Matt McCall is out with a pitch for his MegaTrend Investor over at Stansberry Research ($2,500, no refunds), and, though he remains a perpetual optimist when it comes to tech stocks and the “this will be the best decade yet” promises, the pitch this time is for rare earths mining. Which, to be fair, is mostly a technology story, too — rare earths are critical ingredients in lots of high-tech products, from defense to consumer electronics. The bait for your subscription dollars is his special report about six top rare earth stocks he thinks you should buy… and we’ll get to that in a few minutes (we’ve got clear answers from the Thinkolator for five of the six).

Which will ring a bell to anyone who’s been aboard the good ship Gumshoe for more than a few years — we’ve had one wild bubble market for rare earth miners (or explorers, mostly), that was back from 2009-2011 or so, and there have been a few other mini-bull markets for these stocks over the years, most notably during the “trade war” chatter pre-COVID and again in early 2021, when a new generation of investors learned about speculating in junior mining stocks.

Some quick back story? Rare earth elements, sometimes called rare earth metals or rare earth magnets, are way down the periodic table, often found in uranium deposits, and are critical to all kinds of gee-whiz newer technologies, from guided missiles to iPhones. The production and refining of rare earth elements is dominated by China, partly because that country is, as they have claimed in the past, the “Saudi Arabia of Rare Earths”, and partly because China has often been friendly to the kind of dirty, difficult refining process that separating and preparing these elements for industrial use requires.

It has also been a key part of their industrial policy at times, using export controls and low prices to help to push foreign manufacturers to put their factories in China if they want to use Chinese rare earths — or even to push around the Japanese by turning off their access to these critical elements as they fight over disputed territories, or to dangle threats about cutting off the US when “trade war” talk heats up. The anxiety about this outside of China was ramped up with the move last year to merge several of state-controlled Chinese rare earths companies into one mega “strategic metals” firm called China Rare Earth Group.

So whenever there’s a dispute, the worry that Chinese rare earths dominance might be used as a cudgel gets trotted out again — often by junior mining companies that are exploring for rare earth metals but who never seem to get anywhere near the point that they can actually build a mine… perhaps because the disputes always seem to end, and no one seems excited to finance a mine that has to compete with Chinese production on price. A dozen years ago, the leader of the resurgent rare earths business was Molycorp, which got some government funding and raised money in an IPO and briefly re-opened the historic US rare earths project at the Mountain Pass mine in California to try to restart meaningful US production… before falling into bankruptcy in 2015, as prices collapsed again, and getting bought out by some hedge funds and a junior Chinese partner.

There is clearly also a strategic imperative for companies and governments to ensure access to necessary supplies of these critical elements — the government maintains a stockpile, and presumably some companies do as well, but we’ve been through a few speculative cycles for rare earths in the past couple decades as the headlines create panic and imply that the West will soon be spending billions to build up rare earths mining and refining capacity, and so far those cycles have always led from spike to crash, like every other short-lived commodity bubble.

So… are we building up to another situation like that? That seems to be what Matt McCall thinks, and he’s not alone — when it comes to the “spike” part, at least, I don’t know if he thinks they’ll crash again afterward (from my past experience with rare earth speculators, nobody sees the crash coming when they’re giddy about the price spike).

It’s a complicated business, even compared to other mining projects. Finding economic deposits of rare earth minerals is a challenge, getting permitted to mine them, sometimes with radioactive waste material, is tougher still, and finding or building a refinery to do the dirty work of processing and separating the elements is the hardest challenge of all. Especially if you’re trying to do it without relying on China for the dirty work.

It’s also a business that is more complex than it sounds from my quick intro — there are 17 different rare earth elements that have different uses, each mine includes a different mix of them, and each one is in a different situation when it comes to relative scarcity and value, whether you’re talking strategic or monetary value. And, of course, there’s a big difference between a rare earths mine and a rare earths deposit — there have been lots of deposits discovered over the years, and trumpeted during times of manic excitement in the sector, but, as with any other sector of the mining business, a lot of them probably will never actually turn into mines. None of that may matter if you’re speculating on another stock market mania for the rare earths companies, in those periods of excess they all tend to move together, but it does matter over time if you’re thinking of these as long-term investments, or as companies that you expect to be profitable operators for a decade or more.

