Will China’s Latest Moves Help Rare Earth Producers?
Apple (AAPL) just had the most profitable quarter in the history of capitalism.
This is great news for Apple shareholders, but it is also quite significant for certain commodities.
You see, for the first time ever, the company’s iPhone sales in China were greater than those in the developed world.
This is obviously another of many signs that China is indeed moving toward Western standards of living.
But it’s also a sign that the world will need a heck of a lot more rare earth metals to meet the global demand for personal technology.
Futile Blows to China’s Wall
Here is where this demand-supply story takes a twist.
Spurred by pressure from the World Trade Organization (WTO), China announced in January that it was scrapping its decades-long export quota system. In addition, a tariff of 15% to 25% will be removed later this year, probably in May.
China controls about 87% of the rare earths market (it used to be well over 90%), and six companies in China dominate the industry.
It was thought that action would loosen China’s control over the rare earths marketplace.
So it’s understandable that investors in rare earth companies, like Molycorp (MCP), were excited to hear this news.
But the Chinese will not be corralled so easily. InvestorIntel’s Hongpo Shen recently reported that the government merely thought of a way around the WTO’s ruling.
China is implementing a new system of export licensing for rare earth metals. This gives the government even greater control of the market because it can control which Chinese rare earth companies can export.
Adding to that, China is also cracking down on illegal mining operations.
Thus, we are in for a real squeeze on heavy rare earth elements and praseodymium, a light rare earth.
Turning Away From China
So what do China’s actions mean for non-Chinese rare earth companies, like Molycorp? Will this action finally mark the bottom of a devastating bear market?
Unfortunately, it’s still the status quo with China still in charge.
Buyers of rare earth minerals are still refusing to pay a premium for secure rare earth supplies. Buying from the Chinese is still cheaper. So, instead, importers are putting up with whatever amount the Chinese decided to dole out.
And Molycorp, the face of America’s supposed renaissance in rare earths, is already on the ropes.
Standard & Poor’s recently downgraded its debt to CCC (extremely speculative) with a negative outlook due to the company’s unsustainable capital structure, and the continuing erosion of its liquidity position over the next year.
This isn’t a surprising outlook, considering Molycorp’s stock has lost 99.5% of its value since the peak of the rare earth mania in 2011.
Considering all this, the best bet for investors looking to profit from the rising rare earth demand is junior rare earth miners.
One example out of the many juniors out there is Ucore Rare Metals (UURAF). This company’s primary focus is on developing the Bokan-Dotson Ridge property in southern Alaska. The estimated timeline to production is only three years. Even better, approximately 40% (by weight) of the rare earths contained in the property are heavy.
Plus, this company has federal support. The U.S. Department of Defense, under the Defense Logistics Agency, is working with Ucore on the development of the Bokan project.
Keep in mind that junior rare earth miners are highly risky; investors should always do their due diligence.
And the chase continues,