Dacha: A Rare Opportunity in a Rare Earth Stock

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A few years ago rare earth element (or, rREE) investments were seemingly on everybody’s radar. Stocks such as Molycorp (NYSE:MCP) were soaring on a daily basis and saw hundreds of millions of dollars, if not billions worth of stock change hands daily.

The thesis was simple and compelling. REEs are essential resources in many products that modern society cannot live without. The Department of Defense considers several REEs to be strategic resources that the military needs to ensure national security. REEs are also essential for the production of clean energy technologies. Furthermore, REEs are needed to build electronic devices, medical devices, and products used in modern scientific experimentation.

What distinguishes REEs from other metals that satisfy the above claims is that the vast majority of all REE production comes from China. Specifically, most REE production currently comes from the ion-adsorption clay ores in southern China. Estimates vary as to the extent of this monopoly, and it differs from element to element, but in general we can estimate that China controls at least 90 percent of global REE production at the present time, and in the case of some of the rarer REEs this figure exceeds 99 percent. Furthermore, while there are many REE projects in the Western world currently under development, China controls over half of the world’s REE in-ground resources.

Despite this compelling investment thesis, REE-related investments have performed horribly over the past few years. For instance, shares of former Wall Street darling Molycorp trade at less than $5 while they peaked in 2011 at over $70. But the thesis is still the same — and with REE-related investments trading so inexpensively, I think it is time to revisit them. But rather than simply buying Molycorp or the Market Vectors Rare Earth and Strategic Metal ETF (NYSEARCA:REMX), investors need to look under the radar for opportunities.

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