Companies planning to extract “rare earth” elements from the earth crust saw their shares skyrocket in the past year, as worries about the Chinese stranglehold on current supplies lit a fire under this segment of the mining industry.
Now that the stocks have settled back, individual investors may be wondering if this is the time to get on the bandwagon. Rare earths are increasingly critical in high-tech manufacturing, but is it too risky to place a bet on the sector when most companies are still years from production?
“For the right investor, if they do their homework, there still are opportunities in here – real value in this space,” said Jon Hykawy, an analyst who follows rare earth stocks for Byron Capital Markets in Toronto. As with other mining sectors, investors should look for companies with high-grade deposits that will eventually be low-cost producers, he said.
While many companies in the sector have seen their shares weaken recently, some of the rare earth exploration firms are still overvalued, Mr. Hykawy said, because investors “got caught up in hysteria” after China said last year it would limit its rare earth exports. Others, however, can still look forward to impressive gains, he suggests.
The problem in following the sector is that each deposit consists of a different combination of the 17 rare earth elements (some of which are far more expensive than others), and different grades. So each company’s activities have to be looked at individually.
A key factor is how quickly each company will be able to get its mines into production – particularly since an oversupply of some rare earths could become an issue as early as 2014.
A handful of companies are on track for production as early as 2013.
Picks
Mr. Hykawy has four ‘buy” recommendations in the sector, companies he thinks will be in a position to get rare earths on the market fairly quickly and whose shares still have room to move up. All trade on the TSX or TSX Venture exchange.
Among these are Rare Element Resources Ltd., RES-T a Vancouver-based company with a deposit in Wyoming that has “available infrastructure in a good mining jurisdiction,” Mr. Hykawy said. Halifax-based Ucore Rare Metals Inc., UCU-X which has an Alaskan project that could get support from the U.S. government, and Luxembourg-based Frontier Rare Earths Ltd., FRO-T with a large South African deposit, are also on his list.
His top pick is Saskatoon-based Great Western Minerals Group Ltd., GWG-X which is expected to begin producing rare earths within the next two years from its Steenkampskraal mine in South Africa. With a very high grade of rare earth ore, and the facilities to process it, the company is in great shape, he said.
Mr. Hykawy said the biggest and most advanced player in the sector, Colorado-based Molycorp Inc., MCP-N is not on his “buy” list – despite the fact it is a very strong company with a producing mine in California – because its stock price has increased so dramatically in recent months.
Analyst Luisa Moreno, who follows rare earth stocks at Jacob Securities Inc. in Toronto, has a slightly different group of picks. She, too, likes Rare Element, Ucore and Frontier, but also has Matamec Explorations Inc. MAT-X and Avalon Rare Metals Inc., AVL-T both TSX companies, on her list of “speculative buys.”
Montreal-based Matamec has a strong potential resource at its Kipawa deposit in the Témiscamingue region of Quebec, while Toronto-based Avalon owns the large Nechalacho rare earth deposit in the Northwest Territories, she said.
