Rare Earth/Strategic Metals ETF (REMX)

[chrich12]

Interesting interview: Mickey Fulp Talks Energy & Rare Earths

http://www.resourceinvestor.com/News/2010/10/Pages/Mickey-Fulp-Talks-Energy--Rare-Earths.aspx?channel=7

Snippet on REEs ...


"TER: You are also heavily involved in the rare earth element (REE) sector. What's your take on the sector at this point in time?

MF: It is the hottest commodity space around just like the Yukon is the hottest area play. Valuations have gone through the roof over the last couple of months. With a speculative play like this, it's necessary to separate the few contenders from the many pretenders early on. I think I've done that. The stocks have been on quite a run since early July, and the companies that I'm invested in average returns of about 300%. This entire sector is an overvalued speculation right now.

TER: Some might point to China's export restrictions, but that was last year. What's causing the sudden move in the sector this summer?

MF: China further restricted export quotas this summer. The country announced that it was going to crack down on the black market in south China, which is estimated to supply from 20%–33% of the market. This morning I heard an estimate that two-thirds of the supply of heavy rare earths (HREEs) is coming from the black market. China is trying to nationalize its heavy rare earth element sector and force the small and illegal miners to become parts of larger companies.

There is also increased awareness about the sector in the US. I think the US retail investor is driving this market. A final catalyst – and perhaps the biggest – was Molycorp Inc.'s (NYSE:MCP) initial public offering (IPO) on the New York Stock Exchange at a little less than $14/share. It was not well received and went down to $12. During the past six weeks, however, the stock has reached a high of $30.

TER: For investors who aren't already in rare earths, is it too late to get into the game?

MF: I don't think they're too late, but they have to be very selective. Let me give you some examples. In early July, you could've bought Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), Quest Rare Minerals Ltd. (TSX.V:QRM) and Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) on weakness for less than $2. Quest went to something like $5.50 before it pulled back to about $4.50, and Avalon went above $4. Rare Element has been the real star—that stock touched $9.90. Buying stocks on weakness in a bull market is a strategy that will work.

There is a lot of risk involved in buying these stocks; however, Avalon just raised $30 million for its feasibility study. Quest is in the middle of raising $50 million, which will take it through feasibility and provide working capital.

Rare Element Resources also is looking at a major equity financing in the near term, something in the range of Quest and Avalon. These companies have gone to the next level. Probably my favorite in the sector right now is Scandinavian explorer Tasman Metals Ltd. (TSX.V:TSM; Fkft:T61; OTCPK:TASXF). It was a $0.51 stock and has gone as high as $2. It's pulled back now to around $1.90; I think there's upside with Tasman Metals.

TER: You mentioned risk in buying these stocks. Yet all of them seem to be going up and with some type of financing. The sector is really hot so companies probably get the capital easily. Where does the risk come in?

MF: There's extreme risk in this sector because it is highly dependent on the economic health of the world. We saw that with the "flash crash" and the Greek crisis in late May – late June. These better rare earth element explorers took major hits to their market capitalization. If we don't have a robust world economy, these stocks will suffer.

TER: One of the arguments I've heard is that rare earth metals are becoming a strategic metal for governments and military uses, so there's some impetus for the US to ensure it can produce its own rare earths. Are you discounting that argument?

MF: That's part of the equation in the US for sure, but less so outside of our country because US defense operations are so much larger than any other country in the world. What portion of HREE demand goes to the military? I have no idea.

Here's what I see—in the US, the United Steelworkers Union is asking the government to file a complaint with the World Trade Organization (WTO) about China's export restrictions and there are ongoing congressional hearings, as well as the House passage of a bill that sets up studies and committees to institute national policies. I don't really consider those legal beagle efforts to be material changes to what we do in the US with respect to securing REE supply.

Meanwhile, the Japanese are buying – or trying to buy – offtake contracts from future producers and tying up exploration plays in Canada through JVs and in Vietnam. Japan has been very proactive, whereas, in the US, it looks like we'll just sic the lawyers and politicians on it.

