Rare Earth Stocks: On the Way Up or Short Covering?

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Over the past five days, shares of three companies focused on rare earth mineral production have climbed more than 10% while the S&P 500 has managed to stay barely better than flat. Shares of Molycorp Inc. (NYSE: MCP) are up 12%, while shares of Avalon Rare Metals Inc. (NYSEMKT: AVL) are up about 16% and shares of Rare Element Resources Ltd. (NYSEMKT: REE) are up nearly 30%. The Market Vectors Rare Earths/Strategic Metals ETF (NYSEMKT: REMX) is up about 4.5% as well.

These stocks bounce around wildly, but over the past 12 months all are down, from 33% lower at Rare Element Resources, to 35% lower at Molycorp, and 50% lower at Avalon. Momentum in these stocks is, well, momentary, lasting only long enough for some investors to take profits and and others to cover their short positions.

The last few days have seen a momentary rise in both share volume and price and it would be a huge surprise if we aren’t seeing a great deal of short covering, with Molycorp’s shares over $7 for the first time in a month. Some 38% of the company’s shares are short and given the weak second quarter results, being a long-term bull in this stock would be akin to criminal negligence. On average, Molycorp trades nearly 6.5 million shares a day.

Neither Rare Element Resources nor Avalon has anywhere near the short positions nor the daily volume of Molycorp. Both remain exploration-stage plays and share price swings here don’t mean an awful lot.

What’s even odder though, is that given the production news from China that either of these two exploration companies get any attention at all. China’s production quota for 2013 calls for a total of 94,000 metric tons (tonnes) of production. The country’s export quota is 31,000 tonnes, roughly the same as it was in 2012 when actual exports amounted to 13,000 tonnes. For the first seven months of this year China has officially exported 11,185 tonnes, so it’s pretty certain that exports will be much higher than a year ago.

The key word in that last sentence is “officially” because China’s non-official — i.e., smuggled — exports of rare earth minerals is said to be as high as 40,000 tonnes. That depresses prices considerably. The following chart from MetalMiner tracks several industries and commodities and shows quite clearly how depressed rare earth values are compared with other indexes.

Aug-13-Rare Earths
Source: Courtesy MetalMiner

If Molycorp can raise its production the company still has a steep road to climb to profitability given the state of the market for rare earth minerals. If an investor just wants some action, these stocks are as good as any. If an investor wants a good night’s sleep, it might be best to look elsewhere.

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