Rare Earth Stocks Rebounding

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"Follow NA miners that have the crucial heavy rare earths."

Not too long ago in our national history, rare earth element (REE) mining was an American enterprise (Market Vectors Rare Earth/Strategic Metals (REMX)). As in so many other areas like nuclear power, automobiles and technology, it was decided that the U.S. would shut down industries and farm the work out. China took the lead and became the world's supplier of more than 97% of these crucial REEs. Now, the Americans are going, hat in hand, to petition Beijing a la Oliver Twist with a "Please. . .may I have some more?"

Consequently, it is an exciting time for people positioned to profit from the most-promising stocks in the rare earth market. Demand is soaring skyward in the face of a serious shortage. An immediate global call for action and solution is required. It's already too late.

The prices of rare earths are reaching new heights. This swift ascension is all the more notable as China increasingly curtails the exports of these rare ores. Now Beijing has revised downward by 50% what it will allow for sale abroad, in the January to June 2011 period. China also has raised taxes and has cut down on illegal smugglers. It is a game of chess and China is forcing the West to make the next call. Will the West develop its rare earth assets? If the West doesn't, I expect China will make an acquisition. Already Molycorp (MCP) is on the record that China may import certain heavy rare earth elements (HREEs) and may look for targets abroad. China would be making a strong case that even it is strapped for critical HREEs, such as dysprosium and neodymium.

Such regulation of this critical area continues to stoke profitable activity in this sector. It is well known that rare earths are essential to this vital modern industrial nation. For example, Japan, the world's third-largest economy, depends on rare earths, especially their top-notch automobile maker, such as Honda (HMC) and Toyota (TM). Lanthanum is used in their batteries, cerium is in the windshields, dysprosium and neodymium are used in the hybrid engines. These hybrid vehicles are large users of rare earths. Car companies are increasing the amount of rare earths used to raise the fuel efficiency of the newer designs.

Recently, China claimed that it had to place quotas to protect their own industries and environment. China professes it had to exercise self-protection and was not being draconian. In essence, the country advised other nations to expedite their own mining permitting processes so that new prospects could be brought to fast-track fruition.

These actions are not without repercussions. Several U.S. senators threaten to bar Chinese miners from the United States unless they can increase rare earth supplies abroad. Importantly, the World Trade Organization is mobilizing to exert pressure on China to increase it exports through trade sanctions. There is also legislation pending to require the American military to stockpile rare earths. Concerted global action is required that goes beyond protectionism. Governments must accelerate the entire permitting and financing process—such a combined effort is called for immediately.

Many of my rare earth recommendations have huge potential and should be followed as I expect many of these heavy rare assets to gain significantly. Last week, I sent out a report showing increased institutional interest in rare earth stocks as the crisis intensifies in Washington and Beijing. Recently, rare earths moved from a rapidly rising market at the end of 2010 to a sideways consolidation so far in 2011. Some fear the U.S. will retaliate against China by forcing the WTO to threaten trade sanctions. The profit taking appears to be coming to an end and there is a lot of money flowing back into this space.

I sent out last week an update on the break of the 50-day moving average and falling wedge to the upside in Molycorp. Molycorp is the leading light rare earth element (LREE) developer in the Western hemisphere and I believe that this enthusiasm will spread to the other rare earths as this sector looks ready to take off again. This appears to have similar characteristics as the breakout in December where the rare earth sector soared on export cuts from China. Right before the December breakout, many of the rare earths showed similar technical characteristics with a break of the 50-day moving average followed by a reversal higher.

The fact remains that both the U.S. and China realize that they need each other. The U.S. has provided China with a large market and China has afforded the U.S. cheap labor and cheap REE commodities, which is crucial to the latest and most-innovative technology products.

Recently, China and the U.S. had a special dinner announcing a myriad of deals across several industries. The theme of the deals was that China would help devalue the dollar to keep up the equity markets if the country could have access to North American resources and financial companies. China needs to hedge their large positions in the U.S. dollar (PowerShares DB U.S. Dollar Index Bullish (UUP)) and long-term U.S. debt (iShares Barclays +20 Year Treasury Bond (TLT)). China has opened an office in Toronto to look for acquisitions and is encouraging investments in commodities to supply the rapidly developing Chinese market. Molycorp recently announced that China may be looking for rare earth targets and may be an importer by 2015.

China announced yesterday that a rare earth tax will be imposed. This will significantly elevate production costs for companies operating in China. There is significant pressure being put on lawmakers in Washington on developing a domestic supply of rare earths.

The rare earth sector is experiencing an explosion of investment interest as China continues to place restrictions and raise taxes on rare earth oxides (REO), causing soaring prices. Sojitz, a major Japanese trading giant, has already made a deal with Lynas and Hitachi (HIT) and Sumimoto (SMFG) has signed agreements with Molycorp, the only near-term producer outside China. Japan and South Korea invested $1.8 billion in a Brazilian mining group a few weeks ago that is the largest producer of niobium. (Niobium is used to make hard, lightweight steel that is increasingly being used to make vehicles that are lighter and more fuel-efficient.)

As the crisis intensifies, I believe there may be more strategic acquisitions for assets whose projects will come online further down the road. Companies in North America with the crucial heavy rare earth assets should be followed. Many do not realize that even China may make bids in 2011 on HREEs. Stay tuned.

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Jeb Handwerger
Gold Stock Trades

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