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It’s Off to the Races at Molycorp

Submitted by madhedgefundtrader on 09/04/2010 00:17 -0400

I just wanted to follow up on the rare earths piece which I recently published (click here at http://www.madhedgefundtrader.com/august-13-2010.html ). Despite lackluster market conditions at best, Molycorp (MCP) managed to raise $394 million through its July IPO at $14/share. The company will use the funds to reopen a rare earths mine at Mountain Pass, California, making it the largest such producer in the world outside of China. The company will start production by the end of the year, and go full scale by 2012.
This is important because China, supplier of 97% of the world’s supply of rare earths, has cut back export quotas by 40% this year. These incredibly expensive metals are crucial for the manufacture of a variety of alternative energy hardware, as well as a number of military applications. Since the launch, the stock has risen 11%, making it one of the best performing stocks in the market this summer.

So far, the Australian miner Lynas Corp (LYSCF) has been the big beneficiary of the stampede into rare earths shares, doubling since I first recommended it in May (click here for the call at http://www.madhedgefundtrader.com/may-3-2010.html ). Lynas offers established production and experienced management, higher grade ore with a 9.7% yield, higher levels of the more valuable rare earths, realizations per ton that are 57% higher, and a book value of 1.87.

MCP is expected to have a 8.24% yield, is easier to trade with a US listing, has better liquidity, and prospects of greater profitability down the road through vertical integration and economies of scale, at the price of a 2.61 book value. MCP may also receive a political boost in the fall if a group of 20 senators and congressmen are successful in getting the Department of Energy to provide $280 million in loan guarantees. Look at these companies as an alternative energy, national defense, commodity, inflation play, a win-win-win-win.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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Sun, 09/05/2010 - 02:16 | 564364 Eric Cartman

Holy Shit!

I bought this stock a month ago. I can't believe it made it's way to ZH so soon. This is my ONLY investment in the equity market.

Tue, 09/07/2010 - 18:54 | 568290 obobcatu

I was lucky enough to hear an interview from James Dines on King World News (thanks for the pointer to KWN ZH!) where he briefly explained what Rare Earths are, along with some of his reasons why he labeled the Rare Earths sector to be in a "Super Major Bull Market". This was back in late April/early May I think. Since then I've accumulated modest positions (in $ terms, not % of portfolio terms. REEs are the only equities I own besides whatever is in my Gold mutual fund). I own Molycorp, Rare Earth Elements, Quest Rare Metals, Arafura Resources, Ucore Rare Metals, and Tasman Metals. I'm also looking into the Great Western Minerals company that someone a few posts up mentioned. So far these Rare Earth companies have been a home run for me as I'm up ~50%. I personally think there is still a lot of room to the upside as the market is still supply constrained and dependent on exports from China, along with the demand for the Rare Earths expected to grow going forward, but then again I'm a noob investor so take that for whatever it's worth.

Sat, 09/04/2010 - 19:05 | 564030 jm

Some genius is going to create a technique that replaces all those rare earths with something commonplace like zinc.

Never count poeple out when they are in a corner.

Sun, 09/05/2010 - 14:17 | 564801 WilliamShatner

You need to go back to school and take some chemistry classes.

Sun, 09/05/2010 - 22:03 | 565325 jm

Please explain captain.

Tue, 09/07/2010 - 22:08 | 568659 WilliamShatner

Even if some genius finds a way to turn zinc into the myriad of rare earths you'd have to assume the cost associated is cheaper than mining the actual rare earths.

Wed, 09/08/2010 - 06:15 | 569025 jm

I'm not proposing he turns tantalum to zinc. I'm asking what are the properties of these rare earths that make them so irreplacable. Zinc is just my example.

Sat, 09/04/2010 - 16:30 | 563913 TheGoodDoctor

Van Eck (IE GDXJ, GDX etc.) will be putting out a minor metals ETF soon that will cover many of the mentioned companies for those looking for less risk.

Sat, 09/04/2010 - 15:00 | 563833 apberusdisvet

All of you expecting a big surge in the price of Lithium should ponder GM's introduction of the Volt which, in comparison, will make the Edsel look like the greatest "win" of all time.

