The front page headline in The Wall Street Journal a couple of weeks ago read, “Goldman Sachs warns of surplus with rare earths (REMX), rare earths seen growing less rare.” If there was ever a case of clumsy misinformation, this had to be it.
In my opinion the headline should have read, “Rare Earths Seen Growing Rarer -- Possible Mass Buying Explosion Straight Ahead.”
It is well known that Goldman Sachs hires only the most adept analysts, so when Goldman speaks, Wall Street listens. The article states that Goldman’s opinion “matches the outlook of many other market participants who believe the current boom is overdone... we envisage some price softness in the 2013-2015 period.” Goldman’s analyst Malcolm Southwood adds, “The rare earth price boom is nearing its peak. The supply deficit will peak this year before the market slips into surplus ... rising into 2015.”
I beg to differ. Goldman bases its analysis mainly on one company -- Lynas Corporation (LYSCF.PK).. Statistically this skews the rare earth universe.Southwood also omits many important considerations such as differentiating between heavy and light rare earths. No mention whatsoever is given to the difficulty of extracting rare earths from ore. The analyst fails to see that Lynas is facing opposition from environmentalists as the company attempts to build a separation plant in Malaysia.
Currently, there is no other major separation facility of heavy rare earths outside of China. This consideration alone may put a premium on the end products which we know are used for many high tech purposes and which have been labeled as critical by the US Government. Please review the exhaustive study done by the Department of Energy which contradicts Goldman’s analysis by clicking here.
In fact China, which commands the rare earth space, may be a net importer and the supplies for their own needs are growing scarcer. Investors forget quickly; not long ago, China strove to take control of Lynas’s assets, but was countered by the Australian Government. Do not be surprised to see China intensifying its search for rare earth deposits globally.
Goldman’s analyst tried to buttress his argument by including several words about major deposits such as Greenland Minerals, which he claims is more than twice the size of Lynas’s Mt. Weld and Molycorp’s (MCP) Mountain Pass put together. Alas, it is located on “an isolated mountainside just south of The Arctic Circle,” far from suitable infrastructure such as highways that might bring ore to markets at reasonable cost.
Moreover, the rare earth mining stocks have risen much less than the price of the rare earth oxides themselves. This consideration may foreshadow the eventual breakout from a long sideways technical base. The upside breakouts of our rare earth selections are apt to be impressive.
The WSJ article errs in citing Lynas and Molycorp as the main actors on this stage. Indeed in a few years global requirements will rise that will need many companies the size of Lynas and Molycorp.
US legislators are thinking about taking the case before the World Trade Organization to free the West from Chinese domination of rare earths. The Pentagon has observed that the shortage of materials has led to a slowdown in the manufacturing of strategic weapon systems crucial to US military operations.
The Goldman report showed a surplus in light rare earths, not in the critical heavy rare earths used in the permanent magnets placed into hybrid engines and wind turbines such as dysprosium, terbium, and europium. Not all rare earth deposits are created equal and the majors nearest to production do not have these critical elements.
In conclusion, the rare earth marathon may be ready to take off. As Al Jolsen said, “Folks, you ain’t seen nothing yet.”
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