Eager to escape the price drops that hit most commodities in 2012, investors are looking to fill their 2013 portfolios with safe bets. While the majority will likely turn to gold or other precious metals, rare earths could be in for a rally in 2013 especially if prices rebound and the market ends up supply-constrained.
Coming off record highs, prices for rare earth elements (REEs) plunged in 2012. Factors behind the price implosion include: weak economic growth in the major rare earth consuming nations, including Japan and the US; slow growth in China, which along with being the world’s largest producer of rare earths, is also the largest consumer; additional supply from non-Chinese producers like US-based Molycorp (NYSE:MCP), which earlier this year re-opened its REE processing facility in California; an increase in Chinese annual REE export quotas; and Chinese domestic overproduction.
Despite the price pullback, potential investors should realize that prices are still well above the levels recorded prior to the price surge of 2011.
While a substantial increase in global REE production has been forecast – considering ramped-up production from Molycorp and Lynas’ (ASX:LYC) rare earth processing facility in Malaysia - there has also been a high level of uncertainty surrounding the sector’s supply future, as China came under increased scrutiny regarding its export policies this past summer. If the global economy is to see any upside over the next 12 months, supply uncertainty, ergo higher prices, could very well work in the favor of producers as countries scramble to lock in REE supplies.
If that happens, a number of well-placed juniors currently trading at substantial discounts to their actual worth are ready to fill any supply gap. Here is a look at three juniors that are poised to take advantage of a short-term market upswing:
Ucore Rare Metals (TSXV:UCU) is a junior explorer looking for rare earth deposits in North America, and is primarily focused on its Bokan-Dotson Ridge REE property in Alaska.
Why this stock is appealing: With the majority of REE projects still a long way from production, Ucore has stated that its Bokan deposit — the largest heavy rare earth element (HREE) project in the United States — is targeting production in the near term. Bokan is one of only a handful of non-Chinese HREE deposits capable of attaining production within the next three to four years, according to the company.
In November, Ucore released a preliminary economic assessment for the project that shows a net present value of $577 million and an internal rate of return of 43 percent — impressive economics in a struggling market environment.
Investors also began to take note earlier this year, when the company announced that the US Department of Defense (DOD) signed a contract to conduct a mineralogical and metallurgical study on Bokan. The DOD is hands down one of the world’s most attractive global customers for HREEs.
While Ucore is actively discussing offtake partner agreements with a number of American industrial manufacturers, the DOD alone could be a significant consumer of the company’s output. A partnership with the DOD would also eliminate a lot of the risk associated with this project — and would set Ucore apart from its competitors.
While the company performed well in 2012′s negative market environment, it still holds massive upside potential in the medium to long term. Ucore has 152,633,403 shares outstanding and a market capitalization of $74.79 million. The company’s shares are currently priced at 50 cents, well above its 52-week low of 22 cents and well below its one-year high of 64 cents.
Matamec Explorations (TSXV:MAT) is a junior exploration company whose main focus is its Kipawa deposit in Quebec. Most of the Kipawa deposit’s value is in five critical REEs, including dysprosium and terbium, which are indispensable in green technology applications.
Why this stock is appealing: This undervalued firm boasts a high-quality project, an already-established customer base and near-term production goals. Its flagship project has projected revenue of $2.8 billion, a before-tax payback period of only 2.4 years and a mine life of approximately 13 years.
From an investor perspective, the company eliminated a substantial portion of risk when it entered into a memorandum of understanding with Toyota Tsusho (TSE:8015). The auto manufacturer underlined its intent to fast track the deposit into production and eliminated future uncertainty by signing an offtake agreement to purchase 100 percent of the project’s mixed rare earth oxide concentrate. It also agreed to provide the project with technical assistance and to arrange financing through to production.
While nothing has changed in relation to the project’s worth or customer relationship with the Asian manufacturing giant, the company’s share price has plunged over the past 12 months on the back of an overall REE market decline. Matamec’s stock is currently trading at $0.17 — well below its 52-week high of 47 cents. It has 120,300,186 shares outstanding and a market capitalization of $18,640,000.
Stans Energy (TSXV:HRE) is a resource development company focused on developing HREE properties in the former Soviet Union. In December 2009, Stans acquired a 20-year mining license for the past-producing Kutessay II rare earth mine. Kutessay II is the only past-producing HREE mine in the world outside ofChina.
The mine produced the vast majority of the former Soviet Union’s REEs until 1991 and still benefits from good infrastructure and electrical power onsite from its past-producing days. The company also owns the related Kashka rare earth processing facility and rail terminal and has optioned the existing mill.
Why this stock is appealing: Although the project does not boast the highest-grade product on the market, it is an open-pit project, and with all the infrastructure already in place, Stans’ capital costs will be considerably less than those of its competitors.
One of the greatest attributes of this project is that the metallurgical aspects of the project had already been deciphered by the time Stans took over. Stans has completed a JORC-compliant mineral resource estimate as well as a supplementary REE distribution report that identifies the primary commercial components of the open-pit mine.
In terms of the security of its mining claims, along with permitting, the people with whom it works and metallurgical technology, Stans is a stronger company than it was when REE prices peaked in 2011. It also has a solid partnership with the Russian government — a significant coup with regard to advancing the project and an advantage that could come into play when it comes to looking for a large-scale customer further down the line.
The company’s shares took a significant knock this year and are currently priced at 44 cents — above Stans’ 52-week low of 28 cents and well below its one-year high of $1.59. Stans Energy has 157,263,986 shares outstanding and a market capitalization of $69.98 million.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.