The RMI Report: Reading the Tea Leaves (PT 3)

OK here’s the last part…

As an investor I took notice that not only was the market relatively inefficient when there was material news but I also noticed that the market consistently grouped all rare earth stocks together no matter the deposit type.  The most important data point, however, was what happened when Lanthanum prices rose over 500% forcing catalyst producers to increase final product costs.  A 500% price increase in one particular input (La) resulted in only a 5% increase in the final product price to which I saw no backlash from refineries. 

This was a real live data point that spoke to the critical nature of this input to the production of FCC’s and the leverage this represented.  It is this pinch point that was the basis for my thesis behind investing in a physical stockpile which became Dacha Strategic Metals.  To witness this happening in real time was an unexpected spectacle to watch as the inelasticity of demand has never been tested in rare earth material (I can’t emphasize enough how important this data point is).  While Lanthanum and Cerium did not qualify as being strategic by my investment methodology, a political policy change resulted in the creation of a supply disruption (foreign only) and I still believe the heavy rare earths will run into a structural shortage in the next few years.  The difference is that when this happens the shortage of HREEs will be driven off of fundamentals and not a so-called embargo that is temporary.  A possible scenario that may warn of things to come is the more logical refinement of the export quota system so that it reflects the fact that each element has its own uses and markets.

Conclusion?  Read Rare Metal Blog (couldn’t resist the plug J ) and watch for material news that can affect the industry – it is quite possible the lag will persist and you can make some coin off of being on top of things.

Reality Check

There are always two sides to making a good investment; a good entry price and a good exit price.  I state the obvious because sometimes investors forget that it can be just as difficult knowing when to get out as to when to getting in.  A wrong decision leaves money on the table or worse, a potential loss of capital.  As the Rare Earth market became increasingly frothy and newspapers highlighted the China/Japan dispute every day, I went back to the numbers and updated my analysis that I originally wrote in July.  Here were some of my data points;

  • Stock prices were moving on the basis of FOB prices in the Light Rare Earths, however, the entire market value of Lanthanum and Cerium exports was less than $50M for the first half of 2010
  • I roughly estimated that the market capitalization of all RE stocks went up by more than $4B
  • Export Quota usage did not show any signs of being significantly different than any other year placing the real possibility that there will not be a large shortage of export quotas

It was the latter half of October when I not only sold the basket of RE stocks I bought in July but I went short… an old trader’s adage is that “Volume provides confirmation of price signals”, and when you see a $4B market cap increase based on a $50M data point, it tells me things were overdone and the odds were for a pull back.  I remember the few next days, prices continued to moved higher but I just added to my short positions. 

I continue to watch the market closely and use my contacts in the industry to get the latest news and gossip.  I will post my findings and thoughts on this blog so I hope you will find them useful or at least entertaining…  OK, I’ll settle with “thoughtfully stimulating”???

Please, please feel free to ask any question at all… I truly enjoy bantering back and forth between readers and fellow experts in the industry.