Enough buzzkill for you? Sorry, just wanted to get a little “reset” there if you were still too hyped up by McCall’s “1,000%” talk. It’s hard to think critically about an investment when there are little “1,000%” thought bubbles bouncing in front of your eyes.

OK, let’s move on to see if we can ID which miners McCall is teasing… he starts us out with the big picture story, about how President Biden (and before him, President Trump and others) have designated rare earths as strategically important minerals, and promised to spend federal money to make sure the US again becomes a producer of these elements…

“I discovered that President Joe Biden re-invoked a 1950s law just weeks ago. He did it to get around asking Congress for permission… and unlocked more than $10 billion in funding… alongside as much as $600 billion.

“And I soon realized I wasn’t the only one starting to pick up on what was happening.

“Hours after the law went into effect, Warren Buffett’s Berkshire Hathaway committed a multibillion-dollar investment to this sector.

“And they were far from the only ones. This sector is up over 160% from 2020 and cash flows have eclipsed $5 billion, a 13x increase over the past two years.”

To be clear, Berkshire Hathaway has not committed a “multibillion-dollar investment” to rare earth minerals production. Berkshire Hathaway Energy spends a lot on energy storage and “green” energy projects, including big wind farms in Iowa, and they have ancillary connections to a lot of rare earths projects — they’ve bought a lot of Occidental Petroleum stock, for example, and Occidental has in the past had some properties that have rare earths deposits (as have most oil companies, a legacy of the days when they found most of the uranium deposits in the US), and Berkshire’s largest investment is in Apple shares, and Apple is certainly interested in batteries. It’s very indirect, but people love to try to attach Buffett’s name to anything they’re touting.

That reference is to the Defense Production Act, by the way, another legacy of 80 years of building the “imperial presidency” as Congress twiddles its thumbs. The President, in the broadly-defined name of “defense,” has some authority to direct national industrial policy and support critical strategic industries, whether that’s toilet paper and masks during the pandemic or rare earth element mining. President Biden’s use of the Act back in March was largely seen as a push to support critical minerals for battery production, which includes things like lithium, graphite and cobalt, none of which are “rare earths,” and the government has also been focused, in budget talks, on rebuilding the National Defense Stockpile of minerals that are critical to the defense supply chain, including rare earths as well as stuff like titanium, so there seems to be interest in funding projects in the US and “friendly” countries that can provide strategic value.

He also includes a quote from Barron’s, which always helps to make an idea seem legitimate:

“As Barron’s reported:

‘This is the kind of area where the U.S. Government will shoot a fire hose of money at a problem…

‘The U.S. Government is about to throw money at companies in this industry. Grab a bucket and get busy.'”

That’s from an article back in March of 2021, in case you’re curious — the quotes were from Sean Brodrick, who has long been a newsletter guy, too (he was pitching Molycorp in his teaser ads way back in the Fall of 2011, too, a year after that miner had an absurdly well-timed IPO just as the rare earths mania was heating up… and just as it was starting the multi-year decline that ended in bankruptcy). The conventional wisdom from that article was to bet on the sector through the VanEck Rare Earth/Strategic Metals ETF (REMX), which has had its ups and downs over the past few years but is currently up about 20% since that Barron’s story appeared (the S&P 500 is up about 8%).

McCall says he visited California and Texas, climbing a mountain to see some of the sites where money might flow as rare earths heat up again… from the ad:

“… what I found on that mountain will drive our economic and geopolitical future for the next 50.

“Countries will fight over it. Wars will be won and lost. The future of entire nations will be determined by how they secure their own access to this critical resource….

“The only way to get rare earths is to pull them directly from ore deposits in the earth and refine them to extract the purities.

“And the most important part to our story today is China’s stranglehold on these critical materials. Finding our own access to them will determine our global power and prosperity for the next 50 years.

“Which is why I believe you could conservatively make 10x-20x your money… as America invests like never before to make sure we have greater access to these minerals than any other nation in the world.”

And it should come as no surprise that it’s entirely possible for the US to again become a major rare earths producer — I don’t know what the odds of success are, given objection to these projects in most communities where mines or refineries are built, but 30 years ago the US and China were roughly equal players in rare earths, each producing about a third of the world’s supply. More from the ad:

“According to National Defense Magazine, the U.S. could meet 85% of our own global demand for rare earths…

“Just like we were able to produce enough oil to run our own country, and still have plenty left to export.

