“The Coming Major Bull Market in Rare Earths!”

(Originally published in The Dines Letter - 19 June 2009)

Latest from “The Original Rare Earth Bug” (DIREEBUG)

It ain’t over till it’s over.

—Yogi Berra, on the National League pennant race

To prevent cheaters from tinkering with deeds and other contracts between parties, a practice was introduced in England in the late Middle Ages wherein a contract was written out in duplicate on a sheet of parchment, with a blank strip in the middle. The two documents were then cut or torn apart so as to leave a notched or wavy edge such that the genuineness of either document could subsequently be proved simply by matching the two edges. One was said to indent the contract, from the Latin in, in, and dens, tooth. The contract itself was, and still is, called an indenture, from that original means of identification, and was used for example between an apprentice or a servant and his master. Many of America’s early settlers, lacking funds for transportation, voluntarily became “indentured servants” to get to America.The signer “took up his indenture” when he had completed his service. After seven years such a servant was usually able to take up his indenture from the master who had bought it from the ship owner.

Our last TDL (The Dines Letter) announced that DIREEBUG was looking for what we call a “Super Major bull market” in Rare Earths. Not everybody is aware of what Rare Earths are, but they are crucial elements for a wide range of vital products that will dominate this century’s growth areas: electric cars, windmills and solar devices! You can’t make a battery small enough to fit into a cell phone, camera or wristwatch without Rare Earths. We also pointed out that corporations owned by China had cornered perhaps 97% of the world’s Rare Earth production(!), suddenly striking fear into many industries that might wind up as indentured servants to Rare Earth producers. To be perfectly honest, we were shocked by the impact our last TDL had on the mining world internationally, setting off a stampede by investors to buy nearly all available Rare Earth investments, and with some mining companies actually rummaging around their assets to see if they had overlooked any Rare Earths in inventory! We knew that TDL was widely followed by miners, but the Rare Earth business especially was rocked by our having called such attention to it, and the repercussions are still evident.

China has done nothing wrong by capturing the Rare Earth market, but we wish that America had done as much as possible first. Some of our leaders are too busy fighting past wars to imagine future ones. Hopefully, some TDLr will get our last issue into the hands of politicians who could set off a mad scramble for the world’s remaining Rare Earth deposits in order to avoid becoming indentured servants to those who possess those elements!

The front-page charts show the lovely Uptrends that began late last year, as we were turning bullish on the market, again concentrating on “Strategic Metals” because their “wealth in the ground” is less vulnerable to governmental printing presses, than are for example bonds and other confiscatable paper assets. Those five companies have filled up half our recommended Rare Earth portfolio #6, and we are going to wait some time before adding more of them, as we pointed out in our eighth IWB (Interim Warning Bulletin) of this year. We believe the five we have chosen offer the chance of at least one of them becoming a major winner at the center of the field’s available chessboard. Many of the other Rare-Earth miners have deposits that are too small, too far away from production, or in need of more drilling results for us to properly evaluate them as of today. We hope to add five other companies to this list by early 2010, but are in no hurry to rush into anything. We will continue shopping for our loyal, long-term TDLrs and report on our findings when timing seems appropriate.

Meanwhile, we expect other investment advisors to be piling into stocks in the Rare Earth field, thus they might get pushed unreasonably high in the short term, so we would buy half of planned positions now and try to buy the other half at lower prices when they settle down later. We timed our Rare Earth recommendations surgically even as we expected a general market decline, the best time to shop them, although those who wait too long run the risk of these stocks running away on the upside – which is as far as we can take you in your final buying decisions. Meanwhile, we will be including more educational material about Rare Earths in future TDLs because knowledge is power. And wealth. In a way, this reminds us of previous Super Major bull markets we have called, for example the Internet boom in 1997 when not everybody even knew what the Internet was. To get in near rock bottom of a Super Major bull market means going where few dare to tread, first, with the courage to risk one’s career by taking such a stand.

One easily-understandable example of Rare Earths is the ordinary camping lantern that burns fuel but also produces light from heat. Coleman lanterns produce far more light than the mantle (a mantle is the metal that surrounds the flame) should. How? It’s made with yttrium and other Rare Elements. The flame itself produces relatively little light, but the atoms in the mantle get as hot as 2000º fahrenheit whereby the agitated atoms release heat as light, a phenomenon called “incandescence.” In this case, the more heat created the more light because it is not only the atoms that are excited, but components of the metal also release energy. Light produced by this incandescence is sixty times more intense than the light of the flame because while the flame merely produces fuel and heat, incandescence kicks up brightness by the rare phenomenon of “thermal luminescence”!

