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The only thing rarer than rare earths from anywhere other than China is a rare earth stock from anywhere other than China–which is why they’re hot (again)

posted on September 27, 2010 at 12:08 pm
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It was something more than a threat but less than an actual embargo.

But China seems to be putting the clamps on exports of rare earth minerals to Japan.

The New York Times reported on September 23 that China had put an embargo on all exports of rare earth minerals to Japan in retaliation for Japan’s refusal to release a Chinese fishing boat captain who was detained by Japan’s coast guard after his boat collided with two Japanese coast guard ships while fishing in waters controlled by Japan but claimed by China.

Japan has now released the captain, but the two countries remain at loggerheads. China is demanding an apology and Japan is demanding compensation for damage to its patrol boats.

It’s not clear if that the embargo was real or simply a threat. Or whether or not what it was is now over. Figuring out exactly what happened (Is happening?) with rare earth exports to Japan is complicated by export quotas that China slapped on rare earth miners earlier this year. Those quotas look to be almost exhausted so exports to Japan might have been ending in any case.

But this embargo, threat of an embargo, or quota exhaustion, is a big deal for Japan. China mines about 93% of the world’s supply of rare earth minerals and controls 99% of the supply of some minerals in that group of elements. Rare earth minerals are essential to the batteries of hybrid cars, to the magnets that turn the rotation of the blades into electricity in wind turbines, and to produce the intense light of some lasers and to amplify that light as it travels through optical cables.

In other words, if you don’t have a supply of rare earth minerals, you’re pretty much out of business in key 21st century technologies.

China’s strict new quotas—down 40% from 2009 levels—should have been a wakeup call to technology economies of the United States, Europe, Korea, Taiwan, India, and other countries that China wasn’t a reliable supplier of rate earths. When the quotas were reduced, technology analysts believed that it was a way for China to force more high-technology companies to move production to China. Want a supply of rare earths so you can make windmills? Well, you can have them if you move production to China.

But you’ve got to figure that last week’s threat has moved technology CEOs and national security leaders (since rare earths are crucial in modern defense systems) from worry to DefCon4.

The problem isn’t immediate. Most companies that use rare earth minerals have stockpiles of up to 6 months. But the search for alternative sources of supply just got a bit more pressing.

Which is why the stocks of the few non-Chinese rare earth miners have soared recently.

The United States doesn’t have a rare earth industry. The best hope for a revival of U.S. production in the not too distant future is probably Molycorp (MCP), which owns a Mountain Pass, California, mine that stopped production in 2002. The company has been selling rare earth produced for stockpiles left when the mine closed while it resumes mining activity. The company went public at the very end of July.

Molycorp raised $394 million in its IPO—after cutting the offering price. The company estimates that it will spend $511 million by the time it reaches full production of 40 million pounds of finished minerals a year in 2012.

But if you’re looking for a speculative buy in a publicly traded U.S. play, this volatile stock is just about the only name on the list. Shares are up more than 5% today

Australia’s Lynas (ADR: LYSDY or OTC LYSCF) projects that it will become the largest producer of rare earths outside of China after it begins production in 2011. The company’s Mount Weld deposit is projected as one of the richest in the world. 2011 production is pegged at 104 million metric tons of rare earth oxides. (That tonnage gets reduced as the oxides are refined into finished rare earths.)

The ADRs of Lynas, which are very thinly traded (volume averages 24,000 a day), are up more than 4% today.

There’s certainly something real in the rare earth story. I’ve owned Lynas in my Jubak’s Picks portfolio in the past.

Separating the enthusiastic froth from the fundamental values, though, is hard. I think it will get easier once the current speculative fever has a chance to cool down. I’m adding both stocks in my watch list with this post

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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  • flgator on 27 September 2010

    Bought UURAF at $0.56 and it surged last week to $0.68….up 21%…sell or hold?

  • jkallstr on 27 September 2010

    I bought LYSCF at Jim’s original recommendation and held it when he said to sell it. I decided to keep it for a while and watched it go nowhere so I eventually sold it for a very modest profit. Of course about a week later it nearly triples in value from the low .40s to 1.20. This being said, what’s the likelihood of LYSCF to continue to rise?

  • frankatwill on 27 September 2010

    Lynas is closest to production. Go to their web site and see pics of plants under construction. They have just added a find of heavy REO’s to their Mt. Weld site, so they can switch from light to heavy depending on market conditions. A low cost, dry climate open pit mine with low cost separation in Malaysia close to high tech manufacturers. Lyans is the best REO play IMHO.

