The Missing B-52 and Greenland’s Uranium and Rare Earths Future (and some other Rare Earths Ideas)

Revealing a rare earths pick from Chris Mayer

By Travis Johnson, Stock Gumshoe, October 20, 2010

This is a note about a teaser that you can probably solve yourself — and many of you doubtless have. And it’s also about a company I’ve written about before, about a year ago … but the questions are piling up and the enthusiasm behind this stock over the last week is a little ridiculous as a result, so I thought I should take a look and focus on a few of the key points for you.

The tease in question is from Chris Mayer for his Mayer’s Special Situations newsletter — one of those “trade up” newsletters that convinces current subscribers to the $99 letter to try the $995 version, the one that has the more exciting ideas about small cap stocks, or stocks on foreign exchanges, or something else exotic about its countenance that means but a few hardy souls are welcome aboard (otherwise, of course, there would be too many investors “in the know” and the price of the chosen picks would be driven too high … forgetting, for the moment, that teasing the idea with transparent clues like this to a few million of your closest friends is also going to drive the price ballistic, but of course by then many of the paid subscribers are already aboard and Mr. Mayer’s pick looks even more prescient).

And the tease, of course, came in the form of one of those insufferable videos — and yes, I sat through the whole thing just because I love you.

If you haven’t yet availed yourself of this special ten minutes of promo-speak, I’ll give you the gist from my notes (this time around the video didn’t have a text equivalent, unfortunately, so I can’t do much direct quoting because, well, I’m too lazy to transcribe).

The B-52 bit is tied in a bit with the present day politics in Greenland, so there is at least some honesty in that story (though it is, of course, not as linear as the ad might imply) — there was an accident as a crippled B-52 tried to do an emergency landing at Thule in Greenland in 1968, and the plane happened to be on armed patrol at the time with a complement of atomic bombs. The plane crashed a few miles from the air base in a huge fireball, and while the nuclear bombs didn’t explode the fire spread radiation and caused some fallout. I have no idea how much or what the long-term impact was (there was a good article on this in the LA Times many years ago, you can see it here if you want more of the story).

But one impact, at least to some degree, was a prolonged reluctance on the part of Greenland, until very recently a Danish territory, to have any part of nuclear facilities or uranium mining, despite the fact that it’s been known for some time that there are uranium deposits on the island. This is also very likely a more generically political and ideological stance, as the ban on uranium dates back to the 1980s and the global nuclear freeze movements. Mayer’s argument — and we’ve heard this from multiple folks, too — is that Greenland’s recent moves to independence will open up their territory not only to mining and resource extraction in general, since they’ll need to build an economy to replace Danish support eventually, but to uranium mining specifically.

And this is indeed happening, at least to some very limited degree (and investors like nothing more than to take a crack in a dam and extrapolate a future flood). He cites the recent decision by the government to relax this restriction slightly as a key development, and he appears to believe that actual uranium mining is just about inevitable.

The actual revisions and relaxing of the zero-tolerance uranium policy do appear to be aimed pretty much squarely at the company being teased in this ad, which is clearly Greenland Minerals and Energy (listed in Australia at GGG, or GGGO for the options, and at GDLNF on the pink sheets).

And yes, the stock has shot up since the most recent announcement in mid-September, and even more so in the weeks following as word has spread through the rare earths investing community thanks to several different newsletter touts and, of course, to Chris Mayer, who appears to have written some about this topic back in June and updated his subscribers within the last week or ten days on the topic — and, of course, to have facilitated the dispersal of the idea even more with this compelling teaser ad that couldn’t possibly refer to any other company.

The relaxation of the zero-tolerance policy in the Greenland mining code essentially means that they can continue to explore and develop the resource of their main deposit, which is indeed, according to their exploration so far, a large rare earths deposit in Southern Greenland. It does NOT mean that they can mine uranium, or even that they have the go-ahead to mine rare earths, just that they can include the uranium in their resource estimates, and that the zero-tolerance policy is likely to change in practice to allow for extraction of rare earths with some minor uranium byproduct (.01% was the last number I saw, though I don’t know if that’s in the law).

