Friday, October 22, 2010

Rarest of Them All

“Mirror, mirror on the wall,
Who’s the rarest of them all?”

The Step Mother
Snow White by The Brothers Grimm

The Mirror in Snow White had trouble with the rarest-of-all question, but scientists can snap back a quick response when it comes to mineral elements. There are seventeen rare earth elements - all with funny names, hard to pronounce and even harder to spell - such as scandium and yttrium. Developers of high technology such as superconductors and lasers have put rare earth elements to good use in capacitors, electrodes, magnets, ceramics and other components.

Despite being quite abundant in the earth’s crust these elements are widely dispersed and thus tough to mine. That makes them expensive and highly coveted. Significant sources can be found in India, Brazil, South Africa and California in the U.S. Yields from these sites are dwarfed by the scale of production in China, which produces over 90% of the world’s rare earth minerals.

So a year ago when Chinese officials looked into their mirror they did not need to ask any questions. They started slapping restrictions on rare earth mining to maximize production and profits and reduce pollution and costly accidents. As with other industries in China, the Central Government is putting the smaller, less efficient mining companies out of business, consolidating production rights under the larger, ostensibly better run operations.

The China Central Government also reduced export quotas on rare earth elements. Bloomberg News recently reported that shipments have been held up in China ports and customs. Further export restrictions are expected to go into effect in 2011, as China attempts to protect its supplies for domestic users.

U.S. manufacturers are concerned. Rare earth elements are vital in production of numerous high-tech products, including computer memory chips, smart phones, night vision goggles, hybrid cars, lasers, battery electrodes, and oil refinery cracking catalyst. Even Congress has been spurred to surprisingly quick and bipartisan action. The U.S. House of Representatives passed the Rare Earths and Critical Materials Revitalization Act of 2010 earlier this month to help ensure a national stockpile of vital rare earth elements.

Some investors might be impressed to think Congress is worried about the supply of Blackberry smart phones. Think again! Reportedly, rare earth ore shortages have led to delays in delivery of important weapons systems to the military. Consumers are still on their own for their ”CrackBerry” habit.

Even though China is producing the vast majority of rare earth ores, it only has about 30% of rare earth element reserves. The U.S. trails as second with 15% of the world’s reserves. Cheap labor in China led to the dramatic shift to China from other sources.

We expect U.S. producers to eventually benefit from the renewed emphasis on U.S. domestic production. Likely winners are MolyCorp, Inc. (MCP: NYSE) and Rare Element Resources, Inc. (REE: NYSE), both in the Materials Group of our The Mothers of Invention Index.

According to Roskill, a mining and minerals industry resource, global rare earth ore production in 2008 was approximately 124,000 metric tons, of which only approximately 4,300 metric tons originated from outside of China. Molycorp is estimated to have produced 1,700 metric tons and Russian producers another 2,500 metric tons. The dismal figures have prompted a flurry of activity to reopen U.S. mines.

In its S-1 filing with the SEC earlier this year Molycorp claimed that with its modernization and expansion plan the company would have the ability to produce 19,090 metric tons of rare earth ore per year from their Mountain Pass mine in California. The company raised $400 million in the IPO earlier this year.

Vancouver-based Rare Element Resources is building out The Bear Lodge Rare-Earths Project in Crook County, Wyoming, which is still in the exploration stage.

A Swiss company, Glencore International, AG (private), has partnered with Wing Enterprises, Inc. (private) to reopen the Pea Ridge Mine in Missouri. Production could begin as early a 2012, if early studies support mining.

An alternative play on the dynamic shift expected in the rare earth market is Great Western Minerals Group, Ltd. (GWB: VAN or GWMGF: OTC/BB), a rare earth mineral processor and metal alloy producer. The company has yet to produce profits, so the stock is highly speculative in our view.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


No comments: