For most of the past year, any news about rare-earth mineral restrictions in China would send prices for the not-so-rare minerals higher, and related stocks would follow. Molycorp (NYSE: MCP), Rare Element Resources (AMEX: REE), and Avalon Rare Metals (AMEX: AVL) have all ridden this wave, and investors who have hung on for the ride have been rewarded handsomely. But this repeating record has come to a screeching halt recently.
China is working faster than expected to tighten control of the industry and curb overexpansion, and since the start of June, buyers have been stocking up. Mineral prices reacted as expected by doubling, but stock prices went the opposite direction (until today's Piper Jaffray upgrade). Molycorp is down 17% over the past month, while Rare Element Resources and Avalon have fallen by 20% and 11%, respectively. To paraphrase Vince Lombardi, "What the heck is going on out there?"
A little sanity in an insane world
Investors may be seeing beyond the recent price increase to the prices companies can reasonably expect when more capacity comes online. It probably isn't safe to say that Molycorp or Lynas can expect rare-earth prices to remain where they are when their collective 62,000 metric tons come online. But rare-earth prices have surprised me before.
Discount or warning?
Two weeks ago, we got word that insiders were selling a huge stake in Molycorp, taking some profit while they could. But higher rare-earth mineral prices should be a bullish sign indicating that this is a discount for investors. Only time will tell whether sellers or prices are the indicator these stocks will follow.
And we shouldn't have to wait long. Lynas starts operations in the third quarter, and the price reaction to its opening will be crucial. That's when the rubber meets the road, with Molycorp to follow next year. Do you think prices will keep rising or fall once Lynas and Molycorp start operations? Leave your thoughts in our comments section below.
