t write about… so what’s the story this time?
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Let’s check the clues to be sure…
“China’s Military “Kill Switch” Has Nothing to Do with Computer Hacks or Firing a Single Missile
“China’s action will be much more powerful than any of those COMBINED.
“And our national security? Good as DEAD…
“That’s why the U.S. government is taking urgent action to avoid a national crisis.
“And in doing so, the Pentagon zeroed in on one source of this technology that lie out of China’s grips.
“A tiny company I consider to be the next big defense supplier…
“Whose main priority right now is to supply the U.S. military with this technology, under a new deal….
“Defense companies like Lockheed Martin, Northrop Grumman, and General Dynamics build these U.S. rockets, missiles, tanks, and fighter jets…
“And they all get their stash of refined metallic technology from China to give life to every weapon.
“According to national security publication Defense One, these defense companies privately clench their teeth in fear that China could cut supplies.”
So the CEO of this company says “negotiations are underway” with the military, and we’re also told the stock is below $3 a share. What other clues?
This is, we’re told, the only company outside of China that can supply the US with these materials. And what’s that bit about Texas? Here are the hints they drop:
“This company is so strategic, plans are already underway to have a supply hub in Texas for the American market….
“The company is now setting up the world’s ONLY rare earths refinery (outside of China)… in Texas.
“It will be the first of its kind— ever— on U.S. soil (good to see manufacturing coming back to the U.S.).
“And this refinery will have the capacity to produce at least 1,200 tons the final rare earth product…”
And then some financial daydreaming about what this will all mean for the stock:
“Just to be conservative, let’s assume this little company meets half the U.S. rare earth needs.
“That’s an added $80 million into the company’s coffers.
“And we have not factored in any potential increases in the price of rare earth elements.
“But what if rare earth metal prices surge 10-fold—as they did in 2010—as a result of the ongoing U.S./China trade war?
“That could take this company’s revenue up to $800 million i. Enough to turn this tiny company into a ten-bagger over time…”
So what’s the stock? This is, once again, our little rare earths iconoclast Lynas (LYC.AX, LYSCF), which shot to fame a decade ago as rare earths were going on their first modern bull run and they were building their Mt. Weld mine in Australia and beginning to build a refining facility in Malaysia to become a real non-Chinese supplier. The stock was also teased back in January by a different newsletter (Cabot’s Emerging Markets Investor), and this is what I wrote then:
“Lynas has been the only real survivor of the wild ups and downs of the rare earth minerals market, outside of China — production and refining is dominated by China, which uses it for strategic and political ends sometimes, so the pitch here is that China will throw its weight around again in this trade war and cause rare earths prices to skyrocket again, like they did in 2010 (the last time Lynas shares really soared). Lynas was a rare earths “story” stock a dozen years ago and has been producing for years now, but just barely got to profitability last year for the first time and has challenges with its Malaysian refining facility… but yes, if rare earths prices rise Lynas would be probably the safest clear beneficiary that has actual revenues and production and isn’t just a junior exploration story. If prices fall substantially again, they’ll have to rely on their “strategic” importance as the only real non-Chinese provider and hope customers want to pay up for that.”
Since then things have continued to be a little rocky for Lynas — they got a takeover bid from Wesfarmers, an Australian conglomerate, and talked about plans for an Australian refinery if they couldn’t keep their Malaysian operating license (there’s local complaint about the side-effects of some of the processing, mostly because some low-level radioactive waste is generated), though that takeover bid was dropped just this week.
At the same time, they’ve continued to operate in Malaysia and have been getting extensions on their operating license, but this latest renewal was for only six months — less than the three year cycles they had operated on before, and less than most investors had been hoping, and not enough to settle fears about their future.
And while the big-picture trade war stuff, where we envision China perhaps threatening to pull back on rare earth exports, is a positive for the Lynas “story” in the short term… the actual trade war is terrible for Lynas’ actual operations, because it is leading to corporate uncertainty and reduced production of all the stuff that uses neodymium and the other rare earth elements (electric cars, wind turbines, cell phones, etc.), which, you guessed it, means that demand for rare earths falls and the prices fall with them.
There is a Texas story as well, though that’s not going to have an impact anytime soon — Lynas is partnering with Blue Line Chemicals in Texas, which has a limited capability to process small amounts of rare earths, to build a “processing facility” in Texas to separate heavier rare earths, something that apparently is not done commercially anywhere outside of China (including in the Malaysia facility).
