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Goldman Sachs hires only the brightest and most
adept of highly paid analysts. When Goldman speaks – people listen.
Goldman’s opinions are carefully followed so when a story is reported,
investor’s ears perk up.
Sorry Malcolm but if there was ever a case of
clumsy journalistic misinformation this is the poster child for this case. A
couple of days ago there was an inane article on the front page of the Wall
Street Journal that cited that Goldman Sachs analyst Malcolm Southwood
reported there was a surplus of rare earths. He said that rare
earths are growing less rare. What he focused the article on was Molycorp and
Lynas both producers of light rare earths. Sadly,
Mr Southwood, who was speaking for Goldman Sachs did not do his
homework. Southwood cited that there were major deposits, twice the size
of Mt Weld and Mountain Pass put together in Greenland Minerals. What he
didn't mention, however, was that Greenland minerals is located in an
isolated mountainside just south of the Arctic Circle. I have often said that
you can have the biggest deposit of REE's in the world but getting them from
point A to point B is a tremendous capital expenditure that cuts dearly
in a company’s profit margins.
The article states that Goldman’s
opinion, “matches the outlook of many other market participants who
believe the current boom is overdone… we envisage some softness in the
2013 – 2015 period.” Malcolm Southwood, Goldman’s analyst
adds, “The rare earth price boom is nearing its peak. The supply
deficit will peak this year before the market slips into surplus in
2013…rising into 2015.”
Unfortunately, Southwood’s analysis
focuses on one company, the Lynas Corporation, which skews the rare earth
universe into one company to represent the entire field. Southwood omits any
differentiation between heavy and light rare earths and dumps the rare earth
“universe” into the Lynas basket.
Maybe Mr. Southwood was asleep during his
freshman high school geology class because he also omits some very important
distinctions. Mr. Southwood, there is a difference between heavy rare earths
and light rare earths. Mr. Southwood also gives no consideration at all to
the fact that it is very difficult to extract rare earths from its ores. Mr.
Southwood also never mentioned that the Lynas Corporation is facing severe
opposition from the environmentalists in Malaysia as they attempt to build a
separation plant becauseconcerned local residents fear a repeat of
health problems associated with a Mitsubishi refinery, which closed in 1992
after years of demonstrations by citizens protesting its polluting effects. A
clean-up process is still under way at that site. Currently there is no other
separation facility of heavy rare earths outside of China. This
alone would put a premium on the end products which we know are used in many
high tech areas and which have been labelled as critical by the U.S.
Government.
China, which has been the exporter to the world
until two years ago, are themselves becoming a net importer as the supplies
for their own needs grow scarcer. Maybe Mr. Southwood forgot that China tried
to acquire the assets of Lynas but were rebuked by the Australian Government.
I would not be surprised to see China intensify their search for heavy rare
earth deposits globally.
While
the price of rare earth oxides has been on a tear, the rare earth stocks have
certainly lagged. I believe that this may well foreshadow the eventual
breakout of the stocks and I believe that this breakout should begin shortly
leading to ample profits for the companies that Mr. Southwood excluded from
his less than scholarly essay.
Mr.
Southwood, again speaking for Goldman, erred in citing Lynas and Molycorp as
the “main actors on the stage” which I can only characterize as a
gross misrepresentation.
As I
have written many times in my posts, I see incredible opportunity in Ucore
(UURAF). A look at the chart will show that Ucore has pulled back to major
support and is reaching historically oversold levels.
Mr.
Southwood’s report showed a surplus in light rare earths, not in
critical heavy rare earths such as dysprosium, terbium and europium which are
used in the production of permanent magnets that are placed into hybrid
engines and wind turbines. Ucore’s Bokan mountain project, which is in
a mining friendly part of Alaska with no residential or indigenous population
within proximity and has a road three miles form a harbor which has direct
access to the Pacific Ocean is unique in that it is rich in critical heavy
rare earths and is the only asset of its kind on US soil.
Not all
deposits are created equal. Tasman Metals, Ucore and Avalon are three heavy
rare earth deposits which should see gains as investors (and possibly Mr.
Southwood) begin to see the difference between light and heavy rare earths. I
also see partners entering this market to build a separation facility outside
of China within the next 3 to 6 months to supply heavy rare earths to the
West.
If this
post sounds like I am upset at Malcolm Southwood and Goldman Sachs it’s
probably because I am. When Goldman Sachs speaks people listen and Malcolm
Southwood, with his cursory knowledge of rare earth miners, single handedly
destroyed what could have been a profitable trading week not to mention the
turmoil and jobs that he cost people. Maybe the next time the Wall Street
Journal wants to publish and article on rare earth elements the will verify
their sources.
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