Revisiting the Rare Earth Bubble (MCP, REMX, REE, AVL)

If the situation around rare earth elements and rare earth oxides has not created a bubble, it is hard to at least not call it overly frothy.  China’s curb of ‘rare earth’ exports was all the rage in the final months of 2010.  After having read more and more about the reality of supply and demand, there is a reason that Molycorp, Inc. (NYSE: MCP), Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX), Rare Element Resources Ltd. (NYSE/AMEX: REE), and even Avalon Rare Metals, Inc. (NYSE/AMEX: AVL) have not continued their surge this year.

The WSJ in its “China Realtime Report” also dismisses at least some of the excessive concerns around rare earth supplies from China.  For starters, the market is very small and the WSJ noted that China’s entire export market for these was just under $940 million and that the 40% cut in exports targeted actually was a drop of about 9.3%.  If you parse through that article you will get a feeling that the intent of this was to garner top prices rather than to choke off supplies.

If you consider that many industries from consumer products, electronics, military and homeland security, alternative energy and other hi-tech instruments makers rely on rare earth materials then the obvious answer is that this is a highly important sub-sector of mining.  If the supplies are going to not be down 40% and if those supplies are merely being offered at a higher price, then there may have been a huge upside overreaction.

Molycorp, Inc. (NYSE: MCP) took ‘the best of the best’ position of our top 10 IPOs of 2010 after having traded as low as almost $12.00 per share and risen to over $60.00 before today’s level of $47.00.

Calling a situation a bubble is no attempt to minimize the importance of such a small sector.  Still, all markets are finite after a certain point.  Molycorp can push ahead and keep signing pacts all it wants, but that is still no a production story until the later part of this year.  It is really a 2012 story. Australian miners are also moving forward to get their production up.  China so far does not appear to have strangled the ‘rare earths’ market but it is not going to just unload these on the cheap just because major industries need these materials.

Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is still up 0.2% at $23.97 on the day against a range in the last year (less than a year) of $19.25 to $27.19.  Rare Element Resources Ltd. (NYSE/AMEX: REE) is down 2% at $13.26 against a 52-week range of $1.15 to $17.92.  Avalon Rare Metals, Inc. (NYSE/AMEX: AVL) is another fairly new player for U.S. investors but its shares are down 1.5% at $6.63 against a 52-week range of $1.09 to $8.20.

As with all bubbles, they can reflate at any time on just about any headline or any rumor out there.  The market can also remain irrational longer than most investors can remain viable.

JON C. OGG