The most influential countries in the world are joining forces to (try to) act against the recently announced rare earth element (REE) export restrictions by China. In other words: the decade-long risk of a REE shortage has finally become public reality recently. Over the last months China has stopped granting new REE exploration and mining permits to foreign resource companies and increased its export quotas for domestically produced REE that (apparently) is urgently/strategically required for its own consumption/future. China dominates the REE sector by producing around 95% of the world`s REE metals, while demanding around 70% of the global REE supply.
Thus, the only real possibility that is openly and publicly available is that resource companies outside of China consolidate to act against the Chinese dominance in the REE sector. In early March, with a market capitalization of around $3 billion, Colorado-based Molycorp Inc. took over Toronto-based Neo Material Technologies Inc. (one of the very few companies in the field of development, processing and distribution of technically advanced REE products). This acquisition, worth $1.3 billion, gives Molycorp greater exposure to the world`s largest and fastest-growing REE consuming nation, namely China. We expect this transaction to be the starting signal for increased mergers and acquisitions activities in the REE sector over the next months and years.
According to the US Geological Survey, the USA is home of one of the largest REE reserves in North-America – also known as the Bear Lodge deposit of Wyoming. Its current “official” resource is already as big as 7 million tons of high-grade ore averaging 3.75% REO (rare earth oxides; measured & indicated). Over the next months, this resource is expected to be increased by some 24 million tons of high-grade ore averaging 2.75% REO (inferred). Additionally, the Bear Lodge deposit remains open in several directions resulting in further potential (with high probability) to substantially increase the overall reserves during the aggressive drilling program currently underway. The pre-feasibility study was completed with remarkably positive results, whereas the metallurgy has proven to be outstanding. The bankable feasibility study is expected to be completed in the second quarter of next year, whereas mining may start as early as 2014.
Considering the current extreme REE market fundamentals on the one hand and REE deposits like Bear Lodge on the other, we value the owners of such near-mine REE projects as high-potential take-over candidates, whereas we also expect Chinese players – rich in dollar reserves – to enter the bidding for rich REE reserves especially in North America.
Hence, all you can do is shake your head to “analysts’” downgrading a REE stock like Rare Element Resources Ltd. from “Buy” to “Hold” – as anybody (independent) would value such a company with a “Strong Buy” considering owning 100% of the Bear Lodge deposit and having a market capitalization of only $300 million. However, is there a better way to get your North-American and/or Chinese hands on cheap REE stock? No, so let`s change from shaking to nodding our heads – and realize the reality of stock markets: (try to) buy as low and sell as high as possible – no matter what it takes (in a capitalist friendly world).
The TSX stock price of Rare Element Resources Ltd. corrected strongly from approx. $18 to $3 in 2011 (-83%). In 2008, the stock plummeted in a similar strong fashion from approx. $1.60 to $0.25 (-84%). From a technical perspective, these strong price drops were solely so-called “classical pullbacks” to the apex of the (red-blue) triangles. However, the final movement of a triangular price formation is called a “thrust”– and typically starts immediately after having pulled back to the triangle-apex (as the light-green trendlines prefigure) respectively after such a heavily depressive period of time in which all “weak hands” threw away their stock “Hold”-ings – as if there was no tomorrow – only to see it skyrocket “uncatchable” on one of the days that were to follow.
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Stephan Bogner (Dipl. Kfm. in Economics) is a mining and commodity analyst with Rockstone Research Ltd, an independent research house specialized in the analysis and valuation of capital markets and publicly listed companies. The focus is set on the exploration, development and production of resource deposits.
The above editorial is not to be construed as an investment advice, consultation, or even recommendation to buy, sell or even hold any kind of securities or financial instruments of the above mentioned companies, any other company, market or physical commodity. The author was not paid or remunerated in any way by the above mentioned companies. The author does not hold any securities of the above mentioned companies.