Share prices have tumbled down for many rare earth element miners, while the quality of certain companies has dramatically improved. Is now the right time for investors to strengthen their positions in the space or to turn and run? Byron King, editor of Outstanding Investments and Energy & Scarcity Investor, discusses some new tax implications with The Critical Metals Report that could help investors time their gains or losses.
The Critical Metals Report: Byron, in your last interview with us in June, you said it was time to buy low in the rare earth elements (REEs) sector. Is it now time to buy lower, or should investors take their losses and come back later?
Byron King: The REE sector has declined over the summer with the rest of the junior resource space and stock market. While the share prices of the companies I follow may be lower than they were six months ago, the quality of the companies is actually dramatically better.
Stans Energy Corp. (HRE:TSX.V) and Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) are much stronger, much better companies in terms of the security of their mining claims, permitting, the people that they have working with them and certainly in terms of the metallurgical technology that they have at their disposal to turn rocks into a salable product.
TCMR: Why should investors stay in this space?
BK: We had a sweet run in this space in 2010 and 2011. But for the past year or so, it's been brutal. So yes, many investors should consider bailing out, if they haven't bailed out already. This game is not for the timid. Actually, about two years ago, I got my readers out of Molycorp Inc. (MCP:NYSE) at about $55/share. Molycorp was recently at $8/share. Many other rare earth players have taken similar hits.
But it's not hopeless. The two REE companies that I'm following—Ucore and Stans—are true technology leaders, in my view. Each one has developed significant extractive metallurgical techniques to get the high-priced heavy rare earth elements (HREEs) out of the rocks and to turn the material into saleable products.
Stans and Ucore are key players. Both companies have solid partnerships with national governments, which is crucial right now. Stans has a solid partnership with the government of Russia. Ucore has a solid partnership with the US government through the Defense Department. Those two are the strongest boxers in the ring, at least on my fight card.
TCMR: What are you telling your readers when they inquire about the performance, or lack thereof, of many of these REE juniors?
BK: There are fundamental disconnects between share price and the overall quality of these companies. My advice is to remain patient. I tell people that they should not be investing in this space with money that they can't afford to lose. You have to be willing to ride the rollercoaster.
We're getting closer to the end-state breakthroughs, though, such as we've seen with the extractive triumphs – and I mean triumphs! – that Stans and Ucore are making. So I anticipate share price increases over time.
TCMR: Is it possible to calculate the value of these companies without transparent REE prices from inside China?
BK: The China issue makes it more difficult. Yet I certainly believe that there's enough information available to make informed decisions about the merits of Ucore and Stans.
The day-to-day pricing out of China doesn't tell the entire story, in any long-term way. China has long-term REE supply issues. The Chinese are looking around the rest of the world for new deposits and technologies. The Chinese spent a big part of the last 25 years high-grading and exporting the good stuff from their deposits at low prices. It's only in the last two to three years that the Chinese have put a squeeze on exports. Now the country finds itself wrestling with issues of resource depletion. Within very few years, China will wind up being a buyer on world markets as opposed to an exporter.
TCMR: At least a buyer of certain heavies.
BK: Yes—erbium, terbium, gadolinium, europium, lutetium and possibly yttrium.
TCMR: There's an issue looming that's even larger than the "fiscal cliff." Can you talk about that?
BK: It plays into the seemingly endless sales of shares across the entire junior resource space. Much of the US tax code will dramatically alter on Jan. 1. The popular news media keeps focusing on the expiration of the so-called Bush tax cuts. So will Congress and President Obama extend tax cuts for the middle class? That's the headline question.
Yet for investors of any class, capital gains rates are scheduled to go up dramatically. Capital gains rates will almost double from 15% to nearly 30%. Taxes on interest will also go up. Plus – and this is really going to be a punch in the gut – tens of millions of taxpayers are going to be subject to the alternative minimum tax, which is a completely parallel tax system to the one that everyone is used to with Form 1040. A lot of people who understand this have been moving money. They're cashing out of hedge funds – which then sell their resource shares – and changing structures now to avoid problems in 2013.