  • EdMcGon on 27 September 2010

    I don’t know how much you bought, but I’d use a “play with the house’s money” approach. Ucore is still obscenely cheap for it’s potential return.

    If you have a better place to put the money, you could go ahead and sell off roughly 80% of UURAF at 70 cents/share and let the rest ride. Or you can wait until it doubles in value and then sell half.

    But I would definitely hold on to some of it. In a few years, this will easily be trading in Lynas’s territory (currently about $13.30).

  • greedibanks on 27 September 2010

    Where does TC Thomson Creek fit in? Aren’t they a molybdenum producer too?

  • rosemanjhk on 27 September 2010

    Do not know how TC fits in to the rare earth part, but they have risen from the $9′s to over $11 in the last few weeks. I expect to see them break $14-15 level within 6-9 months.

    I have UURAF as well, but bought it higher than it currently is. I would LOVE to see that go as high as Ed portends! It has been much more active the last few weeks, probably due to what Jim discussed…..

  • devaneym on 28 September 2010

    speaking of rare earth minerals take a look at qsurd on the pink sheets. went from $2 in July to over $5 yesterday.

  • 6waysfrom on 28 September 2010

    I’ve done well with Avalon (AVARF) over the past month, and am now looking at Alkane (ALKEF).

    The drawback with Alkane is low volume in the US, but it trades around 2.4 mil shares in Australia – I am in a similar situation with Standard Charter Bank of London.

    Alkane also has the only positive ROE (5.79) of this group and a relatively low beta profile. I am looking at a 2-5 year horizon.

  • Yclept on 28 September 2010

    This is probably nit-picking, but only small “hobby” wind turbines use neodymium magnets in the stator. All commercial sized generators use wound coils and an exciter regardless of the prime mover.
    Lithium is the irreplaceable rare earth needed for rechargeable batteries. China is a major supplier now, but Chile has the largest reserves in the Atacama salt pans. The only sstock play I’m aware of on these resources is SQM . However the horse seems well out of the barn on this one with th P/E currently up above 30. But then, what do I know? I sold and took modest profits in late August. It’s taken off like a rocket since I sold!

  • Yclept on 28 September 2010

    I meant to link this article:
    Though written in 2008, most of it is still applicable.

  • meboatbuilder on 28 September 2010

    I did buy LYSDY near the low and still have it. (About the only thing I’ve done right.) Any thoughts on what to do from here? Off topic; I’m still trying to figure out a way to profit from the eventually (much) higher oil prices….

  • CTscan on 1 October 2010

    In mid-May, LYSCY.PK, at about $24/sh., changed into LYSDY, at about $5/sh, a factor of five. Yet LYSDY ADR is shown as representing 10 shares of the original stock. I’m don’t understand how to compare today’s LYSDY price to that of LYSCY.PK. Is it correct that the LYSDY price at $13.5 is equivalent to a $135 price for the original stock? Is it a factor of ten or of five?

  • mcintorb on 25 October 2010

    LYSDY is equivalent to ten shares of the Lynas stock that trades on the Australian Stock Exchange as LYC, currently around $A1.64.

    LYSCF.PK is those same Australian shares (ASX:LYC) trading on the US OTC market (so if they trade them, your broker will charge you a foreign security fee). These are better than the ADR’s in my view because they are much more actively traded.

    Since the Aussie dollar has climbed to near-parity, the US and Australian prices are comparable (LYSCF is at $1.65 as I write), but not completely in lock-step–there is no overlap in trading hours.

  • CTscan on 5 November 2010

    Thanks, mcintorb. The confusion was between two ADRs: There was LYSCY.PK, which represented 50 shares of underlying (LYSCF.PK). Between 5/14/2010 (Friday) and 5/17/2010 (Monday), it was changed to LYSDY, representing 10 sh. (LYSCY.PK doesn’t exist any more.) The chart for LYSDY at MSN doesn’t show a split, just a drop in value by a factor of 5 on that Monday, but it was really only a scale change. The upshot is that Lynas is about twice as expensive as it was when I made a couple of bucks on it in November 2009.
    Thanks for pointing out the Australian symbol – I can look it up on MSN as AU:LYC, and there’s enough activity to get a smooth intra-day chart.

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