Back in 1977, over thirty years ago, your editor gave some lectures in China and returned with the shocking prediction that “China will dominate the 21st century,” a veritable “Super Major bull market,” a forecast not believed by everybody even today. Gradually emerging from their primeval underdevelopment, China’s people slaved away and built up 2-trillion dollars worth of savings, trustingly parked in ostensibly conservative US government notes and bonds. A cruel trap because China has no control over how many dollars are printed that result in a dilution in the value of each dollar. Chinese money managers cannot dump all their dollars because such a sudden sale would send the dollar crashing, thus reducing the value of its remaining holdings, not to mention provoking America’s indignation typical of a fading power. China’s wise solution has been to get rid of some dollars by buying assets in the real world, especially wealth in the ground that is beyond Washington’s printing-press stranglehold, as outlined in excerpt #1, at the end of this feature. Nonetheless TDL is still on a “Buy” signal on the US dollar.

Because of our Fundamental perception that China will dominate this century, its economy features prominently in our predictions. For example, when we turned negative on China’s economy in 2005 (24 Jun 05 TDL, page 6) it factored into our prediction of “The Coming Real-Estate Crash in 2007.” After that came true, we turned bullish on China on 12 Feb 2009 by IWB, when we figured that their pent-up demand for raw materials would trigger a worldwide economic upturn. It must be remembered that China is a communist nation, so the government is unusually powerful due to its having assumed the role of handling its national necessities that in capitalist countries is otherwise a function of the free market. China has been stung repeatedly by sky-high commodity prices once it was learned that it was a buyer in a market, especially true for iron ore feeding the giant steel industry destined to build its infrastructure. That is partially why we turned bullish on China this February, stockpiling raw materials while prices were down during last year’s crash, and at the same time conveniently escaping from holding so many dollars! Again, we see nothing unethical with that, and were America in that position we would advise it the same way. At least 90 large freighters full of iron ore are parked outside Chinese ports as that nation has also been stockpiling aluminum, canola, copper, nickel, soybeans and zinc. Starting this April China began to stockpile crude oil, one of the reasons we stayed bullish on the fuel near its lows. We also turned bullish on base metals, starting with copper in our TDL of 13 Jan 09 (page 28), as per the chart, because of our bullishness on raw materials. While American steel mills are operating at 50%-60% of capacity, Chinese mills were at 70% and Indian steel mills at 100% of capacity.

It’s not just raw materials, but also real estate, as China has joined Saudi Arabia and Kuwait in buying millions of acres of farmland worldwide in order to grow crops to be shipped back home. But critics already call these land grabs “neo-colonialist ripoffs” as a backlash against incautious Chinese buying has begun to emerge.

Coal is one of the few raw materials where China is not only self-sufficient but, with proven coal reserves of over 100-billion tonnes (the world’s third-largest resource base, behind the USA and Russia, Australia is fourth), it is amazing that China has tentatively agreed to majority finance a US$5.15 billion coal mine in Queensland, Australia. In fact, China has been so persistently acquiring its assets that Australia’s Foreign Investment Review Board is wondering whether acquisitions by state-owned corporations are in its national interest. For example, Australian headlines erupted around Chinalco’s (Aluminum Corp of China) $19.5-billion projected acquisition of Australia’s Rio Tinto that would include the vital Pilbara iron-ore mines in Australia. Chinalco’s buying disrupted a planned takeover of Rio by BHP Billiton that would have created an iron-ore duopoly (along with Brazil’s Vale). Chinalco’s effort to get a foothold in the pricing of bauxite and iron ore has so far failed, and many Australians are suddenly unwilling to see a foreign government own its key assets. Or are awakening to TDL ‘ s predictions on 15 Jan 08 (page 7) concerning the Malthusian investing that we called “commodity chauvinism,” and “commodity imperialism,” in our last TDL (page3 of this feature). Many of our old discussions about “The Coming Mercantilism” are coming true.

Returning to the original discussion of Rare Earths, the bottom line is that nearly all the world’s dysprosium, neodymium, praseodymium, and terbium come from China. Toyota’s nickel metal-hydride batteries and brushless DC electric drive motors required by Toyota and Lexus hybrids must have these Rare Earths or they don’t get built! We find it remarkable that plans are being made for massive increases in production of those cars despite zero prospects of obtaining Rare Earths from China, a nation that has every right to use its own Rare Earth production in its cars.

