When the Trade War started heating up with China, you knew it would only be a matter of time before “rare earths” started coming into play again.
These are the rare earth elements, sometimes called rare earth metals or rare earth magnets, that are way down the periodic table, often found in uranium mines, 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 also 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 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.
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. Last time around the leader of the resurgent rare earths business was Molycorp, which briefly re-opened its Mountain Pass mine in California… before falling into bankruptcy as prices collapsed again and getting bought by some hedge funds and a junior Chinese partner (it’s still private, not sure if they’re actually producing anything these days).
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.
Are about to have another one of these? Well, we’re partway there — the one real investable “outside of China” rare earths project that’s actually producing, Lynas (LYC in Australia, LYSCF OTC in the US) was already under some buying pressure thanks to a takeover offer as the stock suffered from some disputes with Malaysia (where their refining facility is — the mine is in Australia), and then soared briefly above $2 as the Trump/Xi trade war drumbeats were amplified by some conciliatory words from Malaysia late last month.
But that’s an in-production project, and it will be subject to all that boring stuff like cash flow and earnings and reserves — the sexy exploration projects are really what usually get people revved up, since those aren’t nearly as anchored to reality, they just promise what all junior explorers promise: That they can turn a chunk of worthless-looking rock into, well, a gold mine.
So which juniors are going to get touted this time around? We’ve seen a few teaser ads floated, but haven’t written about a rare earths teaser in a while… so Alex Koyfman’s pitch for Penny Stock Millionaire caught my eye. That was a long lead-in to our teaser decipherification today, no?
OK, we’ll get right to it — what’s Koyfman touting? Here’s the first part of the ad:
“Trump’s Secret Rare Earth Stash
“It’s a Sparsely Populated Chunk of Tundra the Size of Texas…
“But With a Quarter-Trillion Dollars of Essential Rare Earth Reserves Locked Inside, it Could Be:
“The Most Valuable Chunk of Land on Earth”
And like so many fun teaser ads in the natural resource space, it starts out with a dramatic story about a mysterious and remote place:
“Hidden away in the coldest regions of the North Atlantic, about 700 miles northeast of Newfoundland, lies a desolate, forbidding tundra.
“It’s more than three times the size of Texas, and yet only 56,000 people dare to live there, giving it the lowest population density of any nation.”
OK, so that’s obviously Greenland, the semi-independent (formerly Danish) territory that has indeed been touted for its rare earth potential a few times in the past. More from Koyfman:
“… locked within a 278-square-mile section on the southern tip of the giant Arctic island known as Greenland is a unique group of minerals, concentrated unlike any other deposit on Earth.
“They’re called rare earth elements, or REEs for short. And this prized piece of land contains more than $273 billion worth.”
And then, we’re delighted to see, we get the “one small company” part that is crucial to any mining teaser pitch:
“This chunk of land isn’t controlled by any nation. It’s controlled by a single company — and not some giant multibillion-dollar corporation with interests scattered all over the globe.Are you getting our free Daily Update
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“This company is small. Tiny, in fact — just over $70 million market capitalization as of today.”
What other clues do we get about our hopeful little miner (or, probably, explorer)?
“… trades under $0.40” … because, as Kofyman says, it’s “technically still in its development stage.”
That’s a technicality that has emptied the wallets of many an investor over the years… but yes, every now and then a little “development stage” miner does actually get a mine financed and built. So will this be the one?
Most of the ad is all about China, of course, and the strategic urgency that will lead to this “one tiny company” becoming a huge player. More from the pitch:
“The Company Taking Over This Real Estate Is About to Claim 25% of the Global REE Marketplace
“As this company moves from limited to full-scale production, it will finally start to monetize the world’s single-biggest REE deposit.
“Over the next 50 years, even by the most conservative growth estimates, these reserves will have generated as much as $273 billion in today’s money.”
What else do we learn about this little stock?
“The $0.40 Stock That Could Return 670%
“This company has already set itself apart from all others in the junior mining sector.
“It’s precisely this sort of company that I live for.
“Right now, my brand-new recommendation is poised to make a triple-digit leap as early-stage limited production — like the kind I told you about at the beginning — moves to full-scale production.”
Why this company? Well, he says that part of the reason is that Lynas and Arafura, two of the survivors from the last startup-and-exploration wave in rare earths, have been co-opted by Chinese investors, so only this little Greenland operator still stands alone as a challenger to the Middle Kingdom.
More? I thought you’d never ask! Additional clues:
“Once production ramps up in Western Greenland — which could happen in the next few months — this operation will remain a significant player by producing 6,500 tonnes of rare earth elements annually….
