Lynn tells me that a bunch of folks have been writing in with questions about this “5G Keystone” pitch int he past few days, so I’ll take a look. Here’s the lead-in from Dave Forest, who’s touting what he says is an 81-cent stock and pitching subscriptions to his International Speculator newsletter over at Casey Research ($1,995/yr, no refunds):
“Analysts predict 5G could become a $17 trillion industry!
“Which means one thing:
“The supply crunch is setting up to be even bigger.
“And that’s great news for us.
“Because one 81¢ company owns one of the largest AND highest-grade neodymium deposits — in North America!
“To be exact, they hold up to 1.2 million metric tons of neodymium.”
So this is another pitch about rare earth elements, which have had a few big runs over the years — and which are the source of political fights between China, which produces almost all of these raw materials, and the rest of the industrialized world, which needs them for all kinds of high-tech gizmos, from smart phones to guided missiles. More from the ad:
“According to Global Times, one of China’s top state-run newspapers, the Chinese government is ready to halt all exports of neodymium to the U.S.
“Can you imagine what that would mean for the 5G rollout?
“I’ll tell you; it would bring America’s deployment of this breakthrough tech to a crawl.”
And the 5G connection is drawn tighter still…
“Back in 2010, as 4G was rolling out…
“The Chinese closed off all exports of this element to Japan, Europe, and the United States.
“And the resulting neodymium supply crunch caused a handful of tiny American stocks to soar…
“Not hundreds of percent… not thousands of percent… but TENS of thousands of percent!”
That had nothing really to do with 4G specifically, of course, but there were sure plenty of soaring rare earths stocks back then — here are the ones he name drops and shows little charts of:
“Avalon soared 13,271%…
“Quest surged 43.589%…
“And Texas Corp skyrocketed 45,000% in 4 months.”
That was an exciting time, for sure, and I remember the last real rare earths mania fondly… but don’t forget how challenging it is to trade these kinds of bubble stories. You’re not going to turn $1,000 into $4.5 million, not just because you probably won’t luck into the right stock… but, more importantly, because you’re not going to buy now and hold through a 43,000% gain and then sell at the top.
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Avalon Advanced Materials was a leader of that prior bubble mania and still exists, so we can look at the chart just to get a little context — yes, it was theoretically possible to buy it in 2003 or 2004 and show extraordinary gains into what we now know was the peak of that boom, in April of 2011, but would you have sold at a 1,000% gain in 2006, or after the stock later dropped by 80% or so in the 2009 crash? If so, no 10,000% return for you! (the chart shows 8,410% gains, I did not try to find the absolute bottom or top share price and buying it for nine cents would have led to a much more dramatic final return percentage than buying it for 11 cents, but that’s pretty close).
And, of course, we should remind ourselves of the old adage — nobody rings a bell at the top. If you were stubborn enough to hold on for your 10,000% gain… would you have been also stubborn enough to not sell as it collapsed from that peak? This is what that same chart looks like if we extend it out another ten years or so, to today — not a 10,000% gain, but a 40% gain (I threw the S&P 500 in there, just for some context):
Lottery tickets are fun, but they don’t compound on themselves — you have to redeem them for cash at some point. And nobody is very good and picking which exact point.
Which doesn’t mean that we should give up on finding exciting little stocks to trade, that’s a fun thing to do with small amounts of your portfolio that you can really afford to lose, just that we should not plan on 10,000% returns, or even 1,000% returns, or, if we don’t have portfolios that can easily absorb the cost, pony up nonrefundable $1,995 subscription fees in the hunt for such elusive beasts. They will come every now and then, for the patient and the stubborn… but remember that if you spend a lot of time chasing 10,000% gains, you’ll also find that they’re always accompanied by their friends, the 80-90% losses that help to absorb some of those big wins. (I’ve got a few 1,000% return equity positions in my portfolio now, just for context, one that took 15 years to get there and a couple that took three years, and those are great portfolio builders… and we’ve even had a few 20,000% returns on wild options speculations… but it doesn’t mean my whole portfolio has ballooned in value or that I’m doing a Scrooge McDuck Money Bin dive each morning, those positions weren’t large enough to put me in the poorhouse if they failed, so they also aren’t large enough to buy me a private island when they succeed. You don’t get returns like that unless you let great companies compound for decades, or you take dramatic risks.)
You know all of that, of course, you’re not a fool — but it’s hard sometimes to keep perspective when you’re staring down some financial pornography…
“… just ONE trade on this company could set you up for life.
“I’m talking about the ability to cover your kids’ or grandkids’ starter home, entire college education, and graduate degree.
“To travel first-class whenever and wherever you want… from the corners of the Caribbean with powder-white sand and warm, blue water…”
So… getting beyond that puffery, what are our clues about this 81-cent company? (The price is probably not 81 cents today, but it can’t be that stale — the ad is apparently circulating very heavily even today, and is currently dated “December 2020”). Here’s what we get from the ad:
“… one 81¢ company owns one of the largest AND highest-grade neodymium deposits — in North America!
“To be exact, they hold up to 1.2 million metric tons of neodymium.”
OK, I guess that’s a lot of neodymium. What else?
“Washington is pressing to decouple America from China’s supply chain completely.
“So, instead of getting 95% of our neodymium supply from China, we could get ZERO.
“Yes, goose egg!
“Where will all the money that usually gets pumped into China go instead?
“Well, the fact is:
“American tech firms will rush ALL of it — or at the very least, a good chunk of it — into a handful of tiny firms…
“Including the ‘5G Keystone’ company I’ve been telling you about.”
“this company is on track to supply America with neodymium — for nearly half a century!”