Sat, 09/04/2010 - 14:23 | 563798 WilliamShatner

Good post.

I saw the boom in rare earths, and uranium, coming when China announced the cutback in exports and that they hoarding uranium.

Went out and bought stock in the following companies:

LITHF.PK UEC RAREF.PK REE MCP LYSCF.PK AVARF.PK UURAF.PK GWMGF.PK DNN URZ

I'm happy to say that I'm up on all of them, and it's really no surprise since this market is fairly limited to a few producers. When shifts like this happen and you've only got a few players in the market you can hardly lose.

Sat, 09/04/2010 - 12:08 | 563665 DoChenRollingBearing

Rare Earth metals is a topic that I have been researching myself as well for the past year or so.

It looks like none of the tradeable RE miners is ready to crank out production very soon, but if MCP is able to go to full scale production by 2012, well that's faster than I would have guessed. MCP mostly has the "light" REs (worth less / kg), although Neodymium is used in permanent magnets. MCP, last I read, is talking with a company in Canada that might be able to separate and refine the different RE metals, apparently the USA cannot do that, at least right now. China can! Also Europe and Japan have technologies to refine the REs. MCP has had a spectacular debut, but, I might want to wait for a pullback before buying it. It is still a long way to 2012, and if the economy stays bad, well...

I know little about Lynas, so cannot comment. But, if they are up and running, well that clearly is a good thing.

Avalon (AVARF) is Canadian company with an apparently big deposit way up north, they are working on it to see how feasible it would be to produce. They are also talking with someone (a European factory builder?) about a plant there that would separate and refine the REs they have, and apparently Avalon has a nice share of the "heavy" rare earths (worth more / kg), including such metals as Europium (red phosphors for your screens) and Terbium (for magnets and batteries I think).

Great Western Mining (GWMGF) bought a processor of Rare Earths in England, but I do not know if they are mining the REs yet. Great Western, like some of the above, has the goal of being a "complete supplier", that is, mining, separating and refining the REs into products that are ready for use by Toyota, the wind turbine producers, the US military, etc.

There is another small miner in the sector: Rare Earth Resources (REE on the AMEX), they are drilling their deposit in Wyoming to see if it is worthwhile as well.

PERHAPS the best way to play this sector would be to buy the, say, 3 most advanced companies in equal dollar amounts. I am thinking of doing just that. If this whole RE takes off because China is retaining their REs, then likely as not at least one or two of these companies may skyrocket and/or get bought out by bigger miners.

Note that if you look at their charts, you will see HUGE moves up and down, so these are probably very risky. They have had big moves up lately, esp. since China said they were cutting exports of REs.

...

I am obviously interested in this sector, thanks MHFT for the article. I hope that other posters can shine some more light on ways to invest in this sector.

Mon, 09/06/2010 - 01:50 | 563793 DavidPierre

DoChen:

Here's something for you to chew over during the long weekend.

Commerce Resources.

John Kaiser recently posted a 'subscriber-only' report on CCE's Eldor project in Quebec and the Tantalum mine in BC.

.....................................................................................

"John Kaiser: Bottom-Fish Comment

Commerce Hits Significant Light Rare Earth Mineralization at Eldor {just the first drill hole! dp}

August 20, 2010

Commerce Resources Corp.

(TSXv:CCE) (FSE:D7H) appears to have made a significant rare earth discovery at its 100%owned Eldor project in northern Quebec which may serve as a helpful distraction from the perpetual waiting game with regard to the arrival of a preliminary economic assessment (PEA) for the Upper Fir tantalum-niobium deposit on the 100% owned Blue River project in British Columbia.

Commerce's CEO, David Hodge, has been working on the tantalum story for a decade since he staked many of the known carbonatites in British Columbia because the technology boom would expand demand for rare metals such tantalum."

......................................................................................

Here's a 'free-be' sneek preview for you. It is a little dated but will not become public for three more weeks. I cannot get the link to work so this may get a bit long winded. I'll just post the more juicy parts.

