Tim Treadgold: Rare earths could be another ‘buy the sector’ situation, just like nickel
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‘Buy the sector’ was useful advice in August for followers of nickel mining companies, and the same thing could be said today of rare earths — if you’re prepared to believe politicians.
No prize for recognising that it takes a leap of faith to make an investment decision based on what a politician says they might do.
But with rare earths there is an international push underway to encourage the development of new sources of supply, to offset the dominance of China in a group of strategically important minerals enjoying strong demand from industry and the military.
In theory, given the potential capital injections from the US, European and Australian Governments, that means a winner or two should emerge from the current crop of hopefuls.
However, the job of separating potential beneficiaries of a government capital injection from stocks destined to be sidelined is tough, which is why anyone prepared to play the rare earth game should follow the nickel advice and buy the sector.
August’s nickel idea on Stockhead (“Nickel on the move – buy the sector”) was timely because all, bar one, of the stocks mentioned has risen and the laggard, Panoramic Resources (ASX:PAN), is only down 1c.
A small fall by Panoramic barely makes a dent in the 32 per cent rise over the past two months by Western Areas (ASX:WSA) up from $2.36 to $3.13, Independence (ASX:IGO) up 17.5 per cent from $5.03 to $5.91, and St George (ASX:SGQ) up 38 per cent from 13c to 18c.
The common thread, apart from Independence also having gold interests, is the revival in nickel as an important ingredient in stainless steel, plus a fast-growing new use in rechargeable batteries for electric cars.
The rare earths game is somewhat different to nickel in that it is dominated by Chinese mines, and even more so by Chinese processors.
It’s that dominance, and China’s history of using rare earths as a trade weapon, which has ignited political interest in the sector among major consumers of the elements which make up the rare earth family — especially praseodymium and neodymium, which go into the high-strength magnets at the heart of every electric motor.
Talks at the highest level of the US and Australian governments started earlier this year, culminating with a visit to Sydney and Canberra earlier this month by the US Commerce Secretary, Wilbur Ross.
It was at those meetings that a proposal to create a “joint action plan” was hatched and while the details are yet to emerge it’s reasonable to assume that it means mining rare earths in Australia and processing them in the US.
First company likely to be sucked into the embryonic Australia/US rare earths joint venture is Lynas Corporation (ASX:LYC), the local miner which undertakes processing in Malaysia, but is likely to be under pressure to shift its processing to the US.
But if that’s the case, and Lynas is indeed a favourite to be the first recipient of direct US Government investment, or an invitation to team-up with a US partner, then it’s interesting to see how the stock market has reacted…or not reacted, to be correct.
Since late last month when the Australia/US rare earths plan was generating headlines, the share price of Lynas has barely moved — $2.60 back then and $2.58 today.
It’s the same with other Australian rare earth stocks. Arafura (ASX:ARU) is up, just, from 9c to 9.8c. Northern Minerals (ASX:NTU) has fallen, just, from 6c to 5.3c.
Hastings Technology Metals (ASX:HAS) is stuck at 18c. Peak Resources (ASX:PEK) has slipped from 4c to 3.6c, but has raised funds through a share issue, as has Greenland Minerals (ASX:GGG) which has dropped from 14c to 10c.
A cooling of trade war rhetoric could be dampening the rare earth story because it might mean China will not use its market control to crimp exports of the minerals to the US.
But even if that’s the case, there is a high-powered political process underway and what seems to be a determination of the US to break its dependence on Chinese supplies of critical minerals used by its armed forces.
It’s when you look at the political push behind rare earths, which is unlikely to fade, and the lack of reaction by Australian rare earth stocks, that a disconnect is evident.
At some time in the next six-to-12 months it is highly likely that the Australia/US rare earths project will return to the headlines, perhaps even with a plan to do something rather than just talk about it.
As a sector, rare earths have a lot in their favour. Strong and growing demand. A dominant producer with a bad habit of restricting supply, and a political push to see new projects developed.
While all that is known, it’s the unknown of which companies will win the “beauty parade” Australian and US Government officials are likely to conduct which means it’s impossible to pick a winner at this stage.
The solution: spread your bets and buy the sector because once the governments start talking about direct investment all rare earth stocks will react positively.