“… they not only have one of the largest and highest-grade deposits in the world…
“But they recently developed a proprietary technology that extracts neodymium at a purity of 99.999%.
“To my knowledge, this is the leading public firm in the U.S. able to do this.”
We get some clues about the CEO, too — Forest says he has 35 years of mining experience, and…
“He previously took a $124 million company to THE biggest U.S. mining company, which ended up selling for more than $1.7 billion
“He was vice president of one of the largest molybdenum mines in the world”
And the board is presumably full of grizzled veterans…
“the board has more than 148 years of experience in the mining industry”
“Two billionaires and a Harvard Business Review ‘Top 100 CEO’ have quietly signed on to support this tiny company.”
So where does that leave us? This is, sez the Thinkolator, Rare Element Resources (REEMF), which Forest has pitched before (it was one of the three “rare earths” ideas he teased, also as 5G plays, about a year ago — along with Namibia Critical Metals (NMREF) and Lynas (LYSCF)). And it is currently the best performing of those three older picks, mostly because of a big 40% surge today after they announced a preliminary deal for US government funding for their commercial pilot project for refining rare earths from their Bear Lodge mine in Wyoming. So on that front, the bad news is that the shares are indeed not at 81 cents anymore, though they were when the stock was a bit of a laggard in December, they’re at roughly twice that price today.
The good news? Well, they might have a deal to build this pilot plant within the next six months or so, and by sometime in 2024 they might have that plant up and running to prove their refining technology and help justify a larger investment in a large-scale project to process Bear Lodge ore (or maybe ore from other North American rare earths projects too, I guess).
How do we confirm that match? Well, the “Harvard Business Review Top 100” CEO is Gerald Grandey, who was appointed to the Rare Element Board of Directors in 2013 — he won that designation when he was the CEO of Cameco in 2010 (he retired from that job right around when the uranium market peaked for the second time in 2011, just FYI). He’s now the Chair of the Board.
And the “148 years of experience tallies up well with adding up just the disclosed years of experience of their consultants and advisory board members — “over 30” for CEO Randall Scott, 35 for George Byers, 31 for Jaye Pickarts, 10-20 for Kelli Kast, and a whopping 50 for F. Steven Mooney, who is still an advisor but stepped down from the Board of Directors.
Mooney is also a connection to the current CEO, Randall Scott, since both worked at Thompson Creek Metals when it was a major molybdenum miner — and, yes that company was sold at a nice profit after they built it up… though the only hiccup we get with the clues here is that the sale was for US$ 1.1 billion, not $1.7 billion (even if you go to the Canadian dollar it wouldn’t have quite hit C$1.7 billion, though it would have been close back then, when a US$ would have cost you about C$1.35).
And yes, the technology of rare element processing/separation has long been a focus for Rare Element — they reported that 99.999% pure “rare earth powder” capability back in 2014, right before the company pretty much went into hibernation for five years, at least as far as investors were concerned, with the Bear Lodge Rare Earth Project put on “care and maintenance” in 2016 to cut costs as they waited for a better rare earths pricing (and investing) environment.
The project seemed relatively reasonable when they released their prefeasibility study back in 2014, with a $300 million capital cost and 45-year project life, and with an after-tax net present value (NPV) of $330 million at a 10% discount rate… which is just math unless they actually get the financing to build it and those 2014 estimates still hold up, of course, and they don’t seem to have done any of that work yet. It wouldn’t be surprising if they hold off until the pilot commercial plant project is funded or built in the next few years and then try to finance, permit and build the mine on the strength of that… but, of course, this is a junior rare earth project — it also wouldn’t be surprising if it doesn’t get built at all.
If the mine at Bear Lodge is built, to be clear, it won’t have much to do with 5G, so that “5G Keystone” bit is mostly just to get your attention. Development takes time, at best it will happen after 5G is already pretty much fully available across the industrialized world — I can’t claim any great expertise about the project, and I don’t know the future, but this is not a financed or permitted project, it’s still early days — so there’s very little chance that the mine could be built within the next five years, and if they don’t get aggressive about development very soon, and raise a lot of money, even that would be a stretch.
In their favor is a strong partner, General Atomics, so that’s good — they provided some of the funding that kept Rare Element going over the past five years. And it’s also good that they might get this government deal to finance the construction of a pilot plant to prove out their refining technology, though that’s also not all that likely to move very fast.
So what happens to the stock price in the next few years depends on investor sentiment above all else, of course, that’s what generates wild bubble markets in rare earths stocks. I’ll just leave you with the historical chart for Rare Element — this is what the share price has done over the past 13 years…
What does that mean? Well, I think of it as being kind of like a Rorschach Test — whether you look at that and salivate over another 2010 spike in rare earths stocks, or fret over the five years of “care and maintenance” and the 99% drop from the peak, is really what will determine whether this is the kind of speculative idea you’re going to get excited about.
Do let us know which way you lean with a comment below, I’m sure there are plenty of Gumshoe readers who follow junior miners more closely than I do — see reasons to believe, or reasons to beware? Please share.
P.S. if you’re looking for the second stock he teases in this ad, the one that points to a special report they call, “5G’s Underground Supplier: The #1 Copper Investment in America?” I expect that’s likely a repeat of the pitch for EMX Royalty (EMX) as a copper royalty company, I wrote about that one here in August when Forest was teasing it as a play on electric cars. Not a bad idea, they have a few really appealing assets, some of which are probably under-appreciated, and I’ve considered buying shares a few times… though I still prefer Altius Minerals (ALS.TO, ATUSF) in that little “base metals royalties” segment of the market.