Get Out of These "Rare-Earth" Companies

"For the long term, the question is not whether investors should own rare earth stocks, it's a matter of whether the prices are right."
-- Wall Street Cheat Sheet

Rare-earth stocks have been all the rage the past six months, with poster children Molycorp (NYSE: MCP  ) and Avalon Rare Metals (AMEX: AVL  ) each up more than 100%. While I have numerous misgivings with the valuations investors are attributing to these companies, there are two stocks that have been boosted by hype that you should absolutely throw away.

One hint
I'm not talking about Rare Element Resources (AMEX: REE  ) , which could be a rare-earth producer in the future if everything works out well. But even this is a tall order given that the property it is preparing to mine has already been passed over by Molycorp, Hecla Mining (NYSE: HL  ) , and Duval. Investors should be aware of what they are getting into, but the crazy thing is, Rare Element Resources isn't even one of the two worst-overhyped of the bunch.

The winners are ...
That honor falls to two Chinese miners, China Shen Zhou Mining & Resources (AMEX: SHZ  ) and China GengSheng Minerals (AMEX: CHGS  ) , whose share prices soared this past week, 30% and 10%, respectively, after Rep. Mike Coffman introduced a bill to establish a stockpile of rare-earth elements. So why are these overhyped, you ask?

First, a similar bill that Coffman introduced last year went nowhere. Secondly, the stockpile would be restricted to U.S. sources of rare earths, so neither Chinese producer would benefit directly. Third, and most importantly, neither of these companies has anything to do with rare earths.

What?
Yes, neither China Shen Zhou nor China GengSheng have in their reserves or plan on producing rare earths. China Shen Zhou is a large producer of fluorite and also produces zinc and copper. Fluorite, or fluorspar, is a key ingredient in the production of aluminum, steel, glass, enamels, and cement, among other uses. The company produced 65,000 tons of it last year out of an estimated 10 million tons produced in China in 2010.

China GengSheng produces refractories (used as linings and key components in many industrial furnaces), industrial ceramics, fracture proppants (used in oil and gas drilling), and abrasives. All are mineral-intensive products, but none have anything to do with rare earths.

My Foolish takeaway
Don't fall for the hype. A small investment in time can take you a long way. If you're still on the hunt for some speculative mining picks click here for Fool metals guru Chris Barker's top 10 gold and silver stocks for 2011. His picks include Taseko Mines (AMEX: TGB  ) , which produces copper and recently discovered a high-grade niobium deposit, a metal that -- while not technically a rare-earth element -- is quite rare.

Dan Dzombak can be found on his Twitter account: @DanDzombak. He does not own shares of any of the companies mentioned in this article.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (19)

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  • Report this Comment On April 14, 2011, at 3:13 PM, JakilaTheHun wrote:

    Uhmmm ... OK. It sounds to me that if neither company is a "rare earth" miner, then perhaps the author is misinterpreting the source of their ascent. It's not as if there isn't a broader commodities boom going on right now.

  • Report this Comment On April 14, 2011, at 4:47 PM, paul1011 wrote:

    I nbelieve that the approach of " Get out " to some of the rare earth companies is an exageration.

    Any judgement should be based on facts not on hyper.

    All rare earh companies are a forefront of an industry which here does not exist.

    The writer should be looking for facts on both sides of the isle,

  • Report this Comment On April 14, 2011, at 7:24 PM, czfoolcaps wrote:

    MCP. Mountain Pass CA. outside Primm NV. Hundreds of millions invested and up and running.

    There's upside still.

  • Report this Comment On April 14, 2011, at 10:26 PM, TheCruiser wrote:

    A blooming idiot. I guess someone is short or they want shares cheaper, but with China stockpiling everything, I think the U.S. should have some inventory and since it takes time to accumulate the Senator was brilliant. He must be a great Chess player seeing 5 moves ahead. I'll keep my shares but thanks for your insight, not!

  • Report this Comment On April 15, 2011, at 4:26 AM, OldenAtwoody wrote:

    What makes you so smart on rare earths? You confuse all dissimilar companies and compare turkeys with eagles.

    1. REE is a pump & dump scam operation. Any FOOL can Google their story and see they are a group of operators “managing” numerous penny stock companies out of one small office, with the same people intermingled as officers. Some of these have previously been involved with law enforcement over their business practices.

    That these operators successful renamed a gold 'mining' company to a rare earth company and caught the investor wave last year is great, but every potential investor must understand – REE holds undeveloped leases. REE is YEARS away from producing anything but salaries and cash-outs for the ‘operators’, and based on their track record, it may be unlikely to ever see anything dug from the ground.

    Can they go legit? Maybe, but would you hand over your car keys over to the parking valet if you knew he was just released from jail and still has a drug habit?

    2. MCP, on the other hand, is an entirely different story – one you fail to adequately address. MCP may be new (in this corporate iteration) but the MINE has been active for decades. It only closed because of the low-cost labor of China, and this is no longer a factor due to the criticality of having US sources for the defense industry, at minimum.

    MCP has a WORKING mine, and has been shipping product from the California mine that was previously excavated, generating cash flow. Sumitomo invested $100M in the last 6 months for development and a share of output. All the environmental clearances are in place to fully re-open the mine, and to build the new energy efficient 300-worker refinery, on-site.

    The next project on the books is an extension of the local natural gas pipeline directly into the location.

    Thus, of the two mines outside China that are shipping, MCP has product, cash, approvals and the full backing of Congress, and is the only one in the US..

    However, over the next 18 months, MCP is the only game in town, and as Congress allocates funding for a rare earth strategic stockpile, they will absolute require that this material be purchased domestically.

    If one questions the wisdom of this, look at the Federal Acquisition Regulations that require that any jewel bearings sourced for military needs must come from domestic mines. This clause is what keeps those mines open. You can darn well expect MCP to benefit from similar requirements.

    Comparing REE and MCP in the same breath is like comparing Bernie Maddoff and Charles Schwab as examples of potential investment options.

  • Report this Comment On April 22, 2011, at 12:20 PM, jimzien wrote:

    Nothing here on Lynas? It's really the only company that has both proven deposits -- at Mt Weld in Australia -- and processing operations nearly ready to roll -- in Malaysia.

  • Report this Comment On April 22, 2011, at 12:40 PM, ChipORiley wrote:

    Check out Stans Energy Group (HREEF) at http://www.stansenergy.com/. They already have the processing plant, rail head and mining deposits of rare earths and their stock is on the cheap right now. But the low stock price will most likely not last long once the analyst start tracking it. Stans Energy Group is a Canadian based company, but has significant rare earth operations in one of the former Soviet republics. They are now in the Beta mode for new processes by which to extract more rare earths during the refining process.

  • Report this Comment On May 27, 2011, at 9:51 AM, mtc2888 wrote:

    Nice call on these stock shorts!

    We have been watching some of these at our firm and we agreed with you. The problem is that we did not pull the plug on these recommendations for whatever reason.

    I went back and did an analysis of these picks and I have to say that you almost nailed the tops in all of these stocks on exactly April 14th.

    Hindsight is 20/20 but I'm still disappointed we did not heed your advice.

    Nice call(s)!!

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