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RallyCry (24.95)

Will Rare Earth Plays Come Back to Earth?



December 29, 2010 – Comments (7) | RELATED TICKERS: MCPIQ , REE.DL

So after getting taken to the cleaners after red thumbing MCP and REE, I was reminded once again the only thing worse then trying to catch a falling knife is trying to catch a runaway rocket that has no cap to the upside. I have now green-thumbed the pair and have my fingers crossed that they don't sell off hard before the 7 day holding requirement is met. I would love to see a good valuation model on this industry now that China is scaling back rare earth exports. Some time in the next two weeks the momentum traders will move out and I would expect atleast a 10-20% haircut in these names. For now, to the moon!

7 Comments – Post Your Own

#1) On December 30, 2010 at 10:40 AM, griderX (97.57) wrote:

Rare Earth companies are HYPE...I almost guarntee you that they will not show significant profits for many years.  Valuations are all out of whack!  Wired Magazine did a nice write up recently on Rare should be able to find information on it...the US has a very large supply of untapped Rare Earths...if we need it the goverment will start hanging out mining permits. 

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#2) On December 30, 2010 at 10:56 AM, silverminer (29.96) wrote:

Switching from short to long is an unusual reaction to getting busted by a short gone foul. The safer bet is usually to take your loss on the short and move along. These names could so easily correct 20-40% to the downside on a dime. I took some real-life profits from the sector yesterday, and at this stage anything I have left in the sector is free exposure.

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#3) On December 30, 2010 at 12:17 PM, RallyCry (24.95) wrote:

@ griderX While they may be overhyped, there are a couple of themes working for Rare Earth companies, scarcity and fear. When you have an industry that is 95% concentrated in China and they start to become protectionist, investors are going to focus on this sector.

@ silverminer I think the bigger issue is whether or not the trade has become crowded. I think as the media continues to pick up and cover this story, the move to the upside still has some room to run. On a relative basis, if these names move 100-500%, the 10% to 40% pullback that we both see on the horizon may be more indicative of consoldation rather than a collapse, and could be seen as another entry point.

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#4) On December 30, 2010 at 2:46 PM, griderX (97.57) wrote:

There is a reason most of the RE are mined in China it's one can compete with them on price and easy regulatory approvals.   Most of the processing & manufacturing work is also done there...very low transportation cost if you mine, assemble and build the products there. 


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#5) On December 30, 2010 at 4:19 PM, RallyCry (24.95) wrote:

@ grider X A couple of items from the geology article that make the bullish case: 

"Substitutes can be used for rare earth elements in some defense applications, however, those subsitutes are not as effective and that will diminish military superiority."

The implies that to some extent, securing rare earth elements is a national security issue for the U.S and other developed countries outside of China. As we have seen in defense projects, the government will pay billions to secure resources and fund programs deemed strategically important. Think Iraq.

"With rare earth elements the time between an entrepreneur's decision to acquire a property and the start of production can be several years or longer. There is no quick way to increase supply."

"If a single country controls almost all of the production and makes a firm decision not to export then the entire supply of a commodity can be quickly cut off. That is a dangerous situation when new sources of supply take so long to develop."

These statement imply that there is a long lead time in ramping up production to meet demand. Rare earth elements are inelastic in the short to medium run as China is cutting off exports. Any profitability model has to take into account the "out years" when production has been brought online. In the next 2-3 years I don't see any reason short of China reversing course, where pricing won't be considerably higher as the availability grows more scarce. China is the OPEC of rare earth until 2013 at the earliest.


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#6) On January 06, 2011 at 12:54 AM, RallyCry (24.95) wrote:

Looking to close out green thumb Thurs. morning on REE with a 17.55% outperformance in 7 days. MCP looks like it may sell off tomorrow so Ill have to wait till Friday before the 7 day min. is reached. I'll hope for the best. I might red thumb these with a  horizon of several months if they continue to get overextended.

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#7) On January 06, 2011 at 10:34 PM, RallyCry (24.95) wrote:

So I barely escaped REE on the open today with a 13 point gain. As feared, the 7 day lockup stomped out the majority of my MCP gain today with only a 2 point gain going into tomorrows open. I could see MCP gapping down again so I am closing my green thumb at market open. 

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