Rare Earth Comments Signal Inexperienced Owners

My posts receive much more exposure on Seeking Alpha than they do on this site. Consequently that's where I get the most feedback; usually of little value.

The rare earth bubble article stirred the pot pretty good. My thesis was rare earths aren't rare, rising prices will attract big miners, REE companies are selling for insane valuations, and finally, if you want to be near the space, buy FCX or TC as they will benefit if the bubble doesn't explode and you'll not lose your nest egg if it does. Most commentors didn't want to get it.

I usually get this type of response when I advocate shorting a stock. All the supporters rally with inane logic and never dispute the central facts. Same thing here. The owners of REE stocks defended the price rise with all types of mineral trivia, mine location, and personal attack. Nobody bothered to re-think their investment and convince me that paying $5B for MCP, a development stage junior, that has committed most of its eventual production to W.R. Grace at a fixed price and therefore won't materially benefit by any huge run up in REE prices, is a prudent investment. That attitude and lack of discipline is how bubbles develop and one is developing, if not already present.

I did receive one comment worth reading. A person that could actually read and understand called me on my reference to Alfred Einstein, hoping it was Albert's brother. I have no idea as what I was thinking about when I typed that other than I probably had a scotch in my hand and wasn't concentrating deeply. It's better to make typing errors than investment errors.

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].

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.