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A worker at Jinyuan Co.'s smelting workshop stokes the pots containing the rare earth metal Lanthanum before he pours it into a mould. (DAVID GRAY/REUTERS)
A worker at Jinyuan Co.'s smelting workshop stokes the pots containing the rare earth metal Lanthanum before he pours it into a mould. (DAVID GRAY/REUTERS)

Mining

Digging for value in the rare earths 'hysteria' Add to ...

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?

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“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., 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., which has an Alaskan project that could get support from the U.S. government, and Luxembourg-based Frontier Rare Earths Ltd., with a large South African deposit, are also on his list.

His top pick is Saskatoon-based Great Western Minerals Group Ltd., 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., 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. and Avalon Rare Metals Inc., 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.

Ms. Moreno noted there are as many as 200 public companies with some kind of exposure to rare earths, and even the good stocks in this sector are very risky. It would take only one or two missteps for any one of them to fall out of favour, she said. “The truth is some of these guys are not going to make it.”

She said it is crucial for investors to make themselves familiar with the details of any company’s prospects and operations before putting money into the stock.

For those looking for broad exposure to rare earths, a safer alternative may be the Market Vectors’ Rare Earth/Strategic Metals ETF , which trades on the New York Stock Exchange. The ETF holds the big players – Molycorp and Australian-based Lynas Corp. – along with Avalon, Rare Element and several metals companies outside the rare earth sector. “It’s a good way of getting into the space,” Ms. Moreno said.

One of the factors that could further drive up the price of rare earth companies is the potential for mergers and acquisitions in the sector. Molycorp, in particular, has made it clear it is interested in purchasing or partnering with others to complement its operations.



A critical resource



What are rare earths?

Rare earths aren't actually rare, or earths. They are metals found in the Earth's crust, but in concentrations that make them difficult to refine. There are 17, with names such as lanthanum, dysprosium, praseodymium, ytterbium and neodymium.



Why is there such a rush to develop rare earth mines?

China currently produces 95 per cent of rare earths, but it has cut its exports and signalled it will continue to do so. This could cause a shortage of some critical materials in the West.



What are they used for?

Rare earths have chemical, optical and magnetic properties that make them useful in many manufacturing processes and components, particularly in high-tech applications. They are used in glass polishing, petroleum refining, magnets, batteries, and display screens.

Richard Blackwell



Some of the top rare earth stocks

Company

Headquarters

Key mine property

Exchange

52 week stock range ($)

Recent Price ($)

Great Western Minerals Group

Saskatoon

South Africa

TSX Venture

0.16 -- 1.23

0.65

Avalon Rare Metals

Toronto

Northwest Territories

TSX, Amex

1.96 -- 9.65

6.40

Matamec Exploration

Montreal

Quebec

TSX

0.11 -- 0.70

0.47

Rare Element Resources

Vancouver

Wyoming

TSX; Amex

1.94 -- 17.85

10.29

Ucore Rare Metals

Halifax

Alaska

TSX Venture

0.20 -- 1.28

0.60

Frontier Rare Earths

Luxembourg

South Africa

TSX

1.86 -- 3.75

1.94

Quest Rare Minerals

Montreal

Quebec/Labrador

TSX Venture; Amex

1.74 -- 8.88

6.54

Neo Material Technologies

Toronto

China

TSX

3.34 -- 10.67

9.31

Molycorp

Colorado

California

NYSE

12.10 -- 79.16 (US$)

57.71 (US$)

Lynas Corp.

Australia

Western Australia

ASX

0.53 -- 2.70 (A$)

1.98 (A$)

Arafura Resources

Australia

Northern Territory, Australia

ASX

0.40 -- 1.79 (A$)

0.67 (A$)

Source: Globe Investor

Follow on Twitter: @blackwellglobe

 
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