The news that Japanese geologists have found as much as 100 billion tons of rare earth minerals in the deep sea mud on the seafloor near Hawaii and Tahiti two to four miles below the surface of the Pacific Ocean made headlines around the world. The journal Nature Geoscience was the first to report the discovery (http://www.nature.com/ngeo/journal/vaop/ncurrent/full/ngeo1185.html) but many other publications picked up on the story including the Wall Street Journal, CNBC.com and Yale Environment 360, just to name a few.
The discovery of large deposits of rare earth minerals is great news for the hybrid automobile and mobile phone industries since these minerals are crucial in creating the electronics, batteries and magnets that make up these products. Currently, proven reserves of these products are indeed rare with China by far the biggest miner and exporter of these elements, followed by Russia and the U.S. China’s reluctance to part with enough of the elements to satisfy global demand has caused volatility and unpredictability in prices for the minerals and was the basis of a condemnation this week from the World Trade Organization.
While the news of this new resources is very promising, the viability of extracting them from the sea floor remains in question. The articles suggest that acid leaching is a proven method for recovering the minerals from the deap sea mud, but actually accessing the minerals from the sea floor will be very expensive and commercialization could be as much as 20 years away, according to several of the reports.
Nonetheless, the news was welcomed by industries throughout the world, including various small cap companies that are focused on the use or commercialization of minerals in one form or another.
Vancouver-based Rare Element Resources Ltd. (AMEX: REE, http://www.rareelementresources.com/) explores and develops mineral properties in the U.S. and Canada and owns the Bear Lodge property in northeast Wyoming. REE, which has a market cap of $449 million, was as high as $17.92 earlier this year, was trading at $10.25 on July 6.
Toronto-based Avalon Rare Metals Inc. (AMEX: AVL, http://www.avalonventures.com/), formerly known as Avalon Ventures, develops rare metal deposits throughout Canada. AVL traded for nearly $10 in April but had backed off to $6.45 by July 6. The one-year chart shows a nice upswing with the stock price less than $2 a year ago.
Beijing-based China Shen Zou Mining and Resources (AMEX: SHZ, http://www.chinaszmg.com/) mines and processes nonferrous metals in China. It’s a relatively small company ($104 million market cap) that was trading for less than $1 about a year ago and then ran up to more than $10 in January. On July 6 it was trading for about $3.37.
Two larger companies in the rare metals business include Australia-based Lynas Corporation (LYSCF.PK, http://www.lynascorp.com/), with a market cap of $3.34 billion, mines and processes rare earth metals in Australia and Indonesia; and Greenwood Village, CO-based Molycorp (NYSE: MCP, http://www.molycorp.com/), with a market cap of $4.82 billion, operates the Mountain Pass Mine in San Bernardino County, CA. MCP has been enjoying a fine run in the past 12 months. A year ago it traded for about $12, then ran to nearly $80 in May before correcting down to $57.47 by July 6. A CNBC report suggested Molycorp could be an acquirer and consolidator in this market.
One small cap company that needs a rare earth element, tellurium, in its devices is Northville, MI-based Amerigon * (Nasdaq: ARGN, http://www.amerigon.com/), which makes heated and cooled seat systems for the global automotive market, among other products. Amerigon management closely watches the volatile price of tellurium, which can be meaningful in its profit margins. The company, which is in the process of acquiring W.E.T. Systems of Germany, a rival, has enjoyed the revival of the automobile industry. Its stock was trading at $17.80 July 6, a 52-week high.
Not exactly a peer, but another small cap mineral resources company that makes its living digging up sands from ancient sea bottoms is Industrial Minerals Corp. * (OTCQX: ILMCY, ASX: IDM, http://www.industrialmineralscorp.com.au/). Industrial Minerals has recently begun excavating chromite, garnet, zircon and hi-iron from the mineral sands near Coos Bay, OR. The chromite, which is used by foundry operators worldwide for making iron and steel, is considered exceptionally high grade and demand is robust.
* Denotes client of Allen & Caron, publisher of this blog