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.

MO: Not Altria, Not Momentum, But Molybdenum

I haven't smoked since college, never owned a tobacco stock, and I generally don't think favorably of momentum investing, so I've rarely thought of "MO". But I got interested in MO this Spring and remain so. Molybdenum is atomic number 42 and periodic table symbol MO.

MO is a necessary component of steel and industrial products. It's not a precious metal, it was nearly so when it sold for $40 per pound several years ago, but an industrial metal selling at about $16 per pound today. Recently the London Metals Exchange started trading MO, but the price is mostly determined by industrial usage. That could change.

I generally don't speculate in commodity prices, but inflation and currency debasement concerns gets me thinking about protection. The best way for a value investor to participate in commodities is through a reasonably priced company. I found Thompson Creek Metals [TC] awhile ago and like the company even more now than before as it is about to go from a pure moly miner to a mining company that also has gold and copper interests. The latter come through the acquisition of Terrane Mines which should close yet this year. Terrane brings diversification and a precious metal component.

Thompson Creek is a solid operation, not some "junior" mining operation that could go away tomorrow. TC has a market cap of $1.5 B, over $600M of cash, and no debt. Before you get too excited, much of that cash and about 25MM shares will go to Terrane shareholders, but the company gets significant mining assets and a revenue stream. Pre-acquisition it is trading at a forward P/E of 7X and EV/EBITDA of 4.5X. Trailing twelve months ROE is 16%.

If the world economy plods along, TC will do well. If it craters, they won't fail. If central banks weaken international currencies like I think they will, molybdenum and other industrial commodities will explode and TC will participate. Beyond central bank mischief, MO will be in demand because China has now entered an import phase and is no longer an exporter. If China builds stocks like they have in copper and other industrial metals that should encourage LME activity and price rises. TC is an efficient miner and roaster that will certainly benefit from rising prices of their product.

Current pricing of TC is attractive and even though it will go down if the world economy slows, a several year out time horizon will be rewarded.