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Sorting Through The Chaff - Is Lynas The Best Rare Earth Play?

Tyler Durden's picture




 

Following the recent strategic move by China to minimize rare earth mineral exports, the speculative investing crowd has suddenly found a new momentum darling: the REMs (something we highlighted long before the China news even hit). And the growing chorus of voices that has emerged calling for a bubble in the rare earth space may certainly be on to something: to be sure many of the companies will not be profitable for years with quite a few likely not to even generate revenues for a decent amount of time, implying valuations are once again based on "stories" and hype. Today's launch of a rare earth ETF is surely a validation of the bubble theory. Amidst the bubble talk, the question of how long constricted supply demand conditions is certainly key. However, are there diamonds in the rough among the chaff? In other words, are there stocks that could be good pair trade or long hedge candidates to a short basket? Today we take a closer look at Lynas Corp, which was highlighted in the latest 13D.com (a newsletter we can not praise enough) report as "its favorite in the field."

Here is 13D's October 21 take on Lynas:

Lynas Corp (LYC:AU, AU$1.76; LYSCF, $1.73)- which announced a new agreement with a major Japanese firm a day after our last article-remains our favorite in the field, and likely provides the shortest path to free cash flow among major rare earth miners. We expect that recent rare earth supply concerns will enable Lynas to continue signing agreements to sell essentially all phase-1 production and enough phase 2 output to accelerate expansion. Thereafter, it may be able to separate and market rare earth concentrate from other mines, such as its own resource in Malawi and output from Northern Uranium's Australian resource before developing its Crown polymetallic depost.

Another indcator that LYC may be due for a major move higher is the October 26 downgrade by JPM from overweight to neutralm with a A$1.71 price target. As is well known, when a broker is downgrading something, it is buying it from clients. Nuff said. An extract from the JPM report authored by Alistair Reid:

Overall, we believe LYC has a strong competitive advantage given its position as a viable source of new non-Chinese supply of rare earths. However, given the stock’s recent out-performance and potential risks around the timing and cost of delivery of the IREP, we believe investors should consider reducing any OW position. We continue to watch for further progress in bringing the IREP on-line including completion of the concentrator by early CY11E, securing funding solutions for the expansion, executing further customer offtake agreements, updates on the construction schedule and marketing of synthetic mineral products.

Without doubt the stock has had a dramatic run up, and has returned about 194% YTD, and 130% in just the past three months, and is due for a pullback. That said, it would appear that while many of the other names in the space, which have had a comparable move higher, would be far more of the story-type picks, Lynas may be positioned to be a relative outperformer and a likely long hedge to all short "bubble pop" exposure.

We will present more on the name in the coming days. In the meantime we present JPM's initiation report in Lynas for all those who wish to get acquainted with the name.

LYS JPM

 

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Thu, 10/28/2010 - 12:11 | 683512 Cookie
Cookie's picture

Grrr, bought this at 14 cents in Feb 2009, sold half at 55 cents, thought I could get back in at 39.....made bearish from too much ZH...all my fault nevertheless

Thu, 10/28/2010 - 12:23 | 683546 squidward
squidward's picture

I picked some up several months ago, and found an extra $50 commission Fidelity charged me to buy it.  It wasn't in the estimate before you exicute a trade as normal.  Not a big deal with large purchases or if you got in when it was $.50 but depending upon what your timeframe is and who your broker is it may need some consideration.

Thu, 10/28/2010 - 12:34 | 683588 Trifecta Man
Trifecta Man's picture

Before you join the rare earth bubble, consider this analysis.

http://seekingalpha.com/article/231266-rare-element-resources-potential-...

Thu, 10/28/2010 - 12:50 | 683642 DoChenRollingBearing
DoChenRollingBearing's picture

Excellent link, thank you.

Thu, 10/28/2010 - 12:35 | 683589 sethco
sethco's picture

REM hasn't been good since MONSTER.

Thu, 10/28/2010 - 12:42 | 683609 ArrestBobRubin
ArrestBobRubin's picture

Lynas, while an interesting story, seems inferior to my preferred REE play, Avalon (AVARF).

To start with, Avalon's Thor Lake resource in Canada is much larger than what Lynas has. But Avalon's key value differentiator is the fact that their resource contains a much higher proportion of the most valuable and rarest "heavy' RE metals.

Beyond AVARF, I also think Tasman (TASXF) is a better value with a better story and future than Lynas. Tasman's rescources are across Scandinavia are are very rich. Tasman will wind up being the leading supplier of REE to Europe and the UK. Best of all, the excellent Mickey Fulp (www.mercenarygeologist.com) has blessed Tasman as his favorite REE play of all. I'll take the opinion of a real expert and an honest man like Fulp over some tout by Lucifer's minions every time.

I don't have anything against Lynas and may add 'em to my REE portfolio. But I gotta say the fact JP Moron is touting them is a real turn off.

 

 

Thu, 10/28/2010 - 12:44 | 683627 DoChenRollingBearing
DoChenRollingBearing's picture

Arrest, thank you, exactly the kind of informed comments I am looking for!

Thu, 10/28/2010 - 12:50 | 683619 DoChenRollingBearing
DoChenRollingBearing's picture

I too have been following the rare earths story for about a year, though strictly as a non-professional.  I have not yet read the JPM piece above, but I pass along some observations for what they are worth (not much):

Lynas (LYSCF on stockcharts.com) -- building processing plant, becoming more vertically integrated

Great Western (GWMGF at stockcharts) -- has a processing plant in England and some kind of small plant in the USA

Avalon (AVARF) -- nice big deposit (with more valuable "heavy" rare earths), talking with a construction company about building a plant

Molycorp (MCP) -- fairly big deposit, talking with others about processing.

The above 4 companies are in or heading to being able to ADD VALUE to mined rare earths.  Separating, processing and refining the various rare earths seems to be where the REAL MONEY is, as there are LOTS of companies that have deposits of rare earths.

I too would be very interested to hear from informed ZH-ers about rare earth companies.

Thu, 10/28/2010 - 18:36 | 684724 DavidPierre
DavidPierre's picture

The Northern Miner recently featured Commerce Resources Corp. (TSXv: CCE)(FSE: D7H) and the Eldor Rare Earth Project in an article titled "Commerce Expands Eldor REE Drilling."

http://www.commerceresources.com/i/pdf/02025-Commerce-Resources-reprint-Oct-18-10.pdf

Encouraging to see the Eldor Project and Commerce Resources gaining greater attention in the media and in the world's foremost mining newspaper.
I've made some serious change with this great group of guys over the past few years.  Do your own DD.  You won't be disappointed with what you learn.

Thu, 10/28/2010 - 13:15 | 683658 carbonmutant
carbonmutant's picture

REMX not getting much love today. All babies look ugly.

http://www.reuters.com/article/idUSSGE69Q0PP20101027

Iluka Resources Ltd and Lynas Corp Ltd are the top two securities in the fund.
http://www.vaneck.com/funds/REMX.aspx

Thu, 10/28/2010 - 13:34 | 683775 janchup
janchup's picture

13D costs $15,000/year at full individual investor price and is, even at that nosebleed level, capable of truly awful calls. I know from experience. Don't forget your stops. Calls like like "Buy Dubai" and Buy Natural Gas, summer of 2008. Also some good calls too of course...."Buy Stocks, March 2009" "Buy and Hold Gold," 2003. If you are considering a subscription negotiate like hell and get 2/3 off. The writing and level of intelligence is very good. I will admit freely that I always at least more than make back my subscription fee in following them. Sometimes a lot more. 

Thu, 10/28/2010 - 13:52 | 683842 fredquimby
fredquimby's picture

I too have been a rare-earther watcher for a while. I loaded up on LYC on the ASX about 3 weeks ago at 1.48. I will look to sell end March '11 unless it pops to something silly before my cash in date March 30th (I am gambling all till then to make $140,000 for a Fisker Karma for my 40th:)

I have been tracking a load of REE companies, also a few uranium and other similar so have cut n pasted my google finance "Kill the Earth" portfolio for your ease of referencing some more in this sector. Not sure how this table is gonna work, but with that funky new document reader lets see.... The % is todays change 28/10/2010

Name?? Symbol?? Last price?? Change?? Shares?? Cost basis?? Mkt value?? Gain?? Gain %?? Day's gain?? Overall return?? Cash - Deposit / Withdraw  
  Date Amount Notes

  KEMET Corporation KEM 3.26* +0.38 (13.19%) 0.00% Lynas Corporation... LYC 1.58* +0.12 (8.59%) 0.00% Ashburton Ventures Inc. ABR 0.075* +0.005 (7.14%) 0.00% Riverstone Resources... RVS 0.830* +0.030 (3.75%) 0.00% Galaxy Resources Limited GXY 1.53* +0.04 (3.02%) 0.00% Ivanhoe Mines Ltd. (USA) IVN 23.94 +0.69 (2.97%) 0.00% Extract Resources... EXT 7.71* +0.16 (2.12%) 0.00% Western Copper Corporati... WRN 1.46* +0.03 (2.10%) 0.00% Canada Lithium Corp. CLQ 0.810* +0.010 (1.25%) 0.00% Lightbridge Corporation LTBR 5.84 +0.07 (1.21%) 0.00% Colossus Minerals Inc. CSI 8.16* +0.06 (0.74%) 0.00% Cameco Corporation (USA) CCJ 30.54 +0.04 (0.13%) 0.00% First Lithium Resources... MCI 0.095* 0.000 (0.00%) 0.00% Greenland Minerals and... GGG 0.835* 0.000 (0.00%) 0.00% Lithium One Inc. LI 1.08* 0.00 (0.00%) 0.00% Neo Material Tech. Inc. NEM 5.95* -0.01 (-0.17%) 0.00% Sociedad Quimica y... SQM 51.25 -0.21 (-0.41%) 0.00% Titanium Metals... TIE 19.28 -0.10 (-0.52%) 0.00% Baja Mining Corp. BAJ 1.19* -0.01 (-0.83%) 0.00% Tasman Metals Ltd TSM 1.97* -0.02 (-1.01%) 0.00% Great Western Minerals... GWG 0.440* -0.010 (-2.22%) 0.00% Arafura Resources... ARU 1.40* -0.02 (-1.41%) 0.00% Qinghai Salt Lake... 000578 30.70 -0.44 (-1.41%) 0.00% Forsys Metals Corp. FSY 1.99* -0.03 (-1.49%) 0.00% Lithium Technology Corp. LTHU 0.0235* -0.0005 (-2.08%) 0.00% American Lithium... AMLM 0.410* -0.010 (-2.38%) 0.00% QUEST RARE QSURD 4.70* -0.12 (-2.49%) 0.00% GREAT WESTERN MINERL GWMGF 0.431* -0.012 (-2.69%) 0.00% INNER MONGOLIA BAOTOU... 600111 91.28 -2.63 (-2.80%) 0.00% Western Lithium USA... WLC 1.02* -0.03 (-2.86%) 0.00% AVALON RARE METALS AVARF 4.39* -0.15 (-3.21%) 0.00% Potash Corp./Saskatchewa... POT 146.55* -5.25 (-3.46%) 0.00% Avalon Rare Metals Inc AVL 4.50* -0.17 (-3.64%) 0.00% Paladin Energy Ltd. PDN 4.17* -0.19 (-4.36%) 0.00% Tibet Mineral Developmen... 000762 44.00 -2.33 (-5.03%) 0.00% Constantine Metal... CEM 0.130* -0.010 (-7.14%) 0.00% Linear Metals Corporatio... LRM 0.200* -0.020 (-9.09%) 0.00% Molycorp, Inc. MCP 34.73 -3.83 (-9.93%) 0.00% Rare Element Resources... REE 11.54* -1.23 (-9.63%) 0.00%

Thu, 10/28/2010 - 14:06 | 683884 carbonmutant
carbonmutant's picture

REE forming a bearish engulfing candle on the daily.

Thu, 10/28/2010 - 14:50 | 684043 57-71
57-71's picture

I follow the rare ones too. Hence the user name.

I aam a mining insider.
I bought Lynas at .16 and doubled up on the rights offerring at .33. This one has relly good potential in the next 18-24 months, better than most.

So does Great Western. Bought at .09
The reason for both of these over the others?
Advanced stage development, and vertical integration.
They can both process and sell refined finished product.GWG is adding a second furnace in Michigan to double production there, and will process ore from it's mine in South Africa.

i see both as having the ability to hit $5.00 by mid 2012.
Then it may be bubble time.

Avalon is a great deposit, lots of heavy.
It will cost them way too much to get going, and I see them failing. Another major like a Rio Tinto or Tech will likely pick up a partially finished operation at a discount.

Just my mining opinion.

Thu, 10/28/2010 - 17:01 | 684150 fredquimby
fredquimby's picture

Morgan Stanley are shareholder in LYC they bought in on Sept 16th.

Molycorp have a mine in Nevada, closed when the Chinese drop the prices in the nineties. They shipped the equipment to china after buying it in bankruptcy (Like they did MG in the UK) so it will take Molycorp till late 2011 before anything is produced you would assume.

LYC have a processing facility in Malaysia too that will be able to process others ore. Supply crunch should be over by mid-2012 easy though by the sounds of it :)

It cost me $60 to buy on the ASX but I liked the AUD angle too so thought I would put some $$ back into the lost empire to help them conquer the rising empire...

 

Thu, 10/28/2010 - 17:16 | 684563 michigan independant
michigan independant's picture

http://washingtonindependent.com/101462/california-mine-represents-hope-and-peril-for-u-s-rare-earth-industry

Vorona says the U.S. has a lack of scientific knowledge about REEs because most scientists went to China to continue their work on the minerals decades ago. “If the mines that are being planned were all to come online tomorrow that would be fantastic, but there would be nobody to run them,” Vorona said, noting that China has 100,000 rare earth scientists. He also said that chemical separation of REEs is often very difficult to perfect. “It’s a very long and involved process,” he says. “That’s one of the biggest risks. It can take dozens, hundreds of steps to separate the rare earths.”

Thu, 10/28/2010 - 19:16 | 684772 57-71
57-71's picture

Goldman has a large stake in MoyCorp, I believe.

That in itself has me out.

Fri, 10/29/2010 - 01:34 | 685216 Kaiser Zose
Kaiser Zose's picture

Here's what I know about REE...Nothing.  Bought 10/18 @ 8.32, sold 10/20 @ 13.35.  Bought 10/21 @ 11.10, sold at 10.45.  Bought 10/22 @ 10.05, sold today at 13.01.  

A trading wet dream.  It collapsed this afternoon on news that China may relax restrictions on selling rare earth metals to foreigners.  This scam stock will probably return to where it belongs, sub $2 in short order.  Just glad I banged it for some coin while the suckers were out in force day trading in gayly decorated halloween costumes.

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