“With an expected annual production of that magnitude, this $40 million outfit would have grossed a staggering $208 million.
“But even if it was running at only a quarter capacity, and even if costs ate up an almost unheard-of 90% of gross revenue (for REEs, 50% is closer to normal), the share price would still hit about $2.00.”
And apparently he’s expecting them to make some progress on this project over the summer (not a lot of new work gets started in Greenland in the winter), so he sees big steps forward in the near future… though he does later allow that the 670% gain he says is the “lowball” would be over the next three years.
And, well, that’s about all we get by way of clues — so which of the Greenland rare earths hopefuls is being teased by Koyfman here? Thinkolator sez this is … Hudson Resources (HUD.V in Canada, HUDRF).
And yes, it is down around 40 cents (31 cents in the US, with a market cap of about $55 million).
What will happen with Hudson Resources? Well, if you’re talking about the near-term stock price, that depends almost entirely on what happens with the rare earths market and whether the current trade war chatter turns into a real price spike for yttrium and terbium and all those other little fellas down at the bottom of the periodic table… and, more importantly, into a speculative mania for the stocks in the sector.
And yes, Hudson Resources was around a decade ago, too, and participated in the last rare earth stock mania — it was touted by a newsletter or two as well. Here’s what the chart looked like for Hudson Resources in the years after we first saw it teased in 2009.
It hasn’t done much in the interim, with no rare earths mine financed or built, so it makes sense that it’s just a spike in speculation followed by years of almost nothing… right?
Well, sadly, in this particular sector the story and the speculation are often completely out of alignment for even real companies. Lynas, for example, is a real producer of rare earths, and started shipping ore to its refining facility more than seven years ago, booking sales to end customers not long after that… and here’s how its stock performed during that same time period (Hudson in blue, Lynas in orange):
So don’t get too excited about the fundamentals… in the rare earths sector, they haven’t meant that much. That doesn’t mean they can’t, or that this won’t become a hugely successful producer someday, even maybe a profitable one, but it does mean we should keep the nuttiness of the rare earths stocks in mind.
And actually, I hadn’t remembered this… but I went back and checked, and I wrote a piece about Hudson Resources more recently, back in 2015, when — you guessed it — Alex Koyfman was touting it as “Greenland’s Gift” and promising that this “30 cent stock could return 682%”
I suppose the lawyers would come back and say yes, it still could… but, of course, it hasn’t.
But wait a minute, back in 2015 he also used almost exactly the same words that we’re hearing here…
“Right now, my brand-new recommendation is poised to make a triple-digit leap as early-stage limited production — like the kind I told you about at the beginning — moves to full-scale production….”
So what did I say about them at the time? You can read my article if you like, but here’s a little excerpt:
“And yes, the big picture story is pretty much the same for Hudson Resources as it was five years ago — still a big rare earth minerals deposit at the ends of the earth, still dependent more on investor sentiment about rare earths and the Chinese monopoly than on actual financial operations.
“But there has been a bit of a twist… while for a few years from 2007-2011 or so they were REE-focused as they explored their Sarfartoq project (before that they were looking for diamonds) to define their neodymium (and other REE) resources, they switched their focus starting in 2012 or so to a non-rare earth minerals resource, their White Mountain anorthosite/calcium feldspar deposit that would apparently be much, much easier (and faster, and cheaper) to bring to production.”
And that’s still where things stand, with that non-REE project having been the total focus of the company over the past four years — Hudson Resources is currently starting production at that feldspar operation, juiced by a little extra financing since the construction and startup of the operation took about a year longer than had been anticipated (commissioning started in November), but it should soon be at commercial production with a mine that they say can produce this stuff for over 100 years (they have a permit for 50 years, apparently anorthosite is not nearly as controversial or dangerous as uranium and the permitting was relatively easy). They also have a supply agreement with a major fiberglass producer, think there are other appealing end markets in cement and alumina, and they say the mine is low-cost and should have good margins… though I have not seen any financial projections for the operation (they had a 2015 preliminary economic assessment for the project if it were a full specialty alumina operation, including a $180 million investment that was partly for building an alumina processing plant in the US — but this is currently just an anorthosite mine, and they’ve spent far less than that to build it).
That’s not nearly so sexy as rare earths, though, no one’s likely going to get rich on the “high-end fiberglass” industry because of an investor mania, so it’s not likely to generate any kind of “windfall.” And, of course, the language in the teaser is completely misleading — yes, they are nearing production… no, that production has nothing to do with the possible rare earths project that they also own, but which has been on the back burner (with the burner off, frankly), for six or seven years now.
For super-sexy stock returns, you’d probably need the Sarfartoq rare earths project to get pulled up from the basement, dusted off, and hauled out to the curb with a big price tag on it — and that’s what Hudson appears to be thinking about. They haven’t really updated anyone on the project since 2013, and presumably haven’t done any work on it, but they did issue a press release at the end of last month that shows they’re still paying attention… it begins:
“HUDSON RESOURCES INC. (“Hudson” – TSX Venture Exchange “HUD”) reports that in light of recent trade tensions between the US and China and it’s implications on rare earth availability outside of China, Hudson is reviewing activities with respect to its Sarfartoq Carbonatite Rare Earth Element (REE) project. Hudson believes the best option is to find a partner to develop the deposit. Hudson brings to the table a mature project and the knowhow on permitting, building and operating a mine in Greenland.”
So yes, The Sarfartoq project does have a PEA estimating that they could produce 6,500 tonnes per year of rare earth concentrate (42-45% REO), with an inferred resource of 14.1 million tonnes averaging 1.51% total rare earth oxides… but that PEA was released in 2011, and that has absolutely nothing to do with Hudson’s active White Mountain mine in Greenland that is about to generate some revenue and go to full commercial production. No one, it appears, has come knocking on the door with an urgent need to throw money at the Sarfartoq project in the interim… will that happen now, with the groundwork maybe being laid for another rare earths mania if this trade war keeps going? I dunno. Stranger things have certainly happened, but I wouldn’t bet on the project being moved forward anytime soon.
And, not to lay it on too thick here, but yes, this is a reminder that the peddlers of speculative investment dreams re-use their stories, without any apparent embarrassment. The same language, along the lines of “things will warm up this Summer in Greenland so production could jump right ahead and even a conservative estimate of production puts the share price at $2,” was used in the previous iteration of this ad that I had forgotten… the one that ran with similarly breathless promise in April of 2015. Here’s a slap in the face in the form of a stock chart for what those who believed in the “it’s going to $2” promise at the time:
So is that the cost of a dream? A 10-15% loss ain’t so bad, no? No, for most investors who get a lottery ticket” mindset it’s not the failure of the stock that is the real problem, you can get over that as long as you’re not betting meaningful amounts of money on these kinds of wild speculations… the problem is when you start to believe in these ideas, and put your real savings or retirement account into hugely risky speculations. Here’s what those same years could have meant in the plainest vanilla investment possible, an S&P 500 index fund (Hudson in blue, S&P in orange):
So that’s really more of a lecture than it is a point of analysis, but look at that chart whenever you think about how much money you’re risking in speculative ideas, whether they’re marijuana startups or crazy-valuation cloud stocks or, perhaps even worse, junior miners. Even if you go back a decade, to before the rare earths bubble of 2011, the distinction between long-term “buy the market” investing and story-driven speculations jumps out:
Everybody wants that 500% return that showed up in 2011… but lots of people in 2011 thought they were wagering on exciting world-changing projects, and probably a lot of them held on through that 90% drop that Hudson had when the air leaked out of the rare earths bubble. We all overestimate how good we will be at making the right bet on the next mania and “selling at the top.”
That’s not to promise that the S&P 500 will rise another 250% in the next decade, I have no idea what the future holds… and I expect that the relatively high valuations today (compared to 2009, certainly, but also historically very high) mean that our expectations should be more subdued. But I would still certainly bet my retirement on the S&P 500 before I wagered it on the next rare earths story stock. If the mania does emerge again, and you can’t resist participating, remember to keep your speculations small.
OK, end of your grumpy old man lecture for the day.
If you want to dabble in rare earths, Hudson is not, of course, the only junior in the space (assuming you can even say they’re “in the space” when it seems like the only thing they’ve done in six years on Sarfartoq is issue a press release last month). There are other rare earth juniors around — there’s even another sometimes-touted one in Greenland, Greenland Minerals (GGG in Australia, GDLNF OTC in the US) owns the Kvanefjeld project in Southern Greenland (rare earths, uranium and zinc), which has made it a little further than Sarfartoq — they’re through to “feasibility”… with a Chinese partner… but remain controversial and uncertain, and that project has been in “permitting” for several years, largely because it would also involve the production of uranium (which was illegal until the law was changed a few years ago… though that change, by a single vote, is also in some dispute).
And, well, that’s about it… the rare earths mania was kind of exciting last time, but perhaps living through that made me a little more gun-shy about the inklings of the next mania. Think I’m being too cautious? See dramatic things ahead for Hudson or any of the other rare earth hopefuls who might rise next time around? Let us know with a comment below. Thanks for reading!