"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.
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.
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.