Time to Dig In to Rare Earth Stocks

By Helen Burnett-Nichols

NEW YORK ( Minyanville) - Rare earth stocks have had a difficult 2012 so far, but there may still be a few bright spots for investors in the sector, with possible M&A and joint ventures on the horizon, says one analyst.

Luisa Moreno, an analyst at Jacob Securities in Toronto, explains that performance-wise, rare earth equities have been following the global trend for commodity equities across the board.

For example, the Market Vectors Rare Earth/Strategic Metals ETF (REMX) is down just over 10% this year (as of June 13), while Molycorp(MCP) is down 16% year to date, after a 47% tumble in 2011. Avalon Rare Metals (AVL) has fallen more than 40% in 2012 after a 47% drop in 2011.

In comparison, Toronto's S&P/TSX Venture exchange is down 16% so far in 2012, while the main index, the S&P/TSX Composite, has fallen 3.8%.

Rare earth prices have also been volatile, with neodymium oxide rising more than 82% in early 2011 due to speculation, but having fallen around 70% in the six months to April, Chi Weishan, a researcher at Shanghai Metals Market, said via The China Post .

"Then they all of a sudden collapsed significantly because I think there was a lot of stockpiling as well, before that, and with the slowdown in the economy, less demand," says Moreno, although she says prices are starting to level out.

Rare earth elements, says Moreno, are sold to produce bulbs for cars, iPads, and cellphones, for example. If the economy picks up slightly, she sees demand coming back as these elements are not easy to replace.

"I think the prices are approaching levels which are economic again for many of the industries that they're used and so I would expect, in the second half, for demand to pick up and prices to stabilize a little bit more, but that may not have an effect on company stocks," she says.

According to reports, Dahlman Rose & Co recently said in a note to clients that minor changes in China's rare earths sector should support prices over the medium to long term, despite a fall-off last year.

"It is possible that prices will decline further in 2013 when two new sources of supply commence, but over the near-term, we expect to hear of further project delays and the possibility that numerous development-stage companies are giving up their development plans," said analysts.

In this uncertain environment, investors should be looking to companies that have favorable rare earth distribution, including most of the critical metals such as neodymium and praseodymium, and a reasonable amount of the heavy rare earths, combined with good distribution and a joint venture partner to develop these very expensive projects, says Moreno.