The Original Rare Earthbug

(Originally published in The Dines Letter - 22 May 2009)

Major Announcement: "The Original Rare Earth Bug" (DIREEBUG)!

Too many people miss the silver lining because they're expecting gold.

—Maurice Sitter

Some describe TDL (The Dines Letter) as occasionally "reinventing itself" after it focuses on different groups, which we find curious because we think of our method as seeking huge profits in any "Super Major bull market," not restricted to any one field, as fully explained in our last issue (front page) and mentioned in our Annual Forecast Issue. Our latest Super Major call was our 2000 switch out of Internets and high-techs into raw materials, especially energy and metals, with uranium favored because it straddled both our areas of choice. One basis for our decision to become "The Original China Bug" in 1977 was our prediction of "The Coming Rise of China" because we thought that it would be importing massive quantities of raw materials, which saves us the problem of figuring out which particular manufacturing companies within China might do best.

"Rare Earth Elements" (REEs) represent the first new Super Major bull market we have revealed in nine years. These calls are infrequent because many of our requirements are strict:

  1. There must be a valid and growing use ahead so that it would outperform even during recessions.
  2. A deep and growing scarcity of it.
  3. Bullish chart patterns.
  4. It must be below virtually everybody's radar anonymously, ignored, disdained or even actually hated, the kind of barrier that takes courage to risk a career recommending it. That was true for our bullishness on gold, China, and uranium near their rock bottoms.
  5. Other considerations are technological breakthroughs, such as was the Internet.
  6. Investible in areas without sticky-fingered politicians.

We pondered over the challenge of how to play the future growth in electric cars, windmills, solar, without trying to find the winners in each Sector, and we came up with "Rare Earth Elements." They are made up of the 17 chemical elements listed in the Periodic Table of Elements: namely, scandium, yttrium, and the 15 lanthanoids, rare in commercial concentration and exotic, but possessing crucially essential attributes. Rare Earths are used in computers, TVs, DVD players, cameras, cell phones, nickel-metal hydride batteries, fluorescent lighting, medical magnetic resonance imaging equipment, automotive catalytic converters, super magnets, on and on. Rare Earths represent a unique way to hitch a ride on the world's shift to microminiaturization, especially in electronics. Rare Earths are vital for example in tiny cell-phone batteries so, instead of trying to figure out which cell-phone stock to buy, why not recommend what all their manufacturers would be needing to buy! Motors and generators in each Prius use approximately 65 pounds of Rare Earths. The Rare Earth neodymium is necessary for the lightweight permanent magnets used in Prius' motors, in generators and wind turbines.

The market for Rare Earths in America alone is still only around $1 billion, so its growth should be hyperbolic, depending on availability of product. But there is only one producing mine in North America now, and it operates entirely from old tailings.

If Rare Earth Elements are so vital, why have they not attracted more attention? Rare Earth Elements are at the forefront of many brand-new technologies, so it ostensibly has not yet "registered" that these are a separate group, answering to its own bull market. Furthermore, REEs are usually byproducts of mining other metals, uranium for example. It's not as if there were a few huge, dedicated producers of Rare Earths that we could recommend to attract attention, which is a drawback, yet it also gives us the advantage of getting in early by retarding the entry of other investors and advisors. Finally, and most important, China happens to control around 97% of the world's REE production! In fact, former leader of the Communist Party of China, Deng Xiaoping, once quietly stated, "The Middle East has oil, China has Rare Earths," to us a compelling geopolitical clue of a sprint America doesn't even seem to know it's in yet! The Chinese government has been purchasing Rare Earth mines internationally for its own future manufacturing, taking them off the market permanently rather than looking to resell the product worldwide. Last year we discussed "Malthusian investing," what we baptised "commodity chauvinism" (15 Jan 07 TDL, page 7) and "commodity imperialism" (1 Feb 08 TDL, page 11). If China decides to use all the Rare Earths it owns for its own manufacturing, the so-called "green" movement would be in real trouble, once again pointing to uranium as an energy savior, patiently waiting in the wings.

If Rare Earth Elements are so vital, why have they not attracted more attention? Rare Earth Elements are at the forefront of many brand-new technologies, so it ostensibly has not yet "registered" that these are a separate group, answering to its own bull market.

We had studied uranium for many years before we actually recommended it in 2001, based on market timing and Visual Analysis which is how we got in less than only $1 of its low at $7.10/lb. We have likewise been tracking Rare Earths for years. The chart shows how this group has been smashed down, along with most everything else in the stock market, and is still deeply depressed from its 2008 highs. Best of all, it has completed a Base Formation and registered an Upside Breakout.

In college chemistry class, referring to Rare Earths in the Periodic Table, we recall the professor indicating that nobody knew much about what they were useful for and thus he did not pay attention to them. But we have always had a lingering curiosity about them. After a number of years of studying, researching and pondering on what significance REEs might have for our TDLrs, we finally decided to start our own Rare Earth Stock Average in 2003, the problem again being that there are very few such companies outside China. Our DREI chart is hereby revealed for the very first time ever (next page).

Our guess is, sooner or later, the world is going to awaken in shock at the unavailability of Rare Earths, suddenly placing for example Japan's "green growth" industries at China's financial mercy. America, with its typical dismaying lack of foresight, dumped its so-called "strategic holdings" of Rare Earths long ago, and we understand that it now has none left. That figures.

