Burt Rothberg roughly blogs that he believes that 1) rare earths are in a bull market, 2) there are good reasons to think that this will continue, 3) here is long on Lynas, and 4) he suggests that investors should stay away from the rare earth junior mining companies.
Back about ten years ago REE were a hot buzzword. The theory was that China controlled the entire market, and would restrict exports to favor its own electronics industry. Demand was impregnable since rare earths are indispensable in high tech. This in fact did happen for a short while, and rare earth prices skyrocketed. Many western miners started to explore for and develop rare earth deposits. Two of them actually made it into production, Lynas Corp. Ltd. of Australia/Malaysia and Molycorp of the USA.
Well guess what happened. China was forced to backtrack on its restrictions, and consumers were able to use a lot less rare earths than they had previously. It also turned out that a lot of the "demand" actually was speculative stockpiling. It's an inexorable law of commodities: high prices lead to low prices. In the aftermath, Molycorp went bankrupt and Lynas nearly so. In Molycorp's case the company borrowed too much for them to make it through the tough times. In Lynas's case, there were political and operational problems.
Rare earths are not rare; the name is purely historical. However, the process of mining and processing them is fraught with difficulties. First, there is pollution, both chemical and radioactive. The pollution is both in the mining and the processing. The processing is also difficult. There are many rare earths, and some of them have similar physical and chemical properties. So it's not an easy separation. Not as hard as uranium isotope separation, but still tricky.
Demand for rare earths are varied, but I am going to consider the rare earths that are used in electronics. Several of the rare earths, most notably neodymium and praseodymium, are used to make ultra strong magnets. These in turn are used in many electrical applications, especially electric motors and generators. If you have been following the Tesla/electric car story or the wind energy story, you probably know about the growth in this sector.
Lynas's ore produces a higher than average concentration of neodymium and praseodymium, and that is Lynas's major product. As mentioned earlier, that is where the growth will most likely be.
Before I get to the financial numbers, I want to mention that I an not buying any of the rare earth junior miners. The problem is that RE mining and processing is technically challenging. So there's a steeper learning curve than in, say copper or zinc. The only way I can see a junior making it is by proving up a claim and selling out to an existing producer. There is a very small list of such producers, so the terms are not likely to be good. I know many SA readers like juniors because of the optionality to price upside. Sometimes that is the way to go. But not in this case.
The numbers bear out the above narrative. Lynas had a near death experience while ramping up production. This was due both to a decline in rare earth prices as well as delays in the ramp because of politics and operations. Lynas only survived because of a recapitalization that substantially increased the share count. Now it has had a sharp turnaround and is digging out of its hole. With current good management and if the RE market remains OK like I expect, this will become a very successful company.
Lynas trades in both Australia and in the US as ADRs. Volume is greater and trading costs are lower in Australia. If you have an account that allows you to trade non-US stocks, that is the way to go. Since Lynas is unlikely to pay a dividend in the near future, there should not be that extra tax form to fill out. The collapse in the industry took a while to play out. a graph of neodymium prices from Kitco is provided herein, the metals broker: As you will see, prices are not back to the boom levels, but are well off the bottom. I believe that the higher prices are here to stay. Here's why:
First, as I alluded to earlier, demand is in the hot sectors of the economy. If the world does in fact convert to electric or hybrid cars, this will accelerate. I know there's an awful lot of hype about this, but several countries, including China and the EU, are pushing it hard. So I'm willing to buy some of the hype. Historically, demand has grown at about 6% annually.
Second, China has gone on a quality of life push. Rare earth production is one of the worst polluters in China, and they are shutting down the worst mines. Since these mines were technically illegal anyway, this was pretty easy to do.
So we have a situation in which demand is growing nicely but supply is not. This is a long term commodity investor's dream. Let's see how it can be played. Without pricing in pollution, China is the low cost producer. There are several publicly traded Chinese companies that at least partly produce rare earths. For example there is China Northern Rare Earth Group High-Tech Co Ltd. (China: 600111). I am not going to buy these. Beyond being very difficult to invest in, these companies are subject to the whims of Chinese policy.
The best way the reviewer can see is Lynas Corp. This company went through difficult times, but changed its CEO several years ago. It is now profitable and growing. Lynas has an unusual mining strategy. Its only mine is in Australia, and Lynas only runs it part of the year. The ore is sent to a plant in Malaysia. Originally, some Malaysians objected to the plant as an example of the developed world dumping its environmental problems on the poorer nations. However, the plant has operated responsibly for several years, and the objections appear to have died down.
Working URL: https://seekingalpha.com/article/4171588-rare-earths-groaning-please
Managed & Built by I2M Consulting, LLC | © 2010-
