HardAssetsInvestor

Written by Matt McCall  |

September 27, 2010

Hidden Gems In Strategic Metals

Details

Investing directly in strategic metals can be problematic. Luckily, there are some pure-play equities that can give you access to this market. But as small companies, buyers should be wary.

The price of gold has soared to a new all-time high. Silver has rallied to its best level in 30 years. Even economically sensitive copper is sitting at the highest levels in five months. But they may not be the best investment in the world of metals as we head into the fourth quarter.

There is a group of 17 metallic elements often referred to as "rare earth" or "strategic" metals, and they are beginning to garner more attention. Unsurprisingly, China is at the center of the news. Rare earth metals are used in everything from batteries to wind turbines to cell phones to high-tech weapons. As technology continues to advance, several industries that rely on specific rare earth metals in cutting-edge products will move the world further into the 21^st century.

The problem is that China produces approximately 97 percent of the world's rare earth oxides, which are the raw materials that can be refined into the usable rare earth metals. The Chinese Ministry of Commerce placed export restrictions on rare earth metals this year at a level that is 40 percent lower than 2009. This has many developed nations concerned about a shortage of the metals, and with demand increasing and supply unknown, prices are sure to continue higher.

Investing In Rare Earth Metals

Within the last year, two stocks in the rare earth metals sector began trading on major U.S. stock exchanges. Molycorp (NYSE: MCP) is a Colorado-based company that operates the Mountain Pass mine in California. Outside of China, the mine is the most prolific rare earth deposit being worked, and has great potential. The one issue with MCP is that the mine is not producing at 100 percent, but the company has plans to get the mine up to speed, and has talked about expansion. At this time, MCP is the only miner of rare earth metals in the Western Hemisphere.

Fundamentally the stock has seen sales surge over the last few years. In 2008 sales came in at $2.1 million before jumping to $7.1 million. Analysts estimate sales will increase to $31.4 million in 2010 with earnings per share coming in at -$0.46. That loss isn't particularly concerning, as losing money is not uncommon for a small mining company that is ramping up its operations. Investors are definitely looking at the big picture too, because the stock has doubled less than two months after it began trading on the NYSE. The recent news has turned the stock into a momentum play and I am looking to buy on weakness near the low-$20s.

Looking north, Canadian-based miner Rare Element Resources (AMEX: REE) is also getting into the search for the elusive metals. The company has a 100 percent interest in the Bear Lodge property located in Wyoming. According to the U.S. Geological Survey, the land contains one of the largest deposits of disseminated rare earth elements in North America.

The company has yet to begin production, but drilling started in June 2010 on the Bear Lodge rare earths project. Drilling on a gold project also got under way in July, but the reason the stock has rallied from a low of $1.15 in July to a high above $7 is likely the rare earth metals' potential. REE, like any junior minor, is a speculative play that has the potential to turn into a big winner; however, chasing an unproven stock that is already up 300 percent in three months is not the best investment strategy. Similar to MCP, look for weakness if you are considering buying into REE.