And yes, it probably helps that they’ve signed on the former Prime Minister of Greenland, Lars Emil Johansen to head their Greenland subsidiary.

Greenland is going to probably see some hiccups as their new resource economy emerges (if indeed it does), and this project could potentially be a major one — though certainly Greenland’s potential as an oil producer gets more attention in the mainstream press, at least. As to whether this nascent project that has gone from a political impossibility to a potential mine is worth a dollar, a dime, or ten dollars … well, that’s all based on calculations that seem pretty impossible to make with any certainty … like how long it would take, how expensive it would be to build a mine in Greenland far from any mining infrastructure, how they would process these ores, whether indeed the uranium content resurfaces as a problem, whether the current rare earth strategic crisis emerges as an international and investor priority or goes back underground for a while … well, you get the idea.

And there is another rare earth explorer in Greenland that I’ve written about too, Hudson Resources (HUD in Canada, HUDRF on the pinks) — that was a Brian Hicks tease about a year ago when he called Greenland the “Saudi Arabia of the Arctic”, it hasn’t had anywhere near the traction of Greenland Minerals and Energy but has certainly gone up nicely with the improvement of the regulatory climate in Greenland recently. And there are a few other mining companies getting excited there — London Mining (LOND in London, LIIGF pink sheets) wants to mine iron ore, Ram Resources (RMR in Australia, RAMJF on the pink sheets — not the same as the geothermal company Ram Power, by the way) just bought a private company with a Greenland exploration project, and Prime Minerals (PIM in Australia) apparently has some exploration tracts that they don’t discuss much near Greenland Minerals and Energy’s big project, though they’re primarily an Australian uranium company.

If you want to follow the developments and the political movements, the company certainly does a good job of communicating the positive developments, at least (though that also tends to be a strong suit of every rare earth explorer, all of whom can recite the China monopoly bullet points to you in their sleep) — their website is here.

Personally, I buy the argument about the strategic importance of rare earths, and the critical need to diversify global supply, but I wouldn’t want to place my only bet in Greenland — I’m still much more comfortable with the far more advanced projects like Lynas’ Mt. Weld (though I no longer own Lynas or any of the other rare earth companies, to my regret). And to that matter, I should note that Mayer also teases the bigger picture on rare earth elements, and he throws out a few hints about some of his other favorite stocks in the sector — I’ll try to run down those quickly as best I can:

“Rare Earth Play #2: small oceanic firm stakes claim to one of the largest rare earth deposits worldwide”

We’re teased that this will be the rare earths firm that “beats Greenland” in the race to develop the first new refinery outside China, though given the early stages of the Greenland projects I’d bet that there will be others that beat them, too (refining is a core competency of the Chinese — they have lots of the rare earths in the ground, but arguably of greater strategic consequence is that they have effectively all of the globe’s capacity for highly specialized rare earths refining to create usable end products.

And we’re told that this company had to raise $400 million last year just to survive, that they increased the estimated size of their deposit by 20%, and that they have two processing plants underway that have all the necessary approvals, and they should begin production in 2011.

So what do you know, but this is actually Lynas Corp (LYC in Australia, LYSCF on the pink sheets). And that equity raising was not a foregone conclusion — it was about a year ago and they sold a BILLION shares, almost tripling their share base, in order to recover from the failure of their planned takeover by a Chinese company (ironically enough) and restart what had been halted progress on their mining at Mount Weld and their concentrator plant on site and their refinery in Malaysia (the concentrator will create more concentrated ore for more cost-effective shipping, but the final refining will be done in Malaysia).

