Rare Earths Reeling

by Addison Wiggin – January 19, 2011

  • “This bear market is killing me”… The 5 answers an urgent query about rare earths

  • “Too far, too fast, too much”… Byron King on the rise and fall of a rare earth darling

  • Why investors have to think smarter about rare earths in 2011… and a dark-horse play that could beat everyone else into production

  • Silver Eagle sales set a monthly record… and it’s only the 19th!

  • Et tu, Microsoft? Software giant diversifies out of the world’s reserve currency

“What is going on with rare earths?” reads the email from a slightly panicked reader. “They are just plunging to death, and I am afraid they are taking me with them.”

We don’t usually start an issue with reader mail, but this is a timely issue to tackle in our daily 5 Minutes, as evidenced by this chart. It’s of the sector’s darling stocks, Molycorp.

Molycorp is one of three rare earth stocks this reader says he owns… and is mighty worried about. “The fundamentals are there (or at least I thought so) to support a continued uptrend, but this bear market since they topped on Jan. 3 is killing me. What gives?”

It’s true, the fundamentals are there. Just today, as China’s president Hu meets with President Obama in Washington, Chinese statistics revealed a 9.3% drop in rare earth exports between 2009 and 2010.

That’s a big deal, since China produces 97% of world supply. And without rare earths, a lot of things we take for granted just wouldn’t exist — everything from your mobile phone… to your car’s catalytic converter… to the Pentagon’s precision-guided missiles.

“You could make a lot of money investing in rare earths,” says Byron King… and here comes the caveat… “if you can handle a lot of risk. And I mean a LOT of risk.”

Byron knows rare earths as well as anyone. He first alerted readers of The 5 to their potential on March 31, 2008 — years before the Chinese made headlines by clamping down on rare earth exports. Last October, he spoke at a conference in Washington, D.C., that gathered rare earth specialists from around the world.

He keenly follows the companies trying to bring mines into production outside of China. And the potential is immense. But just because “the fundamentals are there,” in our reader’s words, investing in the space is not a slam-dunk.

“Right now, there are about 200 distinct rare earths investment ‘ideas’ out there,” says Byron. “The promoters will all tell you about their great acreage, their drill program, the core results, the processing research they're doing.

“But are there really 200 sets of great managers in a sector that's been dead as a doornail in the West for two decades? How many of these guys can succeed in a short time, in a tight investment space, with immense capital requirements (many billions!) and with ultra-complex engineering challenges?”

There’s still no publicly traded Western company that has a mine or a refinery up and running, much less product to sell. “All of the publicly traded investment ideas — even the best of them, and some are quite good — are speculative ventures on future output.” Which gets us back to Molycorp.

“I recommended Molycorp in Energy & Scarcity Investor last September, when it was selling at $18.90 per share,” says Byron. “Molycorp has enjoyed a serious run-up and a huge gain. Indeed, that's the problem. Too far, too fast, too much. It was a Molycorp melt-up.”

Byron told readers to sell a week ago today, for a gain of 178%. “I like the company. I like the ore deposit at Mountain Pass, California. I've met the CEO and the chairman of the board and I like them and respect them. I like the other members of management whom I've met. There's nothing not to like about Molycorp, except its current share price.”

Getting to the core of our reader’s concern, “Molycorp shares have outrun the fundamentals of whatever it can accomplish,” Byron concludes, “even under the VERY best assumptions. The market is valuing Molycorp — just one company — at nearly the revenue for the entire rare earths industry.”

Thus, he sees MCP falling to $25-30 over the next two or three months.

So is this the end of the rare earths story? Hardly. But the reality is inescapable here in early 2011: The rare earth game has changed. Investors have to get smarter about rare earths… and choosier about where to put their money.

That’s why Byron was so intrigued by something he unearthed recently while attending another rare-earth conference in Hong Kong. He had to investigate the story further.

In the end, here’s what he discovered: In the breakneck race to bring the first non-Chinese mine into production, this tiny Canadian-traded firm is a dark horse. The Molycorps of the world won’t be in production until 2012… or 2013… or later. But this company will likely be up and running within months — maybe weeks.

“In my 30-year career as a geologist and researcher,” says Byron, “I’ve never been more excited than I am about this little-known mining company’s bonanza in a place you’ve most likely never heard of before.”

Byron’s already delivered phenomenal rare earth returns, like 109% in two months and 178% in four months. And that’s on top of open positions in other tiny resource producers as high as 393%.

“I invested $41,030 in nine of Byron’s stocks,” says one satisfied reader, “and they are now at $65,095, for a $24,071 gain, or 58%, since Oct. 13.

“I can't say enough good things about Byron King,” adds another. “18 months ago, I subscribed to Energy & Scarcity Investor. I am excited to report that my portfolio is up 200% as I type this letter. WOW.

“I trust Byron more than other stock researchers,” says a third, “as he only screams BUY, BUY, BUY, when he means it… and he hasn't been wrong on any of his big recommendations as long as I can remember.”

This is one of those instances where he means it. “To say I’m floored by this stock idea I’m telling you about is a significant understatement,” Byron says.

He’s putting the final touches on his newest presentation. We urge you to give it careful consideration when it arrives in your inbox tomorrow.

Blue chips are turning in the strongest performance among stocks today, relatively speaking. The Dow has trimmed just a few points off yesterday’s gains, while the S&P is back below where it ended last week.

