By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 9/23/10 Sigh up for free Cabot Wealth Advisory e-newsletter
Headlines about “rare earth elements” or “rare earth metals” are popping up all over the place as China is accused of cutting off the supply of these scarce commodities to Japan in protest over the arrest of a trawler captain accused of fishing in waters controlled by Japan but claimed by China. (China denies the export ban.)
Here’s a quick refresher on rare earth elements:
There are 17 rare earth elements, and each one has its uses. When cathode ray TV sets were still dominant, the element europium supplied phosphor that produced the vivid red. Rare earth magnets that use neodymium, praseodymium, samarium, gadolinium and dysprosium are much more powerful than standard ones. Lanthanum increases the refractive index of glass, making it a popular addition to camera lenses. Cerium is the catalyst in your self-cleaning oven. Holmium, erbium and ytterbium are used as dopants in lasers.
These exotic elements have other uses as well, but it’s their extensive and increasing use in hybrid and battery-driven cars that is causing tension. China emerged as a dominant producer of rare earth metals in the 1990s, and its aggressive pricing caused the shutdown of many smaller mines around the world.
But with China now producing 95% of the world’s annual production (or 96% or 97%, depending on what you read), things are getting ticklish as China—which now uses about 60% of the rare earths it produces—needs more and more of its own production.
Even leaving out the potential for the use of these increasingly elements as a punishment for those who tick China off, there’s the very real need for rare earth elements in automotive, high-tech and defense industries in the U.S. and elsewhere.
It takes time to re-open old mines and ramp up production, but that’s exactly what’s happening in many places, including the Mountain Pass rare earth mine in southern California near the Nevada border.
Rare earth deposits often contain thorium and radium, and the radiation from these elements led a uranium prospector to the Mountain Pass deposit in 1949. By the 1960s, the mine was in high gear, producing europium for color TV screens, and heavy production increased through 1995, making Mountain Pass the main source of the world’s supply. But repeated spills of wastewater with radiological contamination (plus the advent of China as a low-cost producer) caused the suspension of separations activity in 1998 and mining operations were shut down at Mountain Pass in 2002.
It has taken concerns about strategic defense needs and the very real possibility that China will reserve more and more of its production for Chinese companies to kick Mountain Pass production back into gear, but that’s what’s happening.
So my stock pick of the week is Molycorp (MCP), which is pumping $500 million into the reopening of the Mountain Pass mine.
Molycorp has actually been processing new output since 2009, using existing stockpiles of the bastnasite ore concentrate left over from earlier operations. But with the infusion of new cash, mining operations are scheduled to resume in 2011.
Mountain Pass has an estimated 2.21 billion pounds of proven and probable rare earth oxides with an average 8.24% ore grade. And Molycorp has a 30-year mining permit (and an associated environmental impact report) issued at the end of 2004.
Molycorp’s bottom line has been a bunch of quarterly losses, to date, which is just what you’d expect from a capital-intensive industry and a development-stage company.
But the story is so compelling that the stock, which came public in late July, has already nearly doubled, with today’s China vs. Japan headlines only stoking the flames.
Is it speculative? Of course. It’s a mining operation and the company hasn’t made a cent yet.
If you decide to take a flier on this one, keep it small and average up as you get a little profit cushion to work with. It’s going to be a bumpy—but fascinating— ride.
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Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report
A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and editor of Cabot China & Emerging Markets Report since 2005. Under Paul’s stewardship, Hulbert Financial Digest rated Cabot China & Emerging Markets Report the number-one-rated newsletter of 2006 with a 78.6% gain for the year, the number-one-rated newsletter of 2007 with a 74.1% return, and the top-performing investment adivsory for five years with a 17.9% annual return.
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