Commodities & Metals

Rare Earths, the New Meth and Crack for Wall Street (MCP, REE, AVL, REMX)

Rare earth materials, rare earth oxides, rare earth elements… Whatever they are called by whichever outlet is writing about them that day, these have become the trading stocks where fortunes have been made.  The sector is probably also making some widows and orphans out of those who tied to be short sellers.

Molycorp, Inc. (NYSE: MCP) was the true beneficiary after China decided to halt exports and then set quotas for exports of rare earths.  The company recently made an acquisition and it has  North America’s only commercially viable rare earth mine that is coming on-line soon.  One analyst even gave it an $85 price target, which is sounding more and more feasible compared to when that analyst call was made.  There are smaller companies which have some operations but Molycorp is the winner.  Shares were down 1.4% at $70.10 in late afternoon trading, but the stock hit a new all-time high yet again of $72.80 today.  To imagine that this traded initially as a busted IPO and could have been bought for less than $13.00 per share.

The move is a tide which raises all ships.  Rare Element Resources Ltd. (AMEX: REE) was down 2% at $15.42 in late afternoon trading with an intraday high of $16.40 and with a 52-week trading range of $17.92. Avalon Rare Metals Inc. (AMEX: AVL) was down 1.3% at $9.50 in late afternoon trading after an intraday high of $9.92 and the 52-week trading range is $1.09 to $10.11.  There is also the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) as well.  Its shares were down 0.2% at $27.64 in late-afternoon trading after its high was $28.19 today and its 52-week range is $19.25 to $28.91.

On any given day you can see active buy and sell calls on Yahoo! Finance news from outlets far and wide.  Today we had Indie Research calling for much higher rare earth prices while Seeking Alpha’s headline yesterday was “Why It’s Time to Dump Rare Earth Stocks Today.”

What is obvious is that this is an old industry that is again emerging due to the demands of today from weapons systems, high-tech systems, alternative energy, batteries, cars, electronics, and on and on.  You are seeing an asset and stock bubble in development here.  At what price that bubble bursts is anyone’s guess.  Bubbles can keep inflating and markets can stay irrational for longer than most investors can remain solvent.

The short interest is absolutely amazing here.  NYSE showed the short interest in Molycorp growing 4% through March to almost 7.4 million shares short.  The amazing short interest growth was the 44% growth to more than 388,000 shares of the Market Vectors ETF.

What would pop the bubble the fastest?  The single event that would pop this bubble immediately is a statement from Minister of Land and Resources Xu Shaoshi or another key Chinese official saying something like this: “Rare earth elements have reached prices at which we are willing to supply the global market demand.”  Even a news report with a rumor that China was considering lifting a ban would probably take a massive bite out of these stocks.

So we have predicated that a bubble is forming.  We are far from the first, we won’t be the last, ad we probably aren’t even catching the top.  If this isn’t a bubble forming, then this is the new street crack.  It seems that everyone is looking for some of these rocks.  If crack is too 1990s, then rare earths are the new meth.

JON C. OGG