Wednesday, January 5, 2011

Rare Earth Minerals Are Not In a Secular Bull Market. It's A Bubble

Scarcity generally does lead to higher prices. But one still has to be careful. In the case of rare earth minerals, I'm afraid Alfred is going to be correct once more. Speculators are pushing any and all rare earth related stocks skyward with no regard for logic and financial analysis. All they heard was that China was no longer going to be an exporter of rare earths, leaving the rest of the world in a shortage. True to form, they've chosen the wrong companies to exploit any bull market in rare earths. As always, it is insanity and will not end well for the uninformed.

The major beneficiaries of the rare earth boom have been small, junior miners such as Molycorp [MCP] and General Moly [GMO]. However, they really don't have a business yet and are basically development stage companies. GMO has basically no revenue and a $450MM market capitalization, while MCP, also without any revenue, is valued at $5B! It's all on the come.

The problem is that rare earths are not rare! Until recently they were just by- products of other mining projects. Giants such as Freeport McMoran [FCX] are in the rare earth business and will be more so as pricing increases. So is large moly miner Thompson Creek Metals [TC].

Chart forMolycorp, Inc. (MCP)

The above chart shows where the insane money has been flowing. I own TC, for its molybdenum business and in process gold/copper project, not for any rare earth miracle. Thompson is a conservatively financed and well managed company. It has over $1B of sales, $500MM of cash, no debt, and a market cap of of only $2.5B. That's right, it has half the market capitalization of MCP!

Remain sane with proven operators, not story stocks.


Harry said...

I just discovered your blog. Great articles. I own TC for all the reasons you mentioned. I am looking at NEM.TO or NEMFF. Neo Metal is a rare earth processor with a p/e of 15. What do you think?

William F. Kabourek said...

Harry, thanks for the kudos. A quick peak at nemto looks like a reasonable company. As a processor, not a miner, its fortunes are subject to its ability to pass on REE price increases in its products. haven't studied that, so don't have an opinion on if i like the company or not. At least it isn't a complete speculation.

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