“But we need new and existing sites to open over the next five years or so.

“And now that the 1950s bill and other government funding projects like it have created as much as a $610 billion windfall into this sector, I believe price is no longer an object.

“This dried up industry is coming back… I saw it for myself….

“… the biggest potential returns, by far, are in the mining companies. That’s where the chance to make 10x, 20x, 30x gains lies, just as we’ve seen in Canadian and Australian rare earth markets.”

So… he says that there’s a ton of money flowing into the sector, and that since there aren’t many viable companies and projects (he says there are only 26 companies in this sector, outside of China), that could create a big catalyst. In his words, “the single biggest catalyst I’ve ever seen for a moneymaking event.”

Do we finally get to the nuts and bolts of the tease? Indeed…

“… out of the small number of small-cap rare earth miners based in the U.S… I’ve reviewed financials, debt, capacity… all the factors critical to success. And I believe I’ve pinpointed the best, those likely to explode higher.

“What I found will rival any other bear market opportunity I’ve uncovered to date.”

Time to haul the Thinkolator out of the garage, pull off that tarp, and pull the starter cord. Ready to shovel in the clues and get you some answers, though with five names I’ll have to be a little brief in my analysis of each one… this is what we get for the five companies he’s teasing:

“Company No. 1:

“The mine this company owns is the biggest producer of rare earths on the Western Hemisphere. Some say it’s the second biggest producer of rare earths in the world.

“And I confirmed, those deposits are still there and going strong. They have decades of materials left to pull out of the ground.”

That’s MP Materials (MP), the current owner of the Mountain Pass mine in California. After their bankruptcy and rescue by hedge funds and a Chinese investor back in 2015, they came public again through a SPAC merger in November of 2020.

Compared to many other SPAC mergers it’s been a somewhat steady story, and it is currently a profitable company. It’s not tiny, the market cap is around $6 billion, and that’s a little tough to swallow for a mining company that’s valued at about 13X sales, but who knows what another rare earths mania might bring (the only large companies in “basic materials” who generally get a valuation like that are the gold royalty companies, with an occasional “story” stock in mining thrown in).

The potential downside for this particular story, should you be looking for that, comes from a short seller, Grizzly Research, which called it “smoke and mirrors” after the SPAC deal and particularly cited the Chinese connection as a risk. I don’t know if they’re right, but it is by far the biggest US rare earths mine and “story.”

I’d be a bit worried that because MP Materials is a pretty large and profitable company, it’s going to miss out on any kind of “mania” that could emerge in the rare earths sector. Maybe not, maybe there will be so much money pouring into rare earths that even a pretty well-known and stodgy operation like MP will see much higher sales as prices rise rapidly, but it can’t have the same open-ended craziness as all the much smaller junior miners in the rare earths space. On the other hand, the income statement indicates that Mountain Pass is profitable at current rare earths prices and with current production, and they do have $600 million or so in net cash, so it’s not likely to lose 90% of its value overnight if investor interest fades.

Analysts currently expect them to be growing production and earnings over the next few years, and the stock is trading at about 23X earnings.

Next!

“Company No. 2:

“The other site that I visited and vetted… is where all the rare earths pulled from the biggest mine in the Southern Hemisphere will be processed. And they just received a massive grant. The Pentagon awarded them $120 million to step up production.

“And, while they’re one of the biggest processors outside of China, they’re still struggling to keep up with demand. Which is perhaps why they’ve announced they’re on track to double their already robust output of rare earths by 2025.”

That’s Lynas (LYC.AX, LYSCF), probably the most widely-teased rare earths producer in the world over the past decade — mostly just because they were the first to really establish an operating mine and build a refining plant and actually sell meaningful quantities of rare earths materials without dealing with China.

Their Mt. Weld mine is in Australia, and they built a refining and separating facility in Malaysia about a decade ago, though that facility has come under some political fire from time to time and the government has threatened to close it, creating a lot of uncertainty over the years. This year Lynas began building a refinery in Western Australia which could help reduce their reliance on Malaysia, but they are also trying to expand in Texas, with a new refining/separating facility for rare earths (that’s been underway for a couple years, with a small test facility, but they did get another $120 million from the US to expand this year… they now expect to build a new plant that will be operational in 2025). I would say that pegging this planned Texas facility as the place “where all the rare earths pulled from the biggest mine in the Southern Hemisphere will be processed” is a pretty substantial exaggeration, Lynas plans to have three refining facilities by the time this one might go online in 2025, and the Texas one might even be the smallest of those three, but maybe it will end up being critical to a key step in the process, who knows what the future holds.

