The Best Way to Play the Rare Earth Run-up

Earlier this week, I noted that high-flying rare-earth miner Molycorp (NYSE: MCP  ) looked overvalued, and more likely to decline in price than Exxon Mobil (NYSE: XOM  ) , another stock sitting atop its current 52-week high. Profitless where Exxon is wildly profitable, dividend-less where Exxon pays 2.4%, and priced at a book value three times that of the oil giant, I saw little hope that Molycorp would continue to outperform the market going forward.

Great timing!

As you've probably heard by now, a day after I made my call, China imposed new quotas on the export of so-called "rare-earth" metals from its shores. Shares of rare-earth plays like Molycorp, Rare Element Resources (AMEX: REE  ) , and General Moly (AMEX: GMO  ) promptly leapt to the moon.

But you know what? While Mr. Market clearly disagrees with me on this one, I'm still right. Eight times book was too much to pay for Molycorp Monday, and it's still certainly too much today, even after the shares gave back their early Tuesday gains. After all, "rare-earth" metals aren't really "rare" at all. In fact, some rare earths are even more abundant than gold … or lead. The thing that makes these metals "rare" is that, because they're more dispersed across the Earth's crust, it's generally considered unprofitable to mine and refine them. (I guess the marketing department nixed the term "unprofitable earths.")

That said, if you absolutely, positively must join this less-profitable-than-gold rush, there are better ways to do so than by investing in Molycorp, Rare Element, or General Moly. As I mentioned earlier this week, Freeport-McMoran (NYSE: FCX  ) also engages in rare-earth mining. Profitable and selling for 15 times trailing earnings, with a 1.7% dividend, it offers a much safer way to play the trend than do its profitless peers.

At only 11 times earnings, Thompson Creek (NYSE: TC  ) looks even better. Like Molycorp, it's only just getting ready to open a dedicated rare-earths mine. Unlike Molycorp, though, Thompson Creek is already wildly profitable. Before the Chinese quota crackdown, analysts were expecting it to grow its profits 22% next year. Add in any price spike in response to the export-throttling, and it could do even better.

Foolish final thought
Thompson focuses primarily on molybdenum production -- but then again, "moly" is an integral part of most names in this sector. Given my druthers, I'd be buying a company that's got more than just its name going for it -- Freeport if you love dividends, Thompson if you don't.

The Fool owns shares of ExxonMobil, but Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 662 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (9) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 6:35 PM, Merckman08 wrote:

    I believe you are wrong about Molycorp. The market for rare earth elements will continue to skyrocket in 2011, with or without the Chinese export restrictions.

  • Report this Comment On December 30, 2010, at 8:02 PM, izasnow wrote:

    Surely You're joking about General Moly.

    It doesn't play in rare earth metals as you told. On the other hand It will be the biggest producer of molibdenum in next years.

    General Moly has two fantastic proyects:

    Mt. Hope.

    1.3B lbs moly in Proven and Probable reserves

    It should begin its Initial Production in 2013

    The project is financed by Hanlong Company a great Chinesse holding.

    Yrs 1-5 of operations, Hanlong will purchase balance of General Moly’s equity production (approximately 16.5 million pounds annually).

    • Yrs 6+, Hanlong to remain significant customer of General Moly.

    Liberty

    19M lbs Moly/year

    1-5 18M lbs Copper/year

    I know the only thing you have heard from General Moly is that has the word "Moly", but molybdenum isn't a RRE as you think.

  • Report this Comment On December 30, 2010, at 8:12 PM, TMFDitty wrote:

    @izasnow: Thanks for the question.

    Some folks view General Moly as a "rare earth" play (http://www.bloomberg.com/news/2010-12-27/chemed-dresser-rand... others don't. However you label it, though, it's:

    (1) acting like one, with its share price moving in tandem with the other stocks mentioned, and

    (2) subject to the same forces moving the "real" "rare" earths, to wit, export quota cuts by China.

    TMFDitty

  • Report this Comment On December 31, 2010, at 10:28 AM, PEStudent wrote:

    Those touting MCP stats leave out the fact that even if MolyCorp processes all that you say, the Price/Sales ratio -using the current price- will be too high: around 10. The P/E ratio will be much higher and we don't know how strong MCP will be with other rare earth companies -including 3 serious ones in Canada and one in Australia- coming online soon and with MCP producing ONLY lighter rare earths - not the lucrative ones like dysprosium. It is true that some new processes are claiming to work without Dy to keep the other rare earths from losing magnetic integrity at high temps, but their degree of usefulness is unknown and into the future.

