Tuesday this week I attended the San Francisco Rare Earths Conference for accredited investors. The first thing I noticed was that “Accredited Investors” were treated much more nicely than the general public was for the first two days of the conference! (No, that’s not one of my “most important things I learned”, just an observation…). 🙂 Literally, when I arrived at the same hotel for the “Accredited Investors” conference, I was enthusiastically greeted and helpfully escorted upstairs to the second level, whereas the “regular” hard assets conference had been located in the dungeon basement of the Marriott.

Additionally, we were provided with a delicious catered gourmet lunch (a “networking luncheon”) and a cocktail reception after the event. (To be fair, though, there were far, far fewer people at the rare earths investment conference so perhaps it was possible to hold it in a nicer/smaller room and provide the delicious refreshments…maybe.)

I have not dabbled yet in rare earths as I did not feel I understood them well enough, so my purpose in attending this conference was to learn, and learn I did!

I learned many, many things about rare earths: the difference between Heavy Rare Earth Elements and Light Rare Earth Elements and which is more valuable (Heavy), the various extraction processes that separate the rare earths from the rocks/sediment they are found in and how much that costs, the overall supply and demand forecast for the various rare earth metals (more on that in a moment), and the typical applications in which they are used (magnets, wind turbines, hybrid and electric vehicles, and many more).

By far, though, the most important things I learned from an investing standpoint are the following:

1.  China controls 97% of the entire rare earths market!

2. “Rare” does not equal “Precious”. “Rare” is somewhat of a misnomer, as these elements are really not all that “rare”, and when prices rise companies that use rare earths will instead substitute other more cost-effective technological processes. Additionally, many rare earths also have radioactive byproducts, which can be good if you are investing in uranium and thorium, but can also be a permitting nightmare for the prospective mining companies. Finally, “rare” earths tend to behave much more like industrial metals (versus “precious” metals) so if the economy continues its slump, “rare” earths will most likely slump as well.

Several “expert keynote” talks were interspersed between all of the company pitches, and the experts all agreed that the “days of easy triples” are gone (so sorry I missed those!) and that now if you are going to invest it is a “stock picker’s” market (meaning you had better understand exactly why you are investing in whatever companies you decide on).

By far the best expert presentation in my opinion was given by Louis James of Casey Research, who actually didn’t give a “presentation” at all but rather a talk. I am working to see if I can post the audio of his talk for you and will let you know when I get approval. In the meantime, he had a few important quotes that I can share with you:

On China:

“The overwhelming factor, the gorilla in the china shop here is literally China.  The determining factors that are going into supply and demand and all the things that people are making equations based on, are not based on supply and demand, they’re not based on the inherent limitations of mining technology, the known number of deposits and all these things, the kind of things you’d like to be able to study and build a model on; they’re based on a policy decision by the Chinese government.” — Louis James, Casey Research

“What the Chinese giveth, the Chinese taketh away. And if they set for policy reasons, output and restrictions that determine high prices will result, they can change that, at the drop of a hat. And how do you project in a market like that? What reasonable number could I stand here and project on a chart when I have no idea what the Chinese are going to do next month, or tomorrow?” — Louis James, Casey Research

On Rare Earth Prices (due to the Chinese supply monopoly):

“You are dealing with an extremely risky commodity price that underlies all the deals you’re looking at. You cannot know, you cannot know what your prices are going to be going forward.” — Louis James, Casey Research

“This is an inherently extremely risky commodity area that you’re getting into with rare earths. Not that they’re not a good commodity, not that there won’t be demand, but I am telling you that the price environment is inherently chaotic because it depends on other things than market forces.” (e.g. the political whim of a handful of men in Beijing) — Louis James, Casey Research

Louis James is one of the smartest and most disciplined investors I know and is Casey Research’s “Chief Metals and Mining Strategist” along with being the Editor-in-Chief of their flagship publication, the International Speculator. I am unaffiliated with Casey Research other than the fact that I am an extremely happy subscriber—I subscribe to the Casey Report, to the International Speculator, and others. They also have a free “Daily Dispatch” and a free “Gold & Silver Daily” that you can subscribe to which I highly recommend.

Louis was not the only expert presenter “cautious” about the rare earth market; in fact, he was in the majority. Dr. Jon Hykawy, Head of Global Research for Byron Capital Markets was also cautious on the market, although he gave several picks (you can look at their specific rare earth picks here). He was not a fan of either Avalon or Quest, and has a “sell” recommendation on Molycorp even though he believes that it must come to market due to its strategic importance.

Strategic Importance and Supply

Which brings me to “strategic importance”…everyone agreed that the U.S. is once again shooting itself in the foot by not mining and producing more of these strategic metals within our borders, especially as one of their primary uses is in Defense. The final speaker, Dr. Michael Berry, talked about this to much extent, but everyone agreed that from an investing standpoint, until you can convince the United States government that it is imperative to have rare earth mining within America, China still has the overwhelming monopoly on supply.

Demand

And from a demand perspective, it is extremely difficult to forecast…while new technologies such as hybrid and electric cars and wind turbines and more may well be the wave of the future, technology also conspires to make processes more efficient (thereby requiring less and less rare earths to get the job done).

One final note worth sharing if you are considering speculating in this space was this little gem… “Drills kill”. It is important to see the drill results from a company because the success rate is something like 1 in 300…OUCH.

Anyway, that concludes the San Francisco Hard Assets and Rare Earths Conference reporting! My apologies for this somewhat “techie” report, but I’ll be back tomorrow with our regularly scheduled (and hopefully more kung fu fun!) Q&A!

To your financial success,

—Kung Fu Girl