IBM turned in some nice numbers, American Express not so much. Traders are also pondering the Commerce Department’s latest figures on housing starts: They fell 4.3% in December, back to October 2009 levels… but permits for new construction jumped 16.7%, the best showing since the expiration of the homebuyer tax credit last spring.

Gold sits where it did about this time yesterday, $1,371. Silver is just pennies away from reaching $29 again.

With 12 days remaining in January, the U.S. Mint has already set a monthly record for Silver Eagle sales. At 4,588,000, the total exceeds the previous record set in November, 4,260,000.

As we mentioned a few days ago, January’s torrid pace may be due to the Mint crediting some of last month’s sales to this month. But even if that’s the case, the combined December-January sales are on a monthly pace of 3,943,000 — which would also exceed November’s record. No matter how you break down the numbers, it’s impressive.

[Ed. Note: Our friends at First Federal have secured a supply of 2011 MS70-grade early release Silver Eagles. Agora Financial readers have dibs through next Tuesday… although based on demand for last year’s issue, they could sell off before that.

If you missed the email announcement earlier today, the details are here. As always, we may be compensated if you buy.]

If China and Russia can bail out of the dollar and start transacting with each other in local currency, why not Microsoft?

The company’s Russian division says it’ll start transacting with its 9,500 local partners in rubles as of March 1. “Nikolai Pryanishnikov, president of Microsoft Russia, said at a news conference that he hopes this may start a trend among other major market players,” reports The Moscow Times.

“Russia, Pryanishnikov said, will be one of the few exceptions worldwide to Microsoft's rule to do business in dollars,” the paper adds. “The company also works in local currency with its partners in China, Canada, Japan and the European Union.”

Wait a minute… What “exceptions” are left? Once Microsoft starts transacting in rupees, reais and won (and that can’t be long, really), pretty much the only place it’ll be transacting with greenbacks will be the United States.

Reserve currency of the world, indeed…

Chris Mayer’s view that serious inflation will drop the hammer is realistic,” a reader writes, “despite what the rose-colored glasses crowd wants to believe. Convention has it that the tide of inflation will ‘float all boats’ in the tangible asset class. Historically, that would include real estate.

“With the Hydra of inflation, unmanageable federal debt, high unemployment and rocketing health care cost uncertainty, who will be left to buy appreciated single-family housing in the years to come? Income property is available, but I wouldn’t want to be saddled with an illiquid asset in the foreseeable future.

“Keep blowing the bugle — some are listening.”

The 5: As Chris says, “Inflation is destroying the value of the dollar, and every single dollar-based asset you own right now.” You need to take steps to protect yourself before that value is eroded any further — which is what Chris’ Retirement Salvation Tool Kit is all about. Details here.

“Thanks to following the advice of Addison and Bill since the tech crash, I saved my decimated retirement funds by putting what was left in gold and sold the big house at the peak of the real estate market when I retired in 2006.

“At 75, I recently cashed out of my homeland and moved to Singapore… permanently. Singapore may be a little pricey, but stable and orderly — all in all, a nice place to live. No regrets.”

The 5: You and Jim Rogers both. We hope you can still make it to see us in Vancouver, though.

“As a small business owner, I would take $1 million at 2% in a flash,” writes a gentleman contributing to our debate over whether small businesses are starved for credit.

“Screw the business, I’d put it into silver or gold (physical metal, ETFs, whatever) and, assuming standard business terms, pay it back at the end of the year in inflated $$$s. That wouldn’t help the economy, but it sure would help my bank account.

“WOW, just like the big banks do with all of the citizen money that Chairman Barack and “Blackhawk” Ben Bernanke (sounds better than ‘helicopter’ and more suitably ’deadly’) give them.”

“Considering I have been drinking black coffee since I was in the second grade, I would like to add to the coffee opinions. At home, the best part of waking up is kissing my wife and making my Folgers. Folgers decaf and regular are equally great. McDonald's coffee is as good as it gets, especially at 64 cents for my senior coffee.

“I agree with you Starbucks sucks, as well as a lot of local yuppie coffee shops. Drinking Starbucks is literally pissing away good money that can be invested elsewhere. Latte? What the heck is that? Real men drink black coffee, not all those sissy drinks.”

“Along with manufacturing,” another reader adds, “we now seem to have a culture that cannot even brew coffee at home. The dumbing of the people.

“Buy the ingredients, mix it at home and put in one of those fancy $15 carry cups. I have enough coffee on hand for six months, my total cost $50. And I am a heavy coffee drinker. What I have may last most people a year.”

“Can't live without my 5 Min. Forecast…beats Charlie Rose!”

The 5: Ditto on our end. It’s a lot more fun assembling this missive for you each day than it would be to conduct interminable suck-up interviews with the likes of Larry Summers and Henry Kissinger.


Dave Gonigam

The 5 Min. Forecast

P.S.: “If you want to invest in the rare earths space, you MUST own shares of this company,” says Byron King, adding to his earlier thoughts. “It's that simple.”

This company isn’t one of the darlings already coming down after a run into the stratosphere. “It has real rocks, a real mine, a real processing plant, real technical people and — most importantly — unduplicable sets of real relationships with the right people in the right places.”

And it could be in production long before any of those other guys. Seriously, you owe it to yourself to see what Byron has to say. Watch for a special announcement in your inbox tomorrow.


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