TER: In your newsletter, you wrote that REE mines "will not be built and operate under the usual economic models of profitability or rate of return. The financial reward in this market is the downstream supply chain." To me, it sounds like this sector will be relying on offtake agreements. Once you get those, there'll be some type of long-term fixed prices.

MF: I think that has yet to play out. The market will likely operate on long-term offtake contracts, but these contracts are likely to be graduated for worldwide increases in prices – and for higher operating costs. I don't think it's necessary for them to be long-term fixed prices; they could be floating prices. Security of supply is the key ingredient here. I see offtake contracts as one way to do it – also strategic alliances with consumers of the products and/or consolidation of players within the industry. One company has a deposit. Another needs supply of the separated, or even the concentrated, oxides. Then you have another one down the line that makes magnets. Finally you have end-users, such as hybrid carmakers, wind turbine generators, and the fluorescent light industry. There are endless possibilities in terms of how this could work out.

Only a few deposits in the world are likely to be developed, and that depends somewhat on who is the first to develop strategic alliances or sell future products. All of the juniors I mentioned have robust deposits—but these explorers will not become miners without help. They are generally run by geologists and are adding engineering staff, but these projects are much larger than any junior could possibly fund. That's going to mean demand for partners on both the financial end and downstream supply chain.

TER: The companies you mentioned earlier, Rare Element, Avalon and Quest, all seem to be raising money. Do you expect that money to come from a JV partner or the ultimate REE user like a carmaker from Japan?

MF: In the case of Avalon and Quest, the funds have been raised largely through North American-based financial institutions. I don't know where Rare Element's money is going to come from. All I've heard is that it will be raising major money in the near term. At this point, the various entities comprising demand for REE have not been in the public eye. Financial institutions are funding the feasibility studies and prefeasibility studies.

TER: I'm intrigued that the ultimate users are not coming up with the financing. When would you see the offtake contracts coming into play?

MF: I expect them to come into play soon. Companies need to get to the prefeasibility stage where financial analysis can be done and capital expenditures and costs of production lead to net present values and internal rates of return that actually have solid studies behind them. We should see this happen within the next year for Quest and Rare Element. Avalon has published a prefeasibility study, but it is marginally economic.

TER: In rare earths, there's an advantage to being the first to produce. There are more than enough REEs around the world to meet demand, and the first to produce will get most of the market share. Do you agree?

MF: There are probably more metals in deposits right now than there is demand. This entire sector is based on future demand outside of China. I very much think that China is tightening exports because it sees internal demand increasing, especially for select HREEs, and won't be able to supply the world as it has for the last 20 or so years. We need a secure supply in the West. That's what's driving the sector right now.

TER: I understand you recently met Gino Roger, CEO of Midland Exploration Inc. (TSX.V:MD) and are now getting up to speed on the Midland story.

MF: It's a very well-run company, a prospect generator in Quebec, with one rare element project of significance that's joint-ventured with Japan Oil, Gas and Metals National Corp. (JOGMEC). Their projects are very early, however.

TER: What else is the company doing?

MF: It also has gold and base metal plays. Its share price has touched about $2.

TER: Anything else you'd like to share with our readers in terms of either uranium or the rare earths?

MF: I'll give you another idea in the rare earth element space, Medallion Resources Ltd. (TSX.V:MDL). It has two projects in Northern Canada—a light rare earth element (LREE) project in Manitoba and an HREE project in Eastern Labrador. Its share price has tripled since the last financing. There is some risk but it's still a penny stock, so it might be something speculators want to take a look at.

TER: How far along are Medallion's projects?

MF: Very early stage. The project in Manitoba has a few drill holes. It is a JV with Rare Element Resources. Medallion CEO Bill Bird was the chief executive of Rare Element when that drilling was done around 2006. Its play in Eastern Labrador in the Red Wine complex is at the drill-targeting stage with geophysics, prospecting and sampling being done. And it has a low market capitalization right now, which the more advanced companies in this space do not have."