Despite the uncertainty currently being experienced across the rare earth element (REE) market, the outlook for demand is growing more and more compelling from an investor standpoint.
China controls the vast majority of REE supply, and its recent announcement that it is considering creating a national inventory reserve in a bid to stabilize prices means that both individual and institutional investors will be looking to mining juniors for future investment opportunities.
As with the majority of junior commodity-focused companies, REE mining stocks have taken a beating over the past 18 months. Despite macroeconomic doom and gloom, critical rare earth fundamentals suggest that there will be a supply shortfall in the short term, and with the majority of junior share prices near record lows, many see the summer as an opportune time to purchase undervalued stocks.
What to look out for
According to Luisa Moreno, an analyst at Jacob Securities, in this uncertain environment investors should be looking to companies that have favorable rare earth distribution, a reasonable amount of heavy rare earths, and a joint venture partner to develop expensive projects.
These are three potential buy opportunities in the short term:
Tasman Metals (TSXV:TSM,AMEX:TAS) is a Canadian mineral exploration and development company focused on strategic metals in Europe. Tasman’s exploration portfolio is uniquely placed, with the capacity to deliver high-tech metals from politically stable, mining-friendly jurisdictions with developed infrastructure.
The company’s flagship project, Norra Karr, is the fourth-largest heavy REE (HREE) deposit in the world. According to a company presentation, at over 50 percent the project has the highest percentage of HREE to total rare earth elements, and is unusually rich in dysprosium and yttrium.
Last month, Tasman added to its already impressive portfolio when it entered into an agreement to acquire a 100 percent interest in three new REE exploration properties in central Finland.
This stock is even more appealing because it has the potential to be one of the first major REE deposits to enter production – an enticing prospect when considering the lengthy timelines most REE projects are subject to.
Earlier this year, Tasman released an impressive Preliminary Economic Assessment (PEA); it is also one of the few REE companies listed on the New York Stock Exchange (NYSE). However, until now, the market has neglected the company’s true value. Jeb Handwerger, editor and publisher of Gold Stock Trades, referred to its price as a “ridiculous bargain-basement valuation.”
The company is currently trading at $1.61 – well below its 52-week high of $4.90. It has 59,501,310 shares outstanding and a market capitalization of $92,335,000.
Matamec Explorations (TSXV:MAT) is a junior exploration company whose main focus is its Kipawa deposit. Most of the Kipawa deposit’s value is in five critical REEs, including dysprosium and terbium, which are indispensable in green technology applications.
The appeal of this company lies in its high-quality project, already established customer base, and near-term production goals. Its flagship project has a projected revenue of $2.8 billion, a before-tax payback period of only 2.4 years, and a mine life of approximately 13 years.
From an investor perspective, the company showed huge upside potential when it entered into a memorandum of understanding with Toyota Tsusho (TSE:8015). The auto manufacturer will help fast track the Kipawa deposit into production and has taken much of the risk element out of the project. Toyota also signed an offtake agreement to purchase 100 percent of the project’s mixed rare earth oxide concentrate and agreed to provide the project with technical assistance and arrange financing through to production.
The company’s share price has experienced volatility over the past 12 months and is currently trading at $0.27 – well below its 52-week high of 48 cents. Its stock often trades at high volumes and recently recorded a single day rise of 29 percent on news that a decision relating to its joint venture agreement with Toyota will be made on or before July 11, 2012.
Matamec has 120,250,186 shares outstanding and a market capitalization of $33,069,000.
Quest Rare Minerals‘ (TSX:QRM) Strange Lake Deposit in Northern Quebec could supply as much as 10 percent of global demand for REEs once it is up and running, and as much as 30 percent of demand for more expensive HREEs.
The company has enjoyed a number of exploration successes since listing in 2008 and was the best performing share on the Toronto Stock Exchange in 2009 – it rose more than 5,000 percent that year, from 6 cents to $3.38, followed by a further gain of 64 percent in 2010.
In 2009, Quest discovered the B zone deposit at its flagship project and, hoping to attract a strategic partner, moved quickly to publish a PEA that indicated impressive economics and strong potential.
Both capital and operational expenditures are forecast to be relatively low, and the project’s location in Quebec is appealing from an investor standpoint; a 2011 Fraser Institute study listed the region as one of the most favorable mining jurisdictions in the world. The project is also able to benefit from infrastructure support under Quebec’s Plan Nord, a sustainable development initiative.
A 2011 research report by Dundee Capital Markets noted that the in-situ value of the deposit is estimated at $18 billion and assigned a buy rating to the company with a target price of $8.88 per share.
The company’s shares are currently priced at $1.80 per share – a touch above its 52-week low of $1.49 and well below its one-year high of $6.79.
Quest Rare Minerals has 61.82 million shares outstanding and a market capitalization of $111,320,000.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.