E•BOOM CAPITAL: 2010 is the Year of the REE Companies

This gaping whole in the earth is Molycorp’s rare earths Mountain Pass mine in California, which the company is reopening with proceeds from a $378 million IPO done at $14 per share in August. Molycorp’s shares are now at $49.

This will be known as the year a small group of companies exploring for “rare earth elements”, known in the red-hot niche sector as REEs, dramatically outperformed all other clean tech and energy efficiency companies, as well as all other sectors of the stock markets.

Shares of several companies pursing REEs, which are critical ingredients in wind turbines, electric vehicles, thin-film photovoltaic (PV) solar system and high-efficiency lighting, have increased more than two or three times in 2010. Examples: Molycorp, Inc., (NYSE: MCP) +394 percent, Lynas Corporation Limited (ASX: LYC.AX) +260 percent, Avalon Rare Metals, Inc. (TSE: AVL.TO) (AMEX: AVL) +125 percent , Rare Element Resources Ltd. (AMEX: REE) (CVE: RES.V) +361 percent, China Shen Zhou Mining & Resources Inc. (AMEX: SHZ) +1200 percent; and penny stock Focus Metals Inc. (CDNX: FMS.V) +232%.

All this because more than 95 percent of the world supply of REEs is mined and processed in China -- and that kind of market control is freaking out the rest of the world, especially the United States. In recent days, the Chinese government has been saying it will further tighten existing restrictions on exports. 

Specific products depending on rare earth elements include permanent magnets (used in wind turbines and electric vehicles),  advanced batteries (used in electric vehicles), thin-film semiconductors (used in photovoltaic power systems), and phosphors (used in high-efficiency lighting systems).

The U.S. has said repeatedly, most recently in a study released by the Department of Energy December 15, that it is formulating a strategy to ensure the U.S.-based clean tech and energy efficiency sector has enough rare earth materials to continue its growth. Part of this strategy will be loan guarantees for sector players or price supports, or both. 

The DoE lists the key rare earths and strategic metals as lanthanum, cerium, praseodymium, neodymium, samarium, europium, gadolinium, terbium, dysprosium, yttrium, indium, gallium, tellurium, combalt and lithium.

Much of the fanfare over rare earth companies is focused on Molycorp, Inc., (NYSE: MCP) whose shares have gone from their August 3, 2010 initial public offering price of $14 per share (total net proceeds of $378 million) to yesterday’s close of $49.30. 

Molycorp’s IPO prospectus and recent communications claim the company is the only rare earth materials producer in the Western hemisphere and owner of one of the world’s largest, most fully developed rare earth projects outside of China at Mountain Pass, in San Bernardino County, California.

For investors, the upside is that Molycorp will be able to return its Mountain Pass project to the same or greater production levels by 2012 that it reached before it was closed in 2002 when it couldn’t compete with production costs of Chinese mines. Also, that 2010‘s international price increases for rare earth materials will hold or increase in 2011 and going forward. 

The downside is that the bubble will burst. If Molycorp shares were fairly priced at $14 during its August IPO, it is hard to see anything but market hype and hope to explain the nearly four-fold leap in share price. If China backs off its export restrictions in return for other trade considerations from the U.S. and other countries, prices may fall, even if the U.S. implements its new strategy including loan guarantees and price supports. (Info on prices here and here.)

In the company’s nine months financial results to September 30, 2010, it reported net sales of $13 million (2009: $4.89 million) and a net loss of $41.2 millon (2009: $19.5 million). Sales were from stockpiled concentrates of didymium oxide, lanthanum oxide, ceric hydrate,  lanthanum chlorohydrate and lanthanum concentrate. At September 30, the company reported cash and equivalents of $351.5 million.

Another way for investors to play the rare earths market is an exchange-traded fund launched in October called Market Vectors Rare Earth Strategic Metals ETF (NYSE: REMX). However, the ETF has lagged far behind the best of the companies (up 20 percent since its launch).

Molycorp is REMX’s fourth largest holding at 6.3 percent of the fund. The three largest holdings in REMX are: 

Iluka Resources Limited (ASX: ILU.AX), + 153 percent YTD

Lynas Corporation Limited (ASX: LYC.AX) +255 percent YTD

Thompson Creek Metals Company, Inc. (NYSE: TC) +22.7 percent YTD

Here are some other companies worth checking out: 

Titanium Metals Corporation (NYSE:TIE) +35 percent YTD

Neo Material Technologies Inc. (TSE: NEM) +67.7 percent YTD 

China Molybdenum Co., Ltd. (HKG:3993) +7.53 percent YTD

Kenmare Resources plc (LON: KMR) +39.5 percent YTD

Osaka Titanium Technologies Co., Ltd. (TYO:5726) +52.5 percent YTD

Photo credit: Isaac Brekken for The New York Times

DISCLOSURE: The writer has no positions in, or professional connections with, these companies.