Rare earth elements are on every resource investors' minds right now. Rare earth attention has risen and fallen; prices have risen and fallen, so the summit provided investors with some insight into what lay ahead.
One of the events at the summit was a panel entitled "The Rare Earth Think Tank". Mickey Fulp, founder of the Mercenary Geologist, moderated the discussion and he was joined by Anthony Alfidi (of Alfidi Capital), John Thomas (the Mad Hedge Fund Trader), and Jeb Handwerger (of Gold Stock Trades). Some of these experts, themselves, own an interest in some of these companies.
Mr. Fulp's first discussion point was to solicit opinions on rare earth element prices.
Jeb Handwerger answered first and said: "We've recently seen a price decline in the rare earths and there have been reports that this is going to affect some of the juniors in the space. I think there is some misinformation that is put out in the media: [The media is] still failing to differentiate between the light rare earths and the heavy rare earths. The lights are more cyclical and don't have the same supply and demand constraints as the heavies have. The heavy rare earths prices have not declined as much."
Then he elaborated on a couple of geopolitical events in the near future and how they could impact investors: "China will come out with new export quotas in 2012; demand is growing rapidly [around the world] for heavy rare earths and will continue to grow. Even in a tough economy, the end-users are going to continue looking for these metals. Investors need to pay close attention to companies in Neodymium, Dysprosium, and Terbium."
Anthony Alfidi gave his opinion on rare earth prices by describing supply and demand influences: "I agree [with Mr. Handwerger] that there is a short-term push for suppliers to refocus on the rare earths elements. But a lot of the suppliers in the industrial space are manufacturers and are looking to diversify away from rare earth elements. There are companies looking for alternatives to rare earth elements."
John Thomas provided his insight: "What we're seeing is the classic bubble unwinding in rare earths that we see in so many other assets. Longer-term, it's a race of supply against demand. On the supply-side, you have China attempting to consolidate and expand their rare earth mining. Molycorp is tremendously increasing their production program. And Japanese companies are in the early stages of attempting to develop mines in various parts of the world. On the other hand, Molycorp expects rare earth demand to rise by 50% in the next 4 years. If demand outstrips supply, we could see a rise in prices."
Mickey Fulp wrapped up this discussion point with his own point of view: "To me, the price movement over the past few years is a classic parabolic rise and fall. That's what prices do – they go up to high then they fall. Whether prices will go up or down, I have no idea. Cerium is now at $80/kilogram. When I first started covering Avalon Metals in 2007, Cerium was $3/kilogram."
Next, the panel discussion turned to the idea that if the market supplies metals uses will be found for them. Mr. Fulp referred to it as "build it and they will come". However, the conversation trended toward a discussion of the possibility of substitution in rare earth applications.
Mr. Thomas started this discussion by showing he was skeptical that it would happen: "We're headed in the other direction [currently]. Prices are so high; engineers are looking for ways to design rare earths out of products." But then he agreed with the theory Mr. Fulp put forward: "If prices drop dramatically, they will find new demand. Globally, electronic hardware applications are growing exponentially so the demand for rare earths from that side is going to continue to rise."
Mr. Alfidi was next and added: "As a long-term play, the US government is finally getting ahead of the game. The Department of Energy is spending $31.6 million to find rare earth alternatives."
Mr. Handwerger shared his point of view: "I've spoken to some of the top scientists and engineers in the field and there's a reason why after 50 years the rare earths haven't been replaced. These elements cannot be substituted. There are no other elements that are feasible to take Dysprosium out without losing efficiency." He added that we can't effectively recycle rare earths and the media is further distorting the situation by encouraging heavy shorting in the markets."
Next, the panel discussed the role of the US government in rare earths.
Mr. Alfidi said: "The US government currently consumes about 5% of the US' annual use of rare earth elements. They are critical to our military systems. The bad news is: The US government does not have any emergency supply of these elements. So if we get into a shooting war where we lose a substantial amount of equipment, we're going to have a problem. The National Defence stockpile has not possessed any inventories of rare earth elements at all."
Mr. Handwerger added that there are so many factories being shut down in the US and being built in China. There needs to be more rare earth supply chain built in the United States. Other panelists agreed and added that any growth would need to come from the private sector because the US government spent more time and money doing studies than acting to correct the problem.
Mr. Thomas said: "Electric cars and hybrid cars are going to increase by 20 million in the next 5 years. These are huge users of rare earths." But Mr. Fulp disagreed: "I don't buy it," he said. "I travel a lot and can't get into an electric car and get where I need to go. This niche… is for environmentally conscious people who live in cities."
What makes a good rare earth element speculative stock?
John: "My favourite is Molycorp (NYSE: MCP). It's really the only publicly listed company that trades in decent size in US [markets] so you can actually believe the numbers and the management. I've visited their mine and talked to their workers." When asked if he preferred cash flow, he added: "Liquidity in juniors is pretty poor. I need something I can move big chunks of money in and out of."
Jeb Handwerger countered John's advice with his own: "One stock I wouldn't touch is Molycorp. They've done more negative to the rare earth space than they've helped. They consistently come out with statements that they can fulfill all rare earth needs in the US. But I haven't seen drill results. They comply with Sarbanes-Oxley but they aren't complying with 43-101 results. Their claims need to be researched."
He continued with some advice for investors: "Investors need to realize that the heavy rare earths – Neodymium, Dysprosium, Terbium – those are the [rare earths] investors should be looking for. I'd also be looking for infrastructure. I'm not looking at companies that aren't at least in their PEA stage – they need to be [at least] in their feasibility stage. I'm looking in North America. Investors need to look at the management. If companies haven't been releasing news for 5 or 6 months, that's a concern. You want to make sure the company has good financials. And above all, you want to make sure the company has good geopolitical support. The US is supposedly the world leader but our military is dependent on a foreign source.
Mr. Alfidi agreed with Mr. Handwerger and then added his own insight: "I like to look at companies where the CEO is a geologist – a geologist knows how to put a drill where 'X' marks the spot and turn rocks into metal. Second, I look at [infrastructure]: A site must have water, power, and roads on-site; specifically the road." Then he gave an example of a company he was skeptical about: "Quest Rare Minerals (TSX-V: QRM). Their ore looks terrific but they don't have a connection to the outside world. They have to build a 75 mile road to make it viable and that is going to cost at least $135 million."
Mr. Fulp had the last word and gave investors advice for characteristics they should watch for, and characteristics they should avoid: "When I speculate in any stock, I look for a combination of the right share structure, the right people, and the right price. It has to be all three. Where a significant number of rare earth companies fail [for me] is in share structure. A company that has 450 million shares outstanding, fully diluted at a $0.35/share price cannot attract significant US institutional investors and/or an AMEX listing. I also don't like companies that are looking for US government support. That raises a big red flag to me if a company is basing their business plan on the government because all they do is one study after another."
Investors who are interested in the rare earth space would do well to review this panel's insight into rare earth supply and demand and apply the tips and rules that the panel put forward to find smart speculative stocks.
REFERENCES
Mickey Fulp – Mercenary Geologist: http://www.mercenarygeologist.com
Anthony J. Alfidi – Alfidi Capital: http://www.alfidicapital.com/
John Thomas – Mad Hedge Fund Trader: http://www.madhedgefundtrader.com
Jeb Handwerger – Gold Stock Trades: http://goldstocktrades.com
Hard Assets Rare Earths Investment Summit: http://www.hardassetsres.com/