“Rare Earth Play #3” is described as a North American play on “heavy” rare earth elements — the “rarer rare earths” that are usually found in roughly 3% concentrations in rare earth ore but are, we’re told, in 20% concentration in this particular resource. And that’s enough to tell you that this is Avalon Rare Metals (AVL in Canada, AVARF on the pink sheets) and their Nechalacho deposit in the Northwest Territories (formerly called the Thor Lake deposit). Avalon is one of the stocks that gets plenty of attention in this sector, and if you’re a REE enthusiast I’m sure you know it well — they’ll probably be the first to produce “heavies” in North America, though there are other non-Chinese “heavies heavy” rare earth deposits being developed, including one from Stans Energy (RUU in Canada, STZYF on the pinks) which bought the rights to the Kyrgyzstan mine that supplied the Soviets with their rare earths (that deposit is apparently 50/50 heavy and light REEs).

And finally, we’re told that there’s an Australian company with new proprietary advancements in the separation/refinement of rare earth elements that will help them move further up the value chain and make their mining resources more valuable. This is undoubtedly Arafura Resources (ARU in Australia, ARAFF on the pink sheets), which did announce some advancement in their separation technology, being tested in a mini plant, that apparently was significant enough to get them at least one analyst upgrade. These shares are on a tear, too, like pretty much every rare earth stock, so although Mayer teased it as a $1 stock it’s up to about $1.70 (it was at a buck a month ago).

So there you have it — some more to chomp on in the way of rare earth elements, a topic that we’ve addressed several times over the past three years in this space, and some stocks that we’ve seen make huge moves both up and down in recent years … they’re all on a big move up right now thanks to Chinese export controls, more investor attention in general, and, in the case of the Greenland stocks, a bit more hope that their exploration projects will eventually become mines now that some of the regulatory limits are being moderated.

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Oh, and aside from the myriad other exploration-stage stocks that I won’t list here (though I should mention the other near-term producer, the recently IPOd Molycorp — ticker MCP — that’s restarting the Mountain Pass mine in California and will probably continue to dominate US rare earths headlines), you can also buy the rare earth elements more or less directly if you so choose — there is a publicly traded investment fund that just holds the actual ores and oxides, both inside and outside of China, and it trades basically like a closed-end fund (though they may well be able to easily issue more shares, I don’t know the details). This is Dacha Strategic Metals, they don’t have the leverage of a mining company but they do ride on investor sentiment for and actual pricing of rare earths — and at the moment the stock is trading at about a 20% premium to the net asset value of their metals stockpile. If you’re interested in this more direct exposure, they trade at DSM in Canada and DCHAF on the pinks — and you can see the information they make available, including their monthly report on the net asset value of their metals cache, on their website here. The last report I saw was that their net asset value was 43 cents on September 30, and the shares are currently trading at 53 cents (both Canadian, not that it makes much difference anymore), with the stock jumping by about 10% just this morning, so this one is, like all the rest, extremely volatile as investors fall in and out of love.

Oh, and I should also note that as I’m typing these final words, China has reportedly begun signaling that they’re not comfortable with the politicization of rare earths and may increase their export quotas — so that could certainly impact the market, too, if it comes to pass, since the Chinese near-monopoly and strategic threat are a big part of any hyperbolic price rise in these elements that some folks might be expecting. China will remain the elephant in this room for many years, regardless of what other new production comes online, so any big changes to exports or pricing that come out of the Middle Kingdom will probably move all of these stocks … all else being equal (is it ever?)

So … what’s your pleasure? Care to jump into the arcane world of rare earths and find your favorite stock? Want to just buy up a few of them based on the strategic picture and increasing investor enthusiasm? Or are you afraid we’re close to the top of the hype cycle for rare earths? Let us know with a comment below.

And if you’ve had the pleasure (or pain) of subscribing to Mayer’s Special Situations, let your fellow investors know what you thought by submitting a brief review here (we have just a couple reviews in so far, though they’re both quite positive). Thanks!



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October 20, 2010 1:21 pm

Thanks Travis for your usual excellent analysis. I've owned some GDLNF since last year's pump, and sold half when it doubled, then watched the remaining shares erode in price until this recent upsurge. So–happy at the moment, but who knows for how long. Sure wish I had loaded up a lot more a month ago.

October 20, 2010 1:30 pm