....................................................................................

"...there are currently no commercial scale primary tantalum mines in operation."

Tantalum has a high capacitance which has made it an important input for the electronics industry, in particular cell phones, but it also has properties which make it an attractive superalloy input where corrosion resistance and high temperature conditions are an issue. Fortunately for the end users existing stockpiles have been supplemented by coltan smuggled out of northeastern Congo where a civil war has been raging for a decade.

The tantalum price has started to rise in recent months, thanks in part to a provision slipped into the Dodd-Frank financial reform bill which will require end-users to demonstrate that their raw materials do not come from so called "conflict" zones, particular those of the Congo. {equivalent to the "blood diamond" controversy}

Given that consumers do not see the rare metals in their technology gadgets, ...tantalum makes an IPhone or IPad work, one would assume that the manufacturers of these gadgets are immune to any backlash. That is not the case, for the "conflict minerals" legislation poses a different problem for OEMs who have been indirectly relying on the black market for smuggled coltan to build their gadgets and who have been covering their butts by requiring suppliers to represent that the tantalum is not sourced from conflict regions without requiring verification of the mine to market supply chain.

The Eldor project is emerging as a rare earth play. The Eldor property first became the target of exploration in 1981.

Commerce was recommended as a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008 based on a strong working capital position and the company's involvement with the bulk tonnage Blue River tantalum deposit. The stock ran as high as $0.82 in late September 2009 when the security of supply theme led by the rare earth sector was making market waves, and Commerce investors still believed a PEA was imminent, but since then the stock has been in a downtrend until the recent uptick related to the Ashram zone drilling. The company remains well financed with about $14 million working capital, though with 130.5 million issued and 176 million fully diluted the stock has a considerable overhang. On the plus side, about 27 million warrants are exercisable at $1.50 until the summer of 2011, which means that they are not a supply threat. During the past year I have been ambivalent about Commerce because of the delays in getting a PEA out for Blue River and the overall small size of the tantalum market. Now that the coltan crisis is coming to a head through the conflict minerals legislation and giving potential suitors a reason to pay attention, now that Commerce seems eager to deliver a PEA, and now that we have a potentially significant light rare earth discovery at Eldor, this bottom-fish is becoming more interesting.

At $0.40 the stock is double the upper limit of the bottom-fish buy range, so I am converting Commerce to a Spec Cycle Hold 100% recommendation with further upside during the next couple months tied mainly to confirmation that the Ashram zone at Eldor is big with the hole 27 grades representative, and with additional upside toward the end of the year hinging on what the PEA says about the Blue River tantalum project compared to other tantalum projects.

.............................................................................................

http://www.globalminingfinance.com/resource-calculator/july-2010/commodity-focus.html

Sat, 09/04/2010 - 13:48 | 563762 JohnG

"PERHAPS the best way to play this sector would be to buy the, say, 3 most advanced companies in equal dollar amounts"

Why not identify the leader in this field and buy only that. If it were myself I'd not like to buy more then one, particularly with a large investment. The volatility could get you killed.

Not saying that these are not worth looking at, I think they are (imho).

Sat, 09/04/2010 - 02:50 | 563465 fxrxexexdxoxmx

fall if a group of 20 senators and congressmen are successful in getting the Department of Energy to provide $280 million in loan guarantees

What need is there for political lobbying (pay to get paid) for industries that are actually viable?

Until we try capitalism again without this kind of crony captialism America will still be lost.

gold, silver, lead, water, shelf stable food stuffs......

Sat, 09/04/2010 - 17:03 | 563931 maddy10

Everybody in the world is giving freebies to productive job generating companies

SEZs are everywhere

what's wrong if US does some and get a few thousand jobs for next 20 years??

You people can never be pleased, I say

BTW is there a way to directly invest in REMs as commodities instead of these non starter companies which have cash and mines but nothing else

Sat, 09/04/2010 - 06:17 | 563492 Iemand

Out of all the state funded entreprises, I would say that this one is one of the better though.

It’s Off to the Races at Molycorp

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