That project is of unclear size, and we don’t know what the timeframe will be — according to this FT article they signed a memorandum of understanding this past Spring, and news reports indicate that it will be a minimum of 2-3 years before they could be producing commercially, which means that for now it’s probably just a token in the ongoing negotiation with Malaysia and a foothold to a hoped-for strategic relationship with US buyers who could commit to pay above-market prices (like the military).
The US rare earths business was destroyed not primarily by evildoers, as I see it, but by a massive Chinese effort to ramp up production and destroy competitors by cutting prices… partly because they wanted to push rare earths customers to not just buy the raw materials, but to manufacture their end products in China. Essentially the same thing they’ve tried to do with steel and so many other products, it’s just that rare earths is a far smaller industry with fewer players.
There’s quite a bit in the pitch about the espionage, chicanery and skulduggery that led us to this point, with the Chinese seeing the long-term strategic importance of rare earth elements and understanding their own dominant reserves of those elements and using that knowledge to put a plan into place to take control of processing and refining those metals by acquiring companies like Magnequench and Molycorp others over the past 20 or so years… here’s a bit of the spiel:
“Magnequench was seized by rogue financiers called the Sextant Group, led by an American named Archibald Cox, Jr.
“It’s these guys who now put YOU, YOUR FAMILY, and every American’s national security at high risk…
“Because Magnequench and its highly-prized technology ended up in the hands of two Chinese companies…
“Beijing San Huan New Materials and China National Non-Ferrous Metals Corporation.
“Shockingly, both companies’ CEOs were son-in-laws of then-Chinese leader Deng Xiaoping….
“Magnequench’s facilities were moved from Idaho Falls and Indiana… and reappeared in Tianjin, China…
“Equipment and patents owned by the U.S. Department of Defense followed suit…
“To make it worse, Pentagon officials had no idea Magnequench was then owned by the Chinese… or that it was in Tianjin.”
Of course, part of the reason that Chinese companies were allowed to buy Magnequench and Molycorp was that the shareholders of those firms were bled dry and the companies were teetering on the edge of insolvency (or actually going bankrupt, in Molycorp’s case) — despite the strategic importance of rare earths, there haven’t been many companies who have actually made money producing them, and there haven’t been other countries outside of China who have been clamoring to set up rare earths refining projects, which tend to be dirty and messy and, worse, at least a little bit radioactive (rare earths are often found alongside elements like uranium).
And the rumors are that the Chinese, though not specifically threatening to cut off rare earths to the West just yet, are nudging President Trump and others with very veiled threats that they might weaponize that trade in the future if China keeps getting pushed on tariffs. If they do that, odds are pretty good that the narrative of “we need strategic non-Chinese rare earths, so they’re hugely valuable” will course through the market again, probably sending all the little juniors shooting upward again.
That’s an “if,” though, and, like many miners who face cost overruns and unpredictable commodity prices, these are not generally companies that are safe to hold for the long term — if they depend on the Chinese cutting off supply to get any funding at all, as is the case for most of these little firms (though Lynas is doing better than most, since they’re no longer an explorer and do actually produce the stuff), then that story will shift really quickly in the other direction once Chinese supply is cheap and available again… as it almost certainly will be at some point, despite the drumbeats of trade war. Maybe lucrative if the timing works in your favor, but certainly not safe.
So, again, Lynas is in a position to be both a beneficiary of and a victim of the trade war… though they’re on fairly precarious ground financially at the moment and have never really gotten to sustained profitability. That won’t mean anything if the Chinese cut off rare earths and headlines trumpet the need for strategic supplies and every newsletter in the world starts touting these companies and they all shoot higher… but if you buy because of that speculative possibility and it comes to pass, remember to think about selling before the trade dispute is settled. Over the past 20 years the strategic importance of rare earths has been trumpeted by companies and politicians, and the need for a non-Chinese source has been talked up by just about everybody… but when the dust settles, the threats are forgotten and the reliable low-cost producer, which will always be China in rare earths, has gotten all the business. Maybe that changes this time, but don’t bet too much on it.
Me, I’ll be watching this story from the sidelines. If you’ve got a thought on rare earths, or Lynas or any of the other players, please do share with a comment below… thanks for reading!