Sunday, October 31, 2010

Bubbleium - A New Rare Earth

Rare earth's are all the rage these days, thanks to China.  Everywhere you read, you hear China is going to corner the market and bring Western Civilization to its knees.  Although it is pretty shortsighted allowing China to control 97% of the production, all is not what it appears.  First some facts:

  • The rare earth marketplace is $2 billion per year.
  • The anticipated growth rate for the rare earth markets is speculated to be 9% per year.
  • The United States requires approximately 5% of the metal prodution as raw materials for domestic manufacturing.
  • The military see no shortages in rare earth's. From Bloomberg last week.  "The U.S. Defense Department has concluded that China’s monopoly on rare-earth materials, used in military hardware such as missile guidance and radar systems, poses no threat to national security, according to a person familiar with a year-long study by the Pentagon."
  • There are no export controls on the sale of value added products from China, made with these materials.
  • By 2012-13, The Lynas mine in Australia will be producing, and it is likely that MolyCorp will be, as well.
  • The Market capitalization of Molycorp (MCP) is $2.6 billion, and Rare element Resources (REE) is $266 million. Lynas Corp (LYC:AU) $2.4 billion.
  • The Market Cap of all Rare Earth companies are $10 billion.
  • Annualized stock price appreciation since mid August for REE and MCP is 1,200%
  • Molycorp needs to secure additional financing equal to its original investment of $250 million.

Based on the above facts, this is a bubble, market caps exceed the entire industry annual production by 5x. These mines will not have any pricing power once they are up and running. Remember, China can control the price of these metals downward, as well as upwards.

I sold my position in REE last week and have no intention of buying Molycorp, until they have completed their dilutive follow-on offerings and the insider lock up periods end.  I will evaluate them, then.

This is a rollercoaster I do not wish to ride.


  1. Bob, I've certainly been enjoying your posts. One question that popped to mind the other day was whether you are managing your own portfolio or managing money for others as well. Just curious as you seem to be able to articulate your thoughts and mind-set so clearly:)

  2. Does the launch of REMX not sway your opinion? They must have done their homework on this matter,they would look pretty silly if prices collapsed.

  3. To Discrete, ETF providers are simply filling a customer demanded need. REMX is no exception. Notice, the day it came out, it top ticked the market for REE's.

  4. To Kathleen, I manage my own money, for three other friends, and one foundation.

    Thank you for your kind words.