A drop in the price of rare earth minerals used in the production of high tech equipment, including hybrid cars and smart phones, is casting a pall over the sector, prompting heightened interest from short sellers.
Since the end of August, short interest in Colorado rare earths giant Molycorp Inc. (NYSE: MCP, Stock Forum), for example, has jumped to 23.4 million shares, an increase of 35% per cent from 17.3 million at the end of July.
Other key players in the field, including Rare Element Resources Ltd. (TSX: V.RES, Stock Forum) (AMEX: REE, Stock Forum), and Avalon Rare Metals Inc. (TSX: T.AVL, Stock Forum), have seen their stock prices fall dramatically from year ago levels.
As it moves to develop its flagship Nechalacho project in Canada’s Northwest Territories, Avalon is trading at $1.90 this week, leaving the company with a market cap of $196.8 million, based on 103.6 million shares outstanding. The 52-week range is $3.95 and $1.39.
Trading at $4.72 on Wednesday, Rare Element Resources has tumbled from a high of $8, leaving it with a market cap of $209.4 million, based on 44.4 million shares outstanding.
As recently as two years ago, rare earths were considered a shiny bright spot in the resource sector, and a major topic for discussion at investment conferences that focus on the speculative side of the market.
At that time, buoyant prices were attributed to supply shortages caused by an embargo in China, which controls over 50% of the world’s reserves of rare earth minerals and 90% of global supply.
But as large resource companies in the United States and Australia reacted to the rise in prices by bringing on new production, a supply shortage that existed two years ago appears to be disappearing.
Indeed, some say China’s domination of the rare earths market is under threat from Sydney, Australia-based Lynas Corp. and Molycorp, which have both made significant announcements in recent weeks regarding production increases.
Lynas has received a temporary operating license for a new rare earths facility in Malaysia and is expected to begin production in October. The company estimates that it will produce 22,000 tonnes of rare-earth materials once it reaches full capacity in late 2013.
On August 27, 2012, Molycorp announced the startup of a new facility that will produce heavy rare earth concentrate from freshly mined ore at its Mountain Pass operation in Southern California, about 60 kilometres south of Las Vegas.
The company is targeting a production rate of approximately 19,050 tonnes of rare earth oxides per year by the fourth quarter of 2012.
However, when Molycorp’s new chemical separation facility at Mountain Pass is completed in mid-2012; the company will have the capacity to produce 40,000 tonnes if it chooses to do so.
In an interview with Stockhouse, Molycorp spokesman Jim Sims estimated that Molycorp could eventually account for up to one third of a global industry that is currently producing about 120,000 tonnes annually.
It would also emerge as the globe’s second largest producer behind Baotou Steel Rare-Earth (Group) Hi-Tech Co. Ltd., which is producing rare earths as a by-product from operations in Inner Mongolia.
This may not be good news for investors in rare earths stocks.
“The entrance of Lynas and Molycorp into production is likely to lead to a global surplus for most light rare-earth elements and we believe it is likely prices will continue to weaken over the near term, with very limited engagement currently from buyers,’’ said UBS analyst Ben Wilson.
If that isn’t enough to alert short sellers, there are currently 200 rare earth projects under development around the world,” said Dudley Kingsnorth, a rare earth expert and Chairman of Industrial Minerals Co. of Australia. He made the forecast during an August 29, 2012 interview with Want China Times, the English News website of the Taiwan-based China Times News Group.
Want China Times is reporting that legally-produced rare earth mineral products reached 84,900 metric tons in China in 2011. But the output of the US enterprises alone will account for half of China’s total amount if the figure remains unchanged in 2013.
Meanwhile, having tumbled from a 52-week high of $42.90, Molycorp is trading at $11.77 this week, leaving the company with a market cap of $1.3 billion, based on 110 million shares outstanding.
Judging by the recent jump in short interest, many investors are betting that Molycorp is heading even lower in the months ahead.