November 2, 2010
Sell Alert,PlusAnUpdateonRareEarths
Dear Energy & Scarcity Reader:
Back on September 3, I recommended that you buy Rare Element Resources (REE: AMEX) , a rare earths developer with an ore deposit out in Wyoming. At the time, REE was selling at $4.80 per share.
We're Up a Lot, and Fast
As recently as last week, REE shares traded at over $13 each. Then last Thursday and Friday, they dropped quite a bit. Now REE is trading at about $10 per share.
We're up over 100% with REE inside of two months, and I'm happy about that. But I also have to recommend that you sell.
In the past two months, we've enjoyed a heck of a lot of appreciation in the rare earths stocks overall. In fact, it's about what I expected to happen over the next year, not just two months all compressed.
If you've followed the news, you know that there was a share price run-up due to political issues involving China. China and Japan are butting heads over contemporary issues, but the root of the matter probably goes back many centuries to a long-standing rivalry within Asia.
More recently, we had a rare earths "embargo" that was not really an embargo -- or so the Chinese said. Whatever it was, it's over now -- or so the Chinese assure us. Actually, in my opinion, the rare earths issue is NOT over by any means. I've got plenty to say about it. But not here. This is just a fast update on REE.
At any rate, in the past couple of months we saw panic buying in the rare earths space. One big winner was the share price of REE, which soared.
A Bridge Too Far
Thing is, REE has gotten way ahead of its own, organic development. Way ahead, like in that proverbial "Bridge Too Far."
Don't misinterpret this sell recommendation. There's nothing "wrong" with REE. Not at all. I like the ore deposit. I like management. I like the business plan. I like what's probably going to happen with this company.
I just don't like the REE share price right now.
In my view, there's a lot of room left for REE to fall, so I'd prefer it if you booked your gain. Will we leave money on the table? Perhaps. But just be happy with a 100% gain inside of two months. Pay your taxes and move on.
I can definitely foresee buying back into REE at some other time. But I want you to book some gains now, and we'll re-deploy the funds into another investment idea at the right time.
Action to take: Sell Rare Element Resources (REE: AMEX).
What About the Other Guys?
As to the other rare earths players? Hang on. Here's the summary.
Lynas Corp. (LYC: ASX) is making excellent progress with its Mt. Weld project, in Australia, and the related processing facility in Malaysia. Hold your shares despite the share price gyrations in the investment space.
Lynas is already moving ore at the Mt. Weld site. It's got piles of ore of different concentrates, all stacked up. But Lynas still lacks a processing plant to turn the ore into real product. So is Mt. Weld a "mine?" I'd say not yet. But that's an issue of semantics, I guess. Lynas will probably be running pilot tests of ore in early 2012, or maybe sooner. Maybe, if everything goes right. And does everything always go right?
Don't take this wrong. I'm just being sanguine about the difficulties involved in getting a new plant up and running, processing ore for which there's no established metallurgical history. I expect good things from Lynas. I also expect that there will be a few problems. That old law-giver, Mr. Murphy, always has a vote on things.
Lynas already has contracts to sell its output, when the plant comes on line. So I expect Lynas will be among the first movers outside China to start generating cash flow from rare earths.
Molycorp (MCP: NYSE) is also on track to restarting things at its Mountain Pass site in California. Again, hold on to your shares despite the share price run-up.
I had a nice talk last week with Molycorp CEO Mark Smith, down in Washington, DC. Mr. Smith gave a great presentation at the rare earths conference I attended. Things are going quite well for this newly-listed firm.
Molycorp has a solid plan to get its processing plant back in operation within about two years. It'll be producing ore, and, like Lynas, be among the first non-Chinese movers to generate cash. There's nothing wrong here. It's all good. Except the same cautionary comments pertain about Mr. Murphy and his laws, above.
Ucore Rare Metals (UCU: TSX-V) enjoyed a share price run-up during the rare earths boom of the past two months, and now the shares are back down near where we bought them. Hold on, though. I'm not worried, and in fact I'm VERY optimistic about where Ucore is headed in the next year or so. Indeed, I think Ucore is under-valued.
Here's my thinking on Ucore. Right now, it's more of a mining and first-stage processing play, than an end-to-end rare earths idea like Molycorp or Lynas. That is, Ucore has a superb ore body at Bokan Mountain, Alaska. It's one of the best ore bodies in North America. That's its key strength, and I'm not looking hard at the "downstream" processing aspect.
Why just focus on the upstream, mining-processing side of Ucore? Because the Ucore plan is very do-able, and soon. I like "do-able" and I like "soon."
Over and above great ore, the Bokan site is an old uranium mine. It's already permitted for mining. (Management needs to update the permits, though. Hint, hint.) It's inside a national forest, so there are no annoying, NIMBY-neighbors to complain. There are about $20 million-equivalent of roads already constructed. There's electric power. There's a deepwater pier right at the foot of the mountain. It's right across the water from the Port of Ketchikan.
That is, of all the many rare earths ideas out there, Ucore holds an ore body that's among the most easily mineable. You've got to like that.
Being adjacent to a deepwater pier, the processed ore can go wherever in the world a boat can float. That would include one or more of the following... Japan, which is screaming for rare earths and is desperately moving to build up its internal processing capability. Or China, which is not above buying foreign ore. Or Malaysia -- think about Lynas using Alaskan ore at its new plant. Or California -- think about Molycorp using Alaskan ore. Or Ucore can ship its product pretty much anywhere else.
In last week's ESI alert, I discussed the Ucore drilling results. I think that Ucore is getting a bad rap, based on a few holes out of many. There are more drill holes for Ucore to discuss in future news releases. Plus, there are the results of an extensive trenching effort that have yet to hit the wires.
In my view, we're going to be very pleased with the Bokan Mountain ore body, when the results come out. We'll see a very mineable ore body, with very good, consistent ore grades -- including enviable quantities of "heavy" rare earths that command premium prices.
Finally, the infrastructure is already there to start mining, and in fairly short order. Really, that matters. When you look at many other rare earths sites, they're on the far side of nowhere. It would take truly heroic efforts, and very big bucks, for some of these other plays ever to see the light of day.
That's all for now. Thanks for reading...
Byron W. King