Being mostly a precious metals investor, the Rare Earth sector is newer to me. It as been a couple years since I was really motivated to blog about any particular subject, but Rare Earths is one of those unique situations that periodically present themselves. It reminds me of the 2001 -2003 era for small cap gold explorers. While the risk was high with penny shares, as the market warmed up to precious metals, it eventually ran over fair valuations and into overvalued channels. At that point, you could buy any penny stock on the Venture Exchange under .$1.and watch it sky rocket simply because it happened to have a lease or an option on a piece of land near a legitamit gold mine or resource.  What does that have to do with Rare Earths? Based on the charts of the majority of Rare Earth explorers, this is a severly beaten up sector and prices of rare earths have also tumbled in the last year or so. A bottom?  From a technical point of view, this is difficult to say.

Looking at Bloomberg Rare Earth Index BNREMRS, in April 2011, it had a high of 347 and currently sits at 93. and change. The Stoxx Global Rare Earth Index had a high of 603  - 3 years ago and currently  sits at 207.   The Market Vectors rare earth ETF REMX  had a high of $29 in April 2011 and now sits at  $12.73 . In all cases, some serious take down of their best levels.  Does there appear any positive signs of a technical bottom?  My best answer is no. I copied the REMX chart below There isn't the usual rounded bottom or V shaped bottom or any other  traditional multiple support level patterns  lie a " Double Bottom"  etc. There looked to be a bottom in summer, but in September, a failure and subsequen decline below the 50dma.  Did I mention the 59ma is lower than the 200dma? So, technically, this sector has "morbidty" written all over it. 

So what is worth writing about and what could possibly be worth owning?  Well, if you subscribe to the rapidly increasing amount of stimulus or QE ( money printing basically )  you might guess that all this leads to eventual depreciation of all major currencies. Inflation as such, is not the actual rising of prices, but the depreciating of dollars, Yen, Euros, and the need for producers to hold the line on return for a diminishing asset...  think oil, wheat, gas, etc. Historically, this version of cost push inflation during a weak economy does have the seeds of dramatic rises in hard assets.  Thus, the ongoing generational bull market in gold. Now assuming we don't vapourize into a huge mushroom cloud, the world economy grinds on and as materials get expensive, where does that leave Rare Earths?  China contols over 90% of the worlds production of all rare earth metals. They are already cutting back the export of these and are on record as saying that the "Middle East has oil, and China has Rare Earths".  Just this week, a news story about the ongoing conflict between China and Japan, has the Chinese talking about cutting all rare earth shipments to Japan.  A strategic weapon kill any high tech industry which depends on rare earths for many applications including the newest iphones.  The link is listed below..

http://www.telegraph.co.uk/finance/china-business/9551727/Beijing-hints-at-bond-attack-on-Japan.html

Ok, so if we subscribe to limited  future supplies and 90% being in the wrong hands, that should mean that global supply will be very tight and perhaps rationed.  Let's not forget that rare earths are also crucial for some of the newest high tech war weaponry. Now we have a serious situation. All major economies outside of China are vulnerable to one exent or another. Is there a more successful  large cap, widely held  stock than Apple at this moment? Gven USA ongoing Middle East interventions and future military strength, how does Rare Earths play out?  This is the macro supply / demand picture. We also know that it is heavy rare earth metals that are most critical compared to the light rare earths. How many 43-11 compiant heavy rare earth deposits sit outside of China?  Not many. How many are on USA soil?  Only One to speak of. Bokan Mountain in Alaska. Is the US Government aware of this deposit of critical rare earths with large percentage of the very valuable Heavy Rare Earths?  Yes, the Department of Defence is partiipating in metalurgical studies and assessing the deposit with further participation pending their findings. Does the state of Alaska like what is going on at Bokan Mt?  Yes, they are committed to funding 50% of the Capex which should be known soon in the upcoming Preliminary Economic Assesment.  Is their cutting edge technology that will seperate the nasty byproducts and waste like Uranium?  YES.  A SPE technology has recetently been announced and is capable of eliminating all of the dangerous elements from the mix and making it salable and easy to transport,unlike most rare earth producers that have to ship the raw ore to have it seperated from it's other byproducts. The economic impact?  Huge.  Easily, a gamechanger for the rare earth economics of Bokan Mt. 

So, who owns Bokan and what manner of participation exists on this unique deposit?  UCE.V  a tiny micro cap with a price of aprox. .53 cents currenty. Shares outstanding is reasonable at fully diluted  172. 2 milion. Cash on hand is around 5.8 million which should be good for about a year , given their burn rate and  alot of the high cost items needed for a feasabilitystudy is already paid for.  Does TA count on micro caps? Well,  it is about 250 K to 300K daily average volume and share ownership is not really tightly held, so TA might give some signs. While all micro caps are moved mostly on news, it is interesting to see the correlation between Ucore Chart and the rest of the Rare Earth industry charts, which some you have seen earlier as in Vectors ETF.  Below is a positive chart looking to re-enter a longer term uptrending channel beginning back in 2009. The 5 ya charat shows this the best and .0 cents wil putit squrely into that channell again. In short term, there also is a small bullish flag that may portend a move to a higher level that we are seeing now in .50 to .55 range .  80 cent range looks possible  if this bullish pattern fufills.  The 3 year chart from stockcharts shows the flag best.  No guarrantees, but the indication and posiility does exist and that is a far cry from the Vectors or Stoxx or Bloomberg indexes on Rare Earths... 

 

The  framework of the story is laid out for you here, and the deeper due dillegence is up to those who have a further interest.  Is this a professional analysis?  No.  Is it a recommendation to buy Ucore stock? No.  All those things are up to professional licensed practitioners and yourself. Hope you enjoyed the read.

cheers

caffee