REEs are a complicated field because there are so many of them and more uses are being discovered as new technologies evolve. Reminiscent of our early recommendations of uraniums, when there were only a handful of eligible companies, we decided that our strategy would be to recommend a few REEs now and continue our hunt for other potential leaders as they surface in the future. Just as soon as the mining communities in Australia and Canada get the idea that there is a new bull market in Rare Earths the hunt will be on, and TDL's sharp elbows will be in there shopping for our loyal, long-term TDLrs.

So How Should Rare Earths Be Bought?

TDL is closely followed worldwide by many in the mining arena, so this issue's conclusions will probably be disseminated quickly, to cast a spotlight on REEs that might suddenly trigger a "moment of recognition" of what is now below virtually everybody's radar. Hedge funds for example following us are likely to have their own Security Analysts check REEs out immediately. Therefore, we recommend that TDLrs place orders promptly and, if there is a burst of buying from others, perhaps wait for it to simmer down over a period of time, hopefully during a general market drop, for a better entry point. That does run the risk that REEs might go straight up from here, but that's your call, as no human knows the future for sure. You need to make your own final decision as to how to get in.

Many are tiny, newly-emerging companies, some with only a sideline in Rare Earths that we hope will get more developed once they get more capital. With small companies, after the horrific 2008 bear market, shook out weak holders, there is not a lot of stock for sale so they are likely to be volatile and we recommend against just charging in and buying a lot of them. Personally, we recommend deciding on the portion of your portfolio you want to put into REEs, perhaps 5% or 10% (depending on portfolio size), setting aside one-third or one-half of that amount to buy now, and then waiting for any possible buying rush to die down so that you could hopefully buy the remainder at lower prices, at least having gotten a foothold.

As usual, never speculate in volatile stocks with money that you could not afford to lose. Chances are that they are within 20% of the Bottom and, if you can get out within 20% of an important Top, that would be wonderful because the Low State of Greed would not activate DINOPA. Please don't overexpect from TDL. You must make the final sell decisions yourself, as we are merely advisors. TDL will offer recommendations, but to hedge in case we ourselves miss the Top, it would be prudent to sell small percentages on the way up, precisely how much is your call. In a general market decline, these stocks will definitely be volatile, but we would be amazed if a "Sell" signal came in before two years. We have owned REEs for a long time and have never sold any; we ourselves usually hold stocks for several years as investors rather than short-term traders, waiting for them to come to fruition.

Our last TDL fully defined what we mean by a "Super Major bull market," to prepare you for this issue, and our last Interim Warning Bulletin added that there would be a very important announcement herein, advising that it be read and acted on promptly so as to get in ahead of non-TDLrs. Please keep this REE announcement private.

We've never seen a Super Major bullish prediction on the Rare Earth group in the world's financial press. Nor are we aware of any leading advisor publicly risking his/her reputation on calling Rare Earths an all-out, Super Major bull market and buying the stocks themselves. Sometimes some have recommended one Rare Earth stock or another, but never the whole group as a package about to embark toward great prominence. Therefore, we feel it fair for us to hereby lay claim to the title of "The Original Rare Earth Bug (DIREEBUG)" and are prepared to buy and hold for a period of some years, if necessary.

We have never promised anyone paradise, so don't expect an immediate bull market as rock bottoms can drag on slowly; the energy group did nothing for the first three years after our 2001 recommendation, and we can't tell if Rare Earths might perform likewise. We don't know everything - sometimes nothing! - so please recognize that these are high-risk mining stocks that are not for everyone and, in the High State of Appropriateness, never risk "survival" money. As usual, you decide when to sell, or sell small percentages on the way up and park the proceeds in short-term Treasury bills to repurchase lower. We'll try to help, but we never give any guarantees of any kind whatsoever. Good luck hunting!

  1. China's Ministry of Land and Resources says production quotas for Rare Earths, for which it is the dominant world supplier, will be reduced and new exploration licenses for Rare Earths, tungsten and antimony halted until 30 June 2010. Many miners recently stopped operations when prices dropped sharply as a result of the global financial crisis. Proactive Investors, 8 May 09. Ed: What we call "The Coming Rare Earth Shortage" appears to us to be increasingly imminent.
  2. A handful of US battery makers is scrambling for government support as the US struggles to win back lost ground from Asian competitors in one of the world's next important technologies. Advanced batteries are seen as a strategic technology, given their importance to electric and hybrid vehicles, and their military applications. As with the chip industry two decades ago, the US has lost the lead to manufacturers in Asia that have invested in high-volume manufacturing. "The US and the Europeans have been asleep at the switch," said Paul Beach, head of business development at Quallion, a battery maker. Many of the breakthroughs in the lithium-ion technology used in advanced batteries were made in Japan, and most manufacturing is centered in Japan, South Korea and China. Richard Waters, Financial Times (London), 17 May 09. Ed: In our view, America might just be on the verge of "discovering" the geopolitical strategic value of Rare Earths, far beyond merely auto batteries, triggering a stampede to mine and develop them! The optimum timing to invest in Rare Earths might be very near, if TDL has chosen luckily.

For more information, please subscribe to The Dines Letter.