Lynas, like MP Materials, is quite large and pretty richly valued for a mining company — it’s also got a market cap of about $6 billion, and has been marginally profitable, off and on, over the past six or seven years.

Moving on…

“Company No. 3:

“Another rare earth company I stumbled upon in my research is a rare earth miner already, and one of their first refineries just got approved. They have $70 million in funding already deployed… and another $81 million in royalty payments going towards the endeavor.

“Soon, they will be a full-service rare earth producer, making their operations even more profitable. And those refineries are going to come in handy, since their mines have robust deposits of select rare earths.

“Just the sites they own now have stockpiles of rare earths that are expected to last until 2034. They also have another $1.25 billion in loan funds waiting.”

That seems likely to be the Eneabba processing plant under development by the mineral sands miner Iluka Resources (ILU.AX, ILKAY), which would process the stockpile of material they have on hand but also would have spare capacity to produce about twice as much, and to operate for decades instead of the planned ten years. This is also an Australian company, and an Australian project — rare earths have not historically been their primary focus, but they are looking to build a larger refining facility in Australia than Lynas, and they do have that substantial $1.25 billion funding available from the Aussie government (that’s Australian dollars, so roughly US$870 million).

Iluka is also the 20% owner of Deterra Royalties (DRR.AX, DETRF), which I own, Deterra was spun out of Iluka a couple years ago and has a royalty on a large iron ore mine (Mining Area C in the Pilbara) as well as royalties on some of the small and not-currently-producing mineral sands projects, including some rare earths. That provides some cash flow to Iluka, which is likely to be helpful as their strategic transition continues.

The company has recently spun out their Sierra Leone assets into a separate company called Sierra Rutile, SRX.AX), in order to focus on their “strategic metals” in Australia — and though rare earths are not a huge part of their revenue stream, part of that strategic shift is a meaningful investment in rare earths through some mineral sands production as well as that refinery project. Currently, the big commodity drivers for them are the zircon and rutile they are currently producing in Australia (rutile is a feedstock for titanium production).

That historic lack of a big rare earths “story” at Iluka, and the uncertain timeline for their strategic shift to produce more rare earths, are probably why the stock is pretty cheap — it trades more like a regular ol’ mining company, at about 10X earnings. Maybe that will turn around as they ramp up their rare earths story and begin producing more neodymium and praseodymium, maybe not, but it’s an interesting story, and not one that’s very closely followed by US investors. I’d rather invest in Iluka than either Lynas or MP Materials, but I don’t know if it will be as exciting a trade if we get a rare earths mania.

And there are more… let’s see if the clues are good enough for some certainty out of the Thinkolator…

“Companies No. 4, No. 5, and No. 6 are equally as impressive:

“One of the companies specializes in the one rare earth material that China is forced to import… and this company is entering into contracts with 10 parties to become the processor for around 85% of the world’s supply. Their rare earth mine has a projected life of 38 years. That gives this company a true chance at an incredible 50x gain, or I believe it could go higher. Especially with financial backers, like Hyundai, who they just signed a deal with.”

That’s Arafura Resources (ARU.AX, ARAFF), also in Australia. Unlike the others, this one’s a non-producing small-cap story, with a market cap of about $300 million. They’ve been around for 15 years or so, like many of the rare earths story stocks, so they had their 1,000% run in 2010, and the big-picture rare earths story drove some more investor investor interest their way again over the past couple years, but they’ve never actually gotten to the point of building a mine. They say their Nolans project in Northern Australia, which does indeed have a 38-year estimated mine life and is concentrated on the magnet-related rare earths, neodymium and praseodymium, and they have also gotten some government and industry support, including Australian government funding up to A$230 million or so, and that offtake agreement with Hyundai. They seem to have a strategy in place for the roughly $1 billion in capital they need to build the project, though I guess that story could change (“in place” doesn’t necessarily mean “committed and ready to write a check,” though there is a lot of money pushing for a rare earths decoupling from China at the moment so the odds seem reasonably good). And Arafura plans to make their final investment decision for the project at some point this year, so it could be a news-heavy period… and they could, if all works out fantastically well, begin producing rare earth oxides in three years or so (they say construction will take 26 months… but miners are always pathologically optimistic).

