Rare Earth Stocks Making Headlines...Again

The U.S. trade dispute with China has brought rare earth minerals back into the headlines and not in a good way.   The trade dust up devolved into potshots in the third week of May 2019, after the Trump Administration moved to effectively ban China’s premier communications equipment and device supplier Huawai Technologies Co. Ltd. from the U.S. market.  The consensus among economics and finance pundits is an in-kind response should be expected from China.

 

What does China have that the U.S. desperately needs?  So many things come to mind, but rare earth supplies seem a likely lever given its importance in the U.S. electronics industry.  The U.S. Geological Survey estimates that in 2018, the U.S. imported rare earth compounds and metals valued at $160 million.  About 80% of those imports come from China that ended up in final products destined for a broad mix of industries from jet engines to medical equipment to computers.  The renewable energy industry is highly dependent upon the availability of rare earths for solar cells, wind turbines and grid electronics.

Officials in the People’s Republic of China are well aware of the power of industry collusion when it comes to rare earths.  After all, the PRC provided strong support several years ago for its domestic rare earths suppliers in their efforts to push U.S. rare earths suppliers out of business with below-cost selling prices.  It was a successful strategy that could now inspire China’s retaliation for barring Huawei.

It might be entertaining to read the trade dispute headlines with those braggadocious threats from U.S. and China partisans.  However, investors would be well advised to pay attention to the boring details of the commodity markets in general and the rare earth segment in particular.

It requires only a cursory look at the list of public rare earth metals exploration and mining companies to realize that outside China the rare earth industry is largely a Canadian and Australian effort.

The largest operator on the list, at least in term of revenue, is Largo Resources (LGO: TO) with US$353.3 million in total sales in the last twelve months.  That said, the revenue is from Largo’s sale of vanadium and not from rare earths.  Vanadium sales often go hand-in-hand with rare earth sales, especially erbium that is used along with vanadium to strength steel.  The vanadium player is a good reminder of the interdependence of metals commodities and thus the far reaching implications of a trade disruption in rare earth metals.

The U.S. has a nascent rare earths sector that produced 15,000 metric tons of rare earth oxides in 2018.  In 2016, an investment group bought certain assets of bankrupt Molycorp including a mine in Mountain Pass, California.  Starting up as MP Productions, mining of bastnaesite, a rare earth fluorocarbonate mineral, was resumed in early 2018.  Interestingly, one of the minority investors in MP Productions is a China company.   Molycorp has since emerged from bankruptcy and is doing business as Neo Performance Materials(NEO:  TO).

The only two winners on the list are, of course, the China players, China Rare Earth Holdings (0769:  HK) and JL MAG Rare-Earth Co. Ltd.(300748:  SZ).  China Rare Earth experienced a dramatic increase in price as the rhetoric between the U.S. and China hearted up and rare earths were posed as trade weapon.  JL MAG Rare-Earth saw an even sharper increase and was successful in sustaining the new price level. 

So far the only smiles in this rare earth metals story are China shareholders.

SELECTED RARE EARTH MINERAL COMPANIES
Company	SYM**	Price*	Mkt Cap*	Sales*	EPS*	PE
Alkane Resources Ltd.	ALK.AX	$0.27	$93.0M	$85.7M	$0.03	5.89
Arafura Resources, Inc.	ARU.AX	$0.04	$34.1M	$0.1M	($0.01)	neg
Avalon Advanced Minerals	AVL.TO	$0.05	$12.9M	nm	($0.01)	neg
Canada Rare Earth Corp.	LL.V	$0.05	$8.6M	$0.6M	($0.01)	neg
Commerce Resources Corp.	CCE.V	$0.05	$15.0M	nm	($0.00)	neg
China Rare Earth Holdings Ltd.	0769.HK	$0.06	$150M	$114.9M	($0.00)	neg
Cobalt 27 Capital Corp.	CBLLF	$3.00	$255.7M	nm	($0.79)	neg
Critical Elements, Inc.	CRE.V	$0.33	$53.1M	nm	($0.02)	neg
Geomega Resources	GOMRF	$0.12	$10.4M	nm	$0.00	neg
Greenland Minerals	GGG.AX	$0.07	$75.3M	$0.1M	($0.00)	neg
Hudson Resources Ltd.	HUD.V	$0.24	$43.2M	nm	($0.01)	neg
Iluka Resources Ltd.	ILU.AX	$6.35	$2.7B	$1.0B	$0.50	12.77
JL MAG Rare-Earth Co. Ltd.	300748.SZ	$5.37	$2.2B	$185.8M	$0.06	95.03
Largo Resources Ltd.	LGO.TO	$1.21	$645.0M	$353.3M	$0.32	3.76
Lithium Americas, Inc.	LAC	$3.92	$351.0M	$5.0M	($0.32)	Neg
Lynas Corporation	LYC.AX	$1.63	$1.1B	$251.5M	$0.02	81.38
Kidman Resources	KDR.AX	$1.30	$527.2M	$0.1M	($0.02)	Neg
Medallion Resources	MDL.V	$0.09	$3.3M	nm	($0.02)	Neg
Midland Exploration	MD.V	$0.72	$49.7M	$0.1M	($0.02)	Neg
Mikango Resources	MKA.V	$0.10	$11.9M	nm	($0.04)	Neg
Neo Performance Materials, Inc.	NEO.TO	$8.89	$341.4M	$329.2M	$0.83	10.77
NioCorp Developments Ltd.	NIOBF	$0.40	$89.4M	nm	($0.03)	Neg
Northern Minerals, Inc.	NTU.AX	$0.05	$92.5M	$3.7M	($0.01)	Neg
Orbite Technologies	EORBF	$0.10	$51.5M	nm	($0.02)	Neg
Peak Resources	PEK.AX	$0.03	$20.5M	nm	($0.00)	Neg
Quebec Precious Metals Corp.	CJC.V	$0.17	$7.5M	nm	($0.03)	Neg
Quest Rare Minerals Ltd.	QRMLF	$0.00	$1.0M	nm	($0.02)	Neg
Rainbow Rare Earth Metals Ltd.	RBW.L	$4.13	$8.4M	$2.8M	($3.69)	Neg
Stans Energy	HRE.V	$0.03	$5.5M	nm	($0.02)	Neg
Ucore Rate Metals	UCU.V	$0.12	$33.7M	nm	($0.02)	Neg
Wealth Minerals Ltd.	WML.V	$0.29	$39.2M	nm	($0.19)	Neg
Average Trailing Price Earnings Ratio (excludes outliers)						8.29
*All figures in USD; Market cap and sales in billions or millions as indicated **US listed unless otherwise indicated.

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.