Today’s Notes:

1. Rare Earths: Sanity in RUU
2. The Alberta Bakken: Primary

We’ve fielded a number of calls and emails recently on the continued rise of rare earth oxide prices and what it means for juniors in the rare earth space. It seems as if you could throw a dart at a list of rare earth names and become a winner.  The upward price momentum is relentless across the entire REE sector. A watch list of sixteen names that we track in the REE space is up 112% over the past three months. With China controlling the market and no legitimate REE production expected outside of the country anytime soon, one can see why REE juniors have had such a spectacular run.

According to Reuters, there seems to be quite a debate going on now amongst analysts and industry experts as to whether or not the rare earth space is indeed a bubble and even the New York Times has entered the fray with experts offering differing and conflicting viewpoints. 

The fact is that the entire rare earth market is small (roughly USD $1.5 billion per year today) and though it is expected to double, with an estimated 150 companies globally involved in rare earth exploration, you can expect that 150 number to decrease – likely sooner rather than later. The market just isn’t big enough to support that many companies.

We have no idea what the structure of the REE market will look like in three to five years, but prefer to keep it simple when evaluating any of these REE juniors as potential Discovery Investments. The New York Times article referenced above says that if and when Molycorp and Lynas begin production, they will account for 35% of China’s current supply. The devil is always in the details, however, and this is a big “if” and “when.” In addition, of course, each rare earth deposit is unique in many respects. It’s the heavy rare earths elements that are much sought after. Finally, the rare earth space is really about an entire supply chain not just a mine.  Since about 1990 the IP for such a supply chain has migrated to China. It will take time to restore it.

The Ten Point Grid for Discovery stocks is a tried and true measure of potential wealth creation and can help in keeping the investment evaluation process clear and simple. However, taking it one step further, we’ve focused on several criteria specific to REEs:

• The composition of any REE deposit – is it predominantly heavy REEs (HREEs)? The one thing people involved in the REE industry can agree on is that HREEs are more valuable than the light REEs (LREEs).

• Has the company solved the metallurgy? This is key. As REEs occur together naturally and each deposit is unique, the ability to successfully (economically and environmentally) separate the 17 REEs from each other is an absolute necessity. The Chinese have proven they can do this, but they did it at a huge cost in degradation of the environment. Who else outside of China can make the same claim?

…..read pages 2-5 HERE