Next?

“Then there’s another company that acquired a mountain in Texas that is chock-full of rare earths. As an established miner already, they have the means to develop this project. In fact, they already have produced rare earths for the Department of Defense. And the diversity of their rare earth deposits is incredible – they’re mining 15 of the 17 rare earths.”

Well, they’re no dummies — they know that stock prices in this sector are built on strategic themes and “look out for China” stories, so they’ve named themselves USA Rare Earth. That company is still private, but their junior partner, from whom they acquired at least some of the properties and assets, is Texas Mineral Resources (TMRC). So that’s our stock here: TMRC is a 20% owner of the Round Top Project being developed by USA Rare Earth, and also owns some other rare earths projects (including a “rare earths from coal” project). Seems like they’ll be a junior partner to USA Rare Earth, which raised a bunch of private money, and they’re very small (market cap around $150 million), so they’re not necessarily in control of their destiny, but the project has quite a bit of funding and could get some attention if the rare earths story erupts.

“And the last company acquired a mine that creates one of the most coveted and rare materials found in the most sophisticated tech. Their sales are up 80% from a year ago since they announced their switch to rare earth production.”

This one I can’t be sure about, the Thinkolator didn’t spit out a certain answer… so we’ll toss out a guess, perhaps this is the Nechalacho mine, which is now owned by a little company called Vital Metals (VTMXF). Nechalacho was also a focus of the last real rare earths mania a dozen years ago, it was first really explored by Avalon Ventures, which became Avalon Rare Earths and is now Avalon Advanced Materials (AVL.TO, AVLNF) — so that’s the cautionary tale for these kinds of companies, Avalon was the belle of the ball in 2011, and briefly reached out its finger and touched a billion-dollar valuation, but is now a little $35 million penny stock. On the other hand, if things go well at Nechalacho, which is in Thor Lake up in the Northwest Territories of Canada, then it might benefit Avalon, too — Avalon still has a royalty on the project, and they still own the “deeps” — Vital Metals owns the project down to something like 150 meters, Avalon owns below that.

That’s a wild guess, to be clear. I bring it up mostly because Vital Metals did acquire the project within the past year or so, and is ramping up initial production. You can check out their presentation about the initial phase of the project if you’re curious.

And I’ll leave you with this, from McCall:

“If I’ve learned anything over the last 20 years, it’s that a basket approach works when you find the next big breakthrough in a sector or technology or invention.

“That’s, in part, why I’m NOT giving out a free recommendation today.

“Because the recommendation I would have given could be the one that goes up over 2,000%… or it could be the one that doesn’t. To me, I’d rather you get a 1,000% average by buying all six of the stocks I recommend today… than risk just buying one.”

Will he be right about the 1,000% average? I have no idea… though we can say, at least, that most of those projects did inspire 1,000%+ moves way back in 2009-2011, whether they were owned by the current operator or explorer or someone else, so if there’s a mania those kinds of returns are possible. We’ve never seen them with a $5+ billion rare earths mine operator, to be clear, those kinds of returns are easier to imagine when you start with a sub-$500 million penny stock that catches the attention fo speculators with good drilling results… but if we get another mania, anything is possible, and the more “grown up” companies in this space would, at least, benefit nicely from a big runup in rare earths prices if we enter into a strategic arms race over those commodities.

I don’t own any of those (other than Deterra, which is loosely connected to Iluka), and I’m not itching to get into a commodity speculation at this point… but it has definitely worked a couple times in the past. If past is prologue, I’d just urge you to remember the old adage that was popularized by Seth Klarman a couple decades ago: These might be trading sardines, not eating sardines

(Klarman included the sardine story in his book, Margin of Safety, but also used it in some recent letters to his investors — here’s an excerpt from one of those Baupost letters, in this case referring to bitcoin: “There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.'”)

So what say you, dear friend? It’s your money, so you get to make the call — ready to speculate on the next wave of government spending to boost non-Chinese rare earths, or on the likelihood that a trade dispute with China could cut off the cheap flow of rare earths and lead to massive price increases? Think the stocks already reflect the glow of that story, or reluctant after being burned by the 2011 collapse in rare earths? Have a favorite among those five or six names? Let us know with a comment below. Thanks for reading!