by Justin Dove, Investment U Research
Friday, August 12, 2011
China’s grapple-hold on the rare earths scene is nothing new. Whenever one entity controls 98 percent of world demand for a product, the market can be easily manipulated.
David Fessler hit the nail on the head back in March about this situation. One of the small mining companies that he mentioned was Rare Element Resources (AMEX: REE). Two conditions have developed for Rare Element Resources since March that are worth noting:
- Rare Element Resources announced on August 4 that it found mineable rare earth deposits in North America.
- The broad market indices dipped more than 10 percent between August 4 and August 8. As a result, Rare Element Resources’ stock lost about 26 percent. On Tuesday morning, it already gained back 10 percent, reaching just over $8 per share. However, these values are still low compared to the peak of $17.16 on January 3.
The company has a market cap under $400 million and hasn’t turned any profits yet. While this is a very speculative stock, there are some good reasons to watch this company…
The Best Cure for High Prices is… High Prices
It’s apparent in the charts below from Bloomberg just how much China has manipulated supply, and therefore prices. Early in the game, China undercut competition and made it unprofitable to mine rare earths anywhere else. After eliminating most of the competition, China’s government began to put restrictions on manufacturing to drive up prices.
- The lowering of China’s manufacturing quotas:
- The rise in prices:
The rise in prices led companies like Rare Element Resources to explore mining opportunities outside of China again. Adding supply to the market will eventually lower prices. However, the companies that act early enough will be able to take advantage of these higher prices.
Global Hunter Securities had some very positive things to say about Rare Element Resources last month. According to their report, “the project’s location, straightforward mining plan and relatively low capex make Rare Element a compelling investment at this time.” Global Hunter gave a price target of $18.50. That may be a bit optimistic for a company yet to turn a profit. But, even if the stock reaches $14 per share, the returns would be greater than 50 percent.
REE Has Something for the Gold Bugs
A play on gold makes Rare Element Resources a bit more attractive than similar competitors such as General Moly (AMEX: GMO) and Avalon Rare Metals, Inc. (AMEX: AVL). Rare Element Resources’ Sundance gold mine in Wyoming is said to have “resource in excess of 900,000 ounces.”
This diversification of production could help cushion Rare Element Resources against an unexpected blow in the rare earth industry.
So it’s important to keep in mind that Rare Element Resources has a 52-week low of $2.69. As recently as May 2009 it was trading below $1 per share. It’s a very volatile, speculative company. It may be wise to simply keep an eye on the company and see how these mining projects in North America develop.
The recent plunge in the market also sank Market Vectors Rare Earth Metals ETF (NYSE: REMX). This ETF is around $20 per share after reaching above $28 earlier this year. This may be a safer investment for those bullish on rare earths.