  • Report this Comment On December 31, 2010, at 2:37 PM, PHampel wrote:

    FCX and TC are good miners, but not rare earth plays. The rare earth element is way too small to play the story that way. Rare earths are a $1 Billion industry that may expand to $2-$3 billion.

    It's ignorant to dismiss the whole story as simply a bubble.I believe the stocks are moving (and have more room) based on the following:

    -Book value expansion. This is a hell of a lot different than earnings expansion. But clearly the analysts are not keeping up with the rare earth element prices and their likely continued rise as the inevitable bottle neck continues to develop.

    -Another $3 billion dollars in green tax breaks in the tax bill just added further demand that will not be met for a while. Regardless of money mines take a while to build. It's not like writing a story. It takes a lot of planning, work, and cooperation.

    -Over the Counter effect. When was the last time you found daily articles on an industry of stocks that is primarily trading over the counter? Look at valuations on Avalon, REE and MCP and I agree they are too high. But they are benefiting from a stock squeeze (a big story with few stocks mutual/hedge funds can buy). Moreover, the good mines of OTC stocks like Lynas and Great Western make them buys and take over candidates.

    Bubble believers are looking at the news and the valuations relative to the market. They will be right about the weak stocks. But the metal prices and well run companies could turn out to be bargins even at these prices. Decide for yourself and do your own due diligence. But if you blindly accept conclusory non-sense with no factual support or in depth thought, you might be the only invester worse than this author.

  • Report this Comment On December 31, 2010, at 10:43 PM, grecho wrote:

    I personally think "rare earth" has pure political implications in relation USA-China.

    Rare minerals is not a new discovery, they existed for pretty long time and become an issue since China announce that will restrict or stop supply to the west so new bubble was born in the share market.

  • Report this Comment On January 01, 2011, at 8:10 AM, asaphome wrote:

    All of you are missing a great play that is obviously and constantly overlooked.

    Mercator Minerals, TSX & OTC , MLKKF.

    Check it out.

  • Report this Comment On January 03, 2011, at 12:33 PM, aquaregia67 wrote:

    REE is not a 1 billion industry that may expand to 2-3 billion. Chinese production of REE in 2010 amounted to approximately 120000 tonnes. REE prices today average $70 per kg for the LYC basket price, so even if you take a much more conservative (read: unrealistically low) price of $50 per kg, REE is already a 6 billion per year industry and growing. More significantly REEs are critical components supporting well over 2 trillion worth of production in a variety of industries, with no viable alternatives, and no reason to look for alternatives when even at these levels REEs contribute such a minuscule component of the cost of the finished goods.

    As for REEs not being rare, they are rare in concentrations that can be economically extracted, and equally importantly they are extremely difficult and expensive to process, with the cost of a new processing plant on the order of $1 billion.

    Conclusion: Anyone who thinks REE prices are a "bubble" is sadly mistaken...

  • Report this Comment On January 07, 2011, at 9:56 AM, cdantoin wrote:

    Molycorp's HREE counterpart: Alaska's Bokan Mt. former operating mine, UCORE (Jack Lifton)

    Company: UCORE

    Vancouver Exchange: UCU.V

    NYSE: UURAF.PK

    Industrial College of the Armed Forces, http://www.ndu.edu/icaf/programs/academic/industry/reports/2...

    State of Alaska House of Representatives: House Resolution #16 http://treo.typepad.com/raremetalblog/2010/04/news-state-of-...

    DOE_CriticalMaterialsStrategy

    http://www.energy.gov/news/documents/criticalmaterialsstrate...

    News:H.R. 6160, the Rare Earths and Critical Materials Revitalization Act of 2010 (“the Act”), by the U.S. House of Representatives: “While these Acts together promise to give U.S.-based rare earth producers a remarkable edge in the race to replace specialty metals now dominated by China, very few domestic projects have the qualifications of Bokan as a strategic military and technological asset,” said Jack Lifton, a leading REE expert and a party to the initial drafting of proposed RESTART legislation. “As the largest historically documented Heavy rare earth deposit in the U.S., Bokan is a counterpoint to Molycorp’s primarily Light rare earth deposit at Mountain Pass in California. Together, these two deposits, located in relative proximity to each other and on U.S. soil, have the potential of liberating the U.S. from non domestic rare earth dependencies in the near term.”

    Ucore Investor Presentation Aug 2010.ppt

    http://treo.typepad.com/UCU%20Inst%20Presentation%20%20Aug%2...

    Chris DoD employee

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