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Good Morning Readers
Since
Goldman Sachs has dubbed MolyCorp as the “sweetheart of the Rare earths
sector.” I will devote this post to MolyCorp. Please remember that when
you read Molycorp, think Ucore, Avalon and Tasman Metals. I will use Molycorp
as a proxy because whatever is happening to the rare earth sector is also
happening to Molycorp.
Suffice
it to say that I haven’t been nearly as excited about a new sector
as I am about rare earth metals at the current moment. Demand for rare metals
has been exploding and few new mines are coming online in this
geographically-concentrated sector.
As all of
the signs for rare Earth metals are flashing green, the market has a big
detour sign in front of the Rare Earth Element Sector (REE’s). The only
conclusion I can come up with is that as the dollar grows stronger the REE
ores cost more making them more expensive to export so for the time being
they are out of favor. I am not worried because I have faith in the Fed. No
matter what is said in the media I firmly believe that a key to this
administration is the devaluation of the dollar. I believe we are at a
defining moment. Will the Fed’s institute a round of QE3 and keep
interest rates low, will they tighten money policy and raise interest rates
(the nightmare scenario on Wall Street) or will they do nothing. It's
confusing but this much I do know - unless the Feds continue to pump money
into the economy the stock market will sell off like the house of cards it is
built on.
For now
let’s review what brought me to this bullish view of Rare Earth
Elements.
The use
of rare earth elements in modern technology has increased dramatically over
the past years. For example, dysprosium and lithium have gained significant
importance for their use in the construction of hybrid cars. Unfortunately,
this new demand has strained supply, and there is growing concern that the
world may soon face a shortage of these materials. This is where the
investment opportunity unfolds.
Up until the beginning of this year, the
story of rare earth metals was mostly one of China producing and exporting
while Japan, America and everyone else was importing. Rare earth elements are
vital to new technologies such as Iphones and flat screen televisions, green
energy technology such as wind, solar and geothermal technologies, critical
to the future of hybrid and electric cars and permanent magnets for defense
applications, such as cruise missiles, smart bombs, predator aircraft, lasers
and sonar systems.
Congress
is debating what to do about America's lack of access to the 17 rare earth
elements - raw materials with strategic military and commercial uses.
While
China mines roughly 97 percent of the world's rare earth elements, the
Chinese are not playing nice in the sandbox. According to Rep. Mike Coffman
from Colorado, Chinese officials made it "clear to me that they are
going to reduce exports." Therefore, Coffman introduced a bill that
would establish a national stockpile of certain rare earths for military use,
similar to the nation's strategic oil reserve. His bill would streamline
permitting for rare earth development and provide loan guarantees to
companies that secure rare earth materials. Sen. Lisa Murkowski, R-Alaska is
circulating a draft bill that would, among other things, reduce red tape on developing
rare earths and other critical materials, and assess where they are located.
The
legislation revealed that America put itself at a strategic disadvantage
through near total dependency on China for such elements. A Congressional
Research Service Report acknowledged the nation's rare earths disadvantage,
even though the Department of Defense uses 5 percent of all such materials
produced in the world. The United States, once a world leader in rare earth
magnet production, now produces only one type of such magnets and no longer
mines any of the elements. China now produces the vast majority of rare earth
magnets, followed by Japan and Germany, according to U.S. government reports.
China is
stockpiling its rare earth materials, imposing stiff export quotas and even
imposed a brief embargo last year on sales to Japan.
As a result, prices for some rare earths shot
up more than 1,000 percent last year. According to one of my sources close to
Ucore (UURAF) in an April report the market for rare earths could double
within a few years to as much as $6 billion.
What makes MolyCorp the “sweetheart of
the Rare earths sector” is that Colorado-based Molycorp has the only
fully permitted U.S. rare earth mine. It is a facility is called Mountain
Pass in California that was closed in 2002. Molycorp hasn't reopened its mine
but has been selling rare earths from its Mountain Pass stockpile. Fifty-one
percent of those sales last year were to Japan, a percentage likely to
continue when the mine is operating again in 2012. Molycorp acquired two
companies -- one in Estonia and one in the United States -- that can make
limited amounts of rare earth metals or alloys but technology to convert
these materials into magnets is missing. This is what makes Ucore,
Avalon and Tasman Metals so appealing (but I digress). The company hopes to
soon seal an agreement to make magnets in the United States with the Japanese
firm Hitachi Metals Ltd., which holds patents for rare earth magnet
production.
Officials haven't worked out details that
include MolyCorp's percentage of ownership in the venture but they are hoping
to secure ownership of close to 50 percent.
Molycorp
will provide 3,000 metric tons a year of rare earth feed stock to the company
it controls in Estonia, as Molycorp Silmet, which sells rare earth metals to
Japan and Europe. Molycorp is currently producing rare earth products at two
overseas locations.
When Molycorp went public, shares opened at
$13.25. Its stock shot up after China's temporary embargo on shipments of
rare earths to Japan and new export quotas. Molycorp stock traded in April at
around $70 a share. Yesterday it closed at $57.52.
According to securities filings, Molycorp
officials are talking with Neo Material Technologies Inc., a Canadian company
that produces rare earth products in China. Most magnets America's military
uses are made in China and Japan.
Coffman
said before Molycorp can start full production, the United States must secure
a source of high-strength rare earth magnets for military use. His bill
envisions paying for a stockpile by selling other strategic materials from
the National Defense Stockpile.
I have
enclosed two charts below that confirm that as the dollar strengthens the
Rare earth stocks sell off because the stronger dollar makes them too
expensive to export. Please take note that at exactly the same time the
dollar started to strengthen (on or about May 6th) the rare earth
stocks began to sell off.
Please
stay tuned for further updates.
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