“The Coming Major Bull Market in Rare Earths!”

(Originally published in The Dines Letter - 14 August 2009)

Latest from “the Original Rare Earth Bug” (DIREEBUG): Back Up The Truck!

Hey, somebody else might want one of those.

—Steven Wright, Comedian, (To a worker in a supermarket parking lot pushing a long line of shopping carts)

One popular childhood game is Monopoly, the winning formula of which is to hurriedly buy properties from which rental income would support gobbling up even more properties, in order to provide an ever- growing income stream – until the hapless renters lose the game. We might have come across a way for our subscribers to make serious money in a comparable way, with “Rare Earths.” Let us explain.

Some investors understandably remain demoralized by the ‘08 Crash but, because of the seemingly unlimited printing of paper money these days, we still firmly believe that there is good money to be made in tangible, wealth-in-the-ground commodities, especially metals and energy. Uranium, straddling both, should therefore be very important in the future; also renewable-energy areas, such as windmills and electric automobiles. The challenge is how to play those trends to make money, since there are zillions of such companies, and few investors could buy them all in meaningful quantities. Therefore, we continue to probe for control of “the center of the chessboard” and focus on Rare Earths because you can’t dominate the coming business growth areas without them. Which Rare Earths are the most important? It is so early in the boom that not everybody even knows what they are, so let us didactically study them.

Stepping back for a moment, TDL (The Dines Letter) became “The Original China Bug” in 1977, predicting that it would “dominate the 21st century.” Also that China’s subsequent emergence from primeval isolation, with a population of around 19.7% of humanity on this planet, should be recognized as a truly momentous event. One aspect of China’s sudden importance is its enormous demand for commodities with which to build a modern societal infrastructure from scratch, partially why we have remained bullish on commodities.

New to the game, and hindered by communism’s anti-business ghosts, China has been repeatedly caught by soaring prices in such commodities as zinc, copper, iron ore (and even oil, by semi-monopolist Saudi Arabia), trapped by so-called gouging capitalists and left with no choice but to pay up for high commodity prices.

Our guess is that in China there is growing resentment based on their perceived unfairness of the situation, so an element of cold revenge stewing would not surprise us. Since this game is not over, we ponder on where China’s response might emerge, so that our loyal, long-term TDLrs might profit.

Our gaze turns to the possibility that that payback might be in “Rare Earth Elements” (REEs), because Chinese leaders have made no secret of their intention to corner that market. America is innocent to an approaching Rare Earth monopoly because it is in the Low State of Assuming that it could continue to buy Rare Earths in the open market.

We will be going into Rare Earths in growing detail in upcoming TDLs but, for the moment, let us assume that they are absolutely crucial for many of the “green” growth areas of the immediate future, for example in building cascades of windmills, solar panels, and millions of electric cars, for starters. Those who dream of constructing windmills have yet to pause and wonder where the requisite Rare Earths will come from. China has announced a 100-Gigawatt goal for wind turbines, plus a mind-blowing number of electric vehicles. They have quietly, albeit not secretly, already garnered a stunning 97% of the world’s current Rare Earth production, as per our recent IWB (Interim Warning Bulletin) entitled “TDL Blows China’s Cover!” Nor could China be fairly criticized because it needs Rare Earths for its own manufacturing. And why not? Perhaps any anger should be directed at other nations too dull-witted not to have gobbled them up sooner, especially the management of America’s General Motors Corporation that once had a virtual monopoly on Rare Earth production and blew it. Perhaps General Motors deserved to go bankrupt for having won the Helen Keller A ward for Farsightedness.

So where does that leave the world now? It’s too late to wrest the monopoly back from China because they won’t sell their assets in exchange for paper dollars that America so gleefully prints. The situation begins to fulfill our old predictions of a breakdown of traditional free-enterprise capitalism into fiefdoms, perhaps cobalt from Africa, potash from Latin America, oil from the Middle East and the emergence of a new economic system echoing Mercantilism. This is also an aspect of our lengthy discussion of modern Malthusianism in our 2008 Annual Forecast Issue of The Dines Letter (15 Jan 2008) as humanity is just now bumping up against our planet’s limits, from clean water and air to wild seafood.

Even now, at this late date, China having stolen a march on the entