WSJ reports pros are shorting rare Earth (REEs) stocks

By BRENDAN CONWAY And TATYANA SHUMSKY, Wall Street Journal (27jun11)

The rare-earth minerals sector is drawing near-record short interest as bearish investors bet against its previously highflying stocks.

The industry, whose minerals are used to help power items as varied as vacuum cleaners and smartphones, had been a darling of the stock market over the past year. Investors snapped up shares of the North American trio of Molycorp Inc., Avalon Rare Metals Inc., and Rare Element Resources Ltd. as rare-earth minerals were viewed as short in supply, likely to be hit by Chinese export curbs and all but certain to enjoy steady future demand by a broad range of tech customers.

That all came to an end in recent months after a confluence of events sideswiped the industry, causing short sellers to swell. Investors who want to short shares borrow the stock and then sell it, betting that the price of the shares will fall and that they can buy them back at a lower price, for return to the lender.

Shares of rare-earth mineral companies have been punished amid doubts that the Chinese supply crunch—the country now accounts for 95% of world output—is as bad as surging prices imply. Last week's share sales by executives at North American industry leader Molycorp may also be weighing on sentiment.

"Short interest in the three quoted rare-earth miners outside of China has continued to build since April and stands just off record highs," said Will Duff Gordon, research director for Data Explorers. Despite a recent share-price correction in the three stocks, "it seems that short sellers still believe them to be overvalued."


Molycorp, Avalon and Rare Element Resources all targeted

These non-Chinese rare-mineral stocks have seen share prices fall between 33% and 42% from their highs in the early part of this year. The proportion of Molycorp shares on loan, a proxy for bearish short interest, hit a high of 11.5% on June 15 and has since hovered slightly below that mark, according to Data Explorers. Avalon and Rare Element have also seen more bearish-looking short activity in recent months.

"The peaks of all three of these stocks were a good 40% above where they are now, so some froth has been blown off the beer," said Christopher Ecclestone, mining strategist at Hallgarten & Co.

The "rare earth" name is something of a misnomer. The 17 metals are found in deposits all around the globe and aren't limited to China.

The range of uses is wide. Certain rare-earth elements, like yttrium, have been used to make specialty steel stronger and more durable over the years, but the industry blossomed with the rise of certain high-tech products over the past decade.

Companies like Dyson Appliances Ltd. rely on neodymium magnets to create the powerful suction vortex in their vacuum cleaners. Apple Inc. and Blackberry maker Research In Motion Ltd. use terbium to make their phones smaller, lighter and faster.

Other countries largely dismantled their mining operations as China undercut competitors and came to dominate processing over the years, according to market participants. The country is in the position of restricting supply to some degree, but recent price gains mean that extracting the metals elsewhere is once again profitable.

Outsiders are only now beginning to rebuild that capability. Mr. Ecclestone said the two companies besides Molycorp "don't have a ghost's chance of production in the next two years, maybe more."


Insider Sales also affecting downward pressure

Some of Molycorp's recent declines may be linked to large insider share sales conducted over the past month. Chief Executive Mark Smith reported a sale of nearly 175,000 shares last week, or about 16% of the executive's holdings as of May.

A Molycorp spokesman said that the short interest may not be driven by sentiment, and may instead be the result of complex arbitrage trades. He added that Mr. Smith's sales were "prudent personal financial planning" and said the "vast, vast majority of [Mr. Smith's] personal net worth is tied up in the single stock."

He added that the executive's interests "remain completely aligned with shareholders" and his financial success "still depends almost completely on the success of the company."

The bearish action comes as some Wall Street analysts have grown more positive on the stocks, largely to reflect the jump in prices. J.P. Morgan Chase & Co. stock analysts led by Michael F. Gambardella raised their Molycorp target price recently to $105 from $87, in part "to reflect the continued rise in rare-earth prices."

But even some bullish analysts are voicing doubts that the surge in prices will last. Dahlman Rose & Co. analysts Anthony Young and Anthony Rizzuto said this week that the underlying metals have already priced in tighter Chinese quotas, adding that they are "uncertain current levels are sustainable."

The analysts have a "buy" rating on the stock, though they reduced their price target, to $120 from $125.

— Chuin-Wei Yap also contributed to this article.

China stockpiling rare earth metals as prices continue climb

Several rare-earth metals have doubled in the last few weeks

Britain's The Independent reports on REEs and Chinese policy


Rare-earth metal prices spike as China stockpiles supplies

By Clifford Coonan in Beijing

Prices for rare-earth metals, which are used in everything from iPods to flat-screen TVs to missiles, are rising sharply as China builds up a stockpile and cuts quotas, so much so that some industries fear global supplies may be in serious jeopardy.

Rare-earth metals are among some of the most sought-after materials in modern manufacturing, and demand for at least some of them is soon set to outstrip supply.

Japan and the US, the world's biggest importers of rare earths, are concerned that China, which produces more than 95 per cent of the world's supply is trying to limit supplies, and urged Beijing not to use the elements as a trade weapon.

Citing the need for a more sustainable approach to the harvesting of its rare-earth deposits, China's cabinet, the State Council, has authorised a crackdown on unregulated rare-earth mining and has introduced restrictions on exports, causing a spike in rare-earth prices. It is also building up a national reserve of the precious elements.

"These policies are in line with common international practices and the rules of the World Trade Organisation. They have been created out of a sense of responsibility not only for China's own development, but also the development of the world," China's Ministry of Industry and Information Technology told the Xinhua news agency.

Rare earths are used in all kinds of modern products because their unique electrical, magnetic, optical and thermal properties make them vital ingredients for some of the most technologically advanced products.

The cost of some of the 17 elements that make up the rare-earth metals has doubled in the last few weeks, with the price of others up by 400 or 500 per cent from the start of the year. Since last year, big government groups like Baotou Iron and Steel have been building up commercial reserves with total capacity of more than 200,000 tonnes, around twice China's annual output, according to Chinese media reports.

Beijing has brought 11 rare-earth mines under state control as it consolidates the industry. Last year, Japan was furious when China slashed exports by 40 per cent and temporarily banned all supplies, after a Chinese fishing boat captain was arrested for sailing too near to a disputed island chain.

China also needs to move quickly on these elements because they are running out fast. The Ministry of Commerce said that between January and November last year, China exported 35,000 tons of rare earth, up 14.5 per cent on 2009. At current rates of depletion, a third of China's rare earths are already used up. There is probably around 15 years worth left at the current rate.

To capitalise on its stocks, China has introduced quotas in recent years, which have cut exports by between five and 12 per cent a year.

There is a strong political dimension to the quotas, but they were also introduced because China is worried about the environmental impact of the mining.

Ceng Qingshou, an elderly rice farmer living in the Guangxi Zhuang region in southwest China, told Xinhua how his rice fields had been contaminated by waste water from a quarry, killing the harvest.

"They paid me 2,400 yuan (£229) to compensate me for my losses last year, but what about this year, and the year after that?" he said.

In other areas rich in rare earths, such as Jiangxi province, rare-earth mines have poisoned wells, leading to anger among farmers.

"While many countries around the world are eager to develop their rare-earth mining industries, China just wants to clean up its act," wrote a Chinese industrial commentator