But the so-called “killer app” for Rare Earths is that China’s Ministry of Industry and Information Technology has already issued a mandatory plan for lowering its 2009 production output targets by 8.1% and 6.9% respectively, from last year, for Rare Earth products and smelting and separating Rare Earth products. Their production target for Rare Earth products is set at 119,500 tonnes for this year and 110,700 tonnes for smelting and separating Rare Earth products. China’s Ministry also imposed a ceiling on tungsten, antimony, and tungsten ore concentrate and antimony ore, so the screws are already being tightened and “The Coming Rare Earth Buying Panic” should not be too far in the future. We have not yet even covered the need for Rare Earths in oil-well drilling, but we will in future TDLs. As recommended in our last IWB and as stated earlier, we would buy half the intended position now and hope for general market weakness enough to drag them down to more favorable acquisition levels.

1. Australia vetoed part of a $1.8 billion bid for Oz, a large zinc miner, because the military raised the prospect of Chinese espionage at an Oz mine not far from an aerospace test site. China is Australia’s biggest trading partner, one of its biggest tourism customers, the largest single buyer of its government debt and a major buyer of farmland and real estate. China’s hunger for steel gobbles up half of Australia’s iron ore exports, and its textile factories buy more than half of Australia’s wool. Over 120,000 Chinese students throng to Australian schools and universities. Although China’s purchases remain dwarfed by cumulative investments of the Americans and the British, they are growing much faster. And suddenly, Australians are stepping back, realizing that their new best friend is someone they really do not know very well, much less trust. Western companies, if at one time equally ravenous for Australia’s resources, are not direct appendages of their national governments. The dominant shareholder in major Chinese resources companies is the Chinese government. There is also the question of whether China’s stake in strategic industries – like its investment in United States Treasury Bonds – could one day morph from a business deal to an instrument of diplomatic influence. Paul Glasson, a Shanghai-based Australian who brokers deals between Chinese and Australian businesses, notes that China’s domestic reserves can meet demand for fewer than half of 45 strategic minerals. By 2020, it will have sufficient supplies of only six. Beijing’s denial of a role in its state-owned companies, he said, is creating a credibility problem. The Australian military has issued a defense strategy proposing the biggest Australian military buildup since World War II, driven in part by a forecast of rising Chinese economic power and a slow American fade in the Pacific. New York Times, 3 Jun 09

2. Korean, Japanese and Western players may find themselves locked out of the Rare Earth sector. High tech and green industries rely on Rare Earth metal resources. With over 90% of the global Rare Earth resource held by Chinese companies, the country’s monopoly looks unchallenged. Rare Earth metals are a collection of 17 different metals that occur within the same ore deposits. While China currently produces 95% of the world’s Rare Earth supply, the metals are also found in the US, Indonesia, Australia and South Africa. Rare Earth metals are needed for the manufacturing of wind turbines, plasma televisions, mobile phones and hybrid car batteries, meaning the Chinese monopoly could shift the high-tech manufacturing industry bases from Japan and Korea to China. China employs a three-pronged strategy; Rare Earth exports are restricted, imports encouraged, and outbound Rare Earth acquisitions actively encouraged. Companies that lack multi-commodity ore bodies, including minerals such as iron ore alongside Rare Earths, will find it hard to operate outside of China’s influence because most of the technology needed for refinement is only produced in China. Japanese, US and European players now face higher barriers to entry which may prevent them from regaining a foothold. The Chinese government, in its determination to increase Rare Earth resources, is less risk averse. Unlike the worry-free Chinese, listed Japanese trading and mining companies have to consider the impact on their share price if they overpay for assets. While in the past, Chinese companies had been outbid by cash-rich Japanese bidders, the situation has now reversed because the Chinese government has recognized its need to purchase overseas resources. Although China is home to the largest Rare Earth reserves in the world, it is still actively seeking chances to acquire overseas mines. The purpose is to assure resources for the green energy, high-tech and defense industries. Cole Latimer, Jieun Kim, Mia Tahara-Stubbs & Yumin Wang, Financial Times (London), 29 May 09. Ed: Typical fine reporting from Financial Times, the first mainstream publication to cover Rare Earths after our writeup recommending them in the TDL of 22 May 2009. These sensational geopolitical shifts are not in the world press’s headlines, and we predict that they will be, believe it or not.

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