Friday, September 17, 2010

Rare Earth Minerals - Overheated or Just Getting Started?

Rare Earth Minerals - These include metals such as Cerium, Europium, Terbium, etc... I had no idea what these minerals were until I learned that they're very common in today's technologies: Hybrid batteries, windmills, cell phones, green technology, etc... It's everywhere. The fundamental side of this is that China accounts for 95% of world production. Given their current state of government, they can limit the production output of these minerals at their discretion. The Chinese government could put trade controls in place causing extreme volatility in rare earth metal prices. I've read some reports showing some of these metals increasing by 500-1,000% gains in the last year lone. Remember the astronomical gains in the real estate bubble? Those lasted, right? Anyways - the potential lies here: Other countries, especially the United States whose consumer is utterly dependent on technologies that rely on these minerals. I don't know about you but life today would be difficult without an iPhone or a Blackberry. These countries are in late stage development and currently only control 5% of this market share. Molycorp (MCP) has mineral rights to the world's 2nd largest proven reserve mine in California. Full production is not scheduled to come online until 2012. Lynas (LYSCF.PK) expects production to begin in 2011 and claims to have the world's richest mine. Stock prices are only factoring in speculation of book value, and not yet the revenue that is to come once production begins. Therein lies the beauty - These stocks have not yet even began earning revenue steams.
This sector has enormous potential - however it is tied very closely to consumer demand for products that require these minerals, and for the time being is subjected to the outside forces such as China, and volatility due to many analysts initiating coverage on these names. Other risk factors to consider are: Potential high costs for extraction of these minerals - is the cost of goods smaller than the revenue stream?, what kind of debt issuance or stock offerings would these companies put into place to keep enough operating cash in the bank to stay alive until production begins? Rest assured: Debt issuance or stock offerings WILL dilute the value of existing shares, causing volatile drops in price that may present buying (or selling) opportunities.

Our first study: Molycorp Corporation (MCP):
Molycorp is one of the bigger names in this sector, and is attracting a ton of attention. Having gained over 70% in the past couple of weeks, it's certainly due for a pullback as we've been seeing in recent days. Since this is a new stock, it's hard to find any constructive or deconstructive patterns that define a clear direction. For the intermediate term, a decisive break above or below the support/resistance ($21) level should determine where price goes.

Study number two: Australia's Lynas Corporation (LYSCF.PK):
Lynas claims to have the world's richest deposit to rare earths in Australia ( there are no real earnings, this is a pure momentum stock at this point.. As you can see, the high is at 1.33 and today the stock could not make new highs. Notice around the 0.70 level the stock already had couple of break out attempts but failed until recently. The fibonacci retracement studies show this thing could easily retrace (pullback) to its 50% level which is around 0.70. Stochastics and Money Flows show severely oversold conditions - ripe for a pullback. Unless the stock can use its momentum to build some support, it could fall back and it could happen fast when it does. The stock is pink sheets, foreign, and the float is small meaning the trading is thin and relatively illiquid. The prices gap everywhere up/down on a daily basis making it more difficult to liquidate your position and could exacerbate the damage to your account. Considering the market capitalization of this company is only around ~$200M, the stock price can be very easily manipulated. Buyer beware. HFT Anyone? I would only use speculative money on this play, I would be a buyer between 0.70 to 0.75. Also, Lynas has completed a 13/34 EMA cross, although a lagging indicator it tends to foretell or confirm bullish patterns or breakouts. Thankfully Lynas has been trading for years with more data than its peers REE or MCP.

Study number three: Rare Element Resources (REE):
REE appears to be a more stronger momentum play. It appears to have lost some steam as the MACD and Stochastics curled over. If this trendline can be regained, an attempt at new highs would be a constructive pattern and prices above 6.37 would be a bullish break-out since it's already knocked on the door a couple of times. Note no major support below until 4.80 to 5.00 areas.

To summarize: I like this sector over the long term, but there will be many opportunities to buy at better prices.
Stay Tuned: I am eying trends in bonds (mortgage rates in particular) and trends in commodities.

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Disclaimer: All content within this site is solely the opinion of the author and does not constitute investment advice. Trade at your own risk.