Rare Earth ETF Impact, The Tail Wags The Dog (MCP, REE, RES.V)

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Molycorp, Inc. (NYSE: MCP) is surging today along with some rare earth companies.  Today’s  news is not that China is lowering rare earth oxides and rare earth elements, it is that an ETF for rare earth materials is coming.  Talk about the tail wagging the dog.  Van Eck Global is said to be launching the Rare Earth/Strategic Metals ETF as a global trade on rare earth materials.

Rare Element Resources Ltd. (AMEX: REE) is surging 11.6% at $12.56 and its market cap now eclipses $400 million.  Its 52-week range is $1.15 to $13.71.

There is another rare earth stock on the Bulletin Board called American Rare Earths and Materials Corp (OTCBB: AREM), although this company recently changed its name and we do not usually care to report on Bulletin Board companies with micro-cap market capitalization rates.

In Canada, one other winner is RARE ELEMENT RESOURCES LTD (RES.V) as shares are up over 13% on last look.

Molycorp is now one of the top IPOs of 2010 and it now has a market cap in excess of $3 billion.  Shares have been up more than 10% today, but the stock is up 8.2% at $38.08 on more than 8 million shares with just over 30 minutes to the market close.

ETFs by their intent are meant to track sectors and meant to expose investors to moves in certain sectors.  By and large, these were intended to be tracking instruments.  Rare earth oxide and rare earth element companies are by and large still very much niche and emerging companies, many of which have little to no revenues.  If this ETF takes off, it will have the unfortunate effect of running up stocks to the point that just being in the ETF would allocate too much ownership by an ETF and that in turn creates a phantom valuation premium in the underlying stocks.  Perhaps the discussed ETF should be forced to become a closed-end fund to avoid having an impact like this.

Some of the names of the rare earth material are not exactly household words… Bastnasite, Cerium, Lanthanum, Praseodymium, Neodymium, Europium, and Yttrium.  There is now going to need to be the term ETFium.

Rare earth elements are not exactly rare by definition.  What is rare about them is that the quantities of locations capable of being mined at cost-effective commercialization are rare.  Rare earths are used in many applications, from tech to water filtration to defense to alternative energy to batteries and much more.

JON C. OGG