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Unanswered Questions for Rare Earth Stocks

By Travis Hoium – Updated Apr 6, 2017 at 9:41AM

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A suspicious start to the week leaves unanswered questions for rare earth stocks.

There have been some crazy moves going on in the rare earth trade this week, and it seems like information isn't exactly getting to investors in a timely manner.

On Monday, rare earth stocks rose across the board on surprisingly little news. Domestically, Molycorp (NYSE: MCP) and Rare Element Resources (AMEX: REE) led stocks higher while China Shen Zhou Mining & Resources (AMEX: SHZ) and Avalon Rare Metals (AMEX: AVL) followed abroad.

Then on Tuesday around 2:30 a.m., Bloomberg reported that China would be cutting rare earth quotas by 11% (later revised to 35%) sending stocks higher again.

But who was buying on Monday? Did word get out of China that the quota would be cut before average investors knew?

We're still left with a few unknowns heading into 2011. How large will the second round of quotas be? The most recent quota of 14,446 metric tons was actually higher than the second round quota of 7,976 metric tons in 2010. Are we sure the second round will be that low again? And Molycorp's CEO says it is not having trouble getting rare earths out of China, so fear reigns supreme, but is it justified?

Something to think about
In an interview on Bloomberg, Molycorp CEO Mark Smith said China is exporting around 30,000 metric tons of rare earths, and the demand from the rest of the world is 50,000 metric tons. Later, he said Molycorp will be ramping up from 3,000 metric tons of production per year to 20,000 metric tons by late 2012.

So wouldn't Molycorp be able to make up most if not all of that gap? And that's before Avalon, Rare Element Resources, or Lynas Corp., which has 11,000 metric tons due to come online in the third quarter of next year and 22,000 metric tons in 2012.

I've been watching these stocks shoot higher long enough to know I don't want to predict a fall yet. But I do think one is coming eventually when we transition from undersupply to oversupply.

Interested in reading more about Molycorp? Click here to add it to My Watchlist to find all of our Foolish analysis on this stock.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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