Rare Earth Debate

We’ve talked a lot about the opportunity of a lifetime in rare earths — and for good reason.

Rare earth pricing will continue to explode, there’s no question about it.

But there are two new reasons to buy.

Bad News Bears

First, though, be sure to ignore the bears.

They will continue to tout over-valuations as a reason to sell.

But in doing so, they’re overlooking the value of rare earths — worth hundreds of billions with national security implications.

And an article I came across recently proves further that they have no idea what they’re talking about.

“The easy money has been made in this sector,” the piece from Seekingalpha.com explains.

On the flip side, Roskill Information Services — a London-based metals and minerals research company — agrees with our supply-demand picture:

By 2014, demand for rare earth metals will be 205,000 tons but production is expected to increase to just 180,000 tons, leaving the world with a shortfall of 25,000 tons.

Certain rare earth elements, like dysprosium, used to make magnets and lasers, will have a deficit supply of as much as 700 tons, and europium, used to create the color red in televisions, will be 50 tons short of projected requirements.

And you want me to believe the easy money has already been made?

That particular article is basing its sell position on rare earth stock valuations. It’s absurd.

The article goes on to evaluate Avalon Rare Metals (AVL):

Earnings estimates for AVL are unavailable and the company has been losing money. The company describes itself as ‘development stage’ and says its ‘principal source of capital is from the issuance of common shares.’

AVL goes on to say, “In order to achieve its objectives, the Company expects it will be required to spend its existing working capital and raise additional funds as required.”

That’s not the kind of business model I want to invest in, especially when the stock is trading near record highs and with a market cap value of about $900 million.

But you’d be a fool to ignore AVL shares under $10…

You don’t ignore a company in the early stages of exploration because you’ll miss the likely runs on “big discovery” speculation; you can’t just value a company’s earnings and revenues when that company is in the development and exploration stage…

Telling people to sell these rare earth stocks based on valuation, earnings, and revenue is proof, to me at least, that the author needs to do more research.

He goes on: “Technology can do amazing things, and I believe there will be ways in the future to make rare earths less rare through improved mining, new discoveries, and the use of alternative or possibly synthetic materials.”

Where’s the research?

Just because the word “rare” is in “rare earths”, that doesn’t mean these elements are rare. They’re not.

And in fact there are very few alternative forms of rare earth. Research shows there are very few substitutes available that can achieve the same levels of performance that you’d get from rare earths.

What’s more, a new law to go into effect this August will add fuel to the fire for rare earth profits…

Reason No. 1 to BUY

Just days ago, a bill was introduced that could give U.S. rare earth miners significant reason to rally.

Colorado Congressman Mike Coffman introduced the Rare Earth Supply-China Technology and Resource Transformation (RESTART) Act of 2011, which would establish “a loan guarantee program for the industry and attempts to speed up the permitting process”, according to reports.

According to the latest press release found here, the bill would:

• require federal agencies to take appropriate action to expedite permitting and projects that will increase exploration for, and development of, domestic rare earths, including the establishment of a multi-agency federal task force to do so;

• require various cabinet secretaries to appoint executive agents for rare earths;

• establish a temporary, but limited, rare earth industry loan guarantee program;

• establish a Defense Logistics Agency rare earth inventory, from domestic sources, to generate a domestic market and facilitate the domestic sourcing of rare earth alloys and magnets; and

• establish a rare earth program at the U.S. Geological Survey.

This could be huge for U.S. miners, like Molycorp (NYSE: MCP), as the law is likely to send REE prices to the moon.

Reason No. 2 to BUY

After popping through the $100,000-per ton mark, rare earth prices are about to explode higher as Chinese producers try to meet stricter environmental regulations by August 1.

Rare earth producers will have to meet stricter environmental standards in China or be denied “environmental assessment approval for new projects, output expansion, and IPOs,” according to the Ministry of Environmental Protection.

And from what we’re hearing, at least 60% of current producers cannot meet the standards — news alone that could jet prices much higher.

Stay Ahead of the Herd,

Ian L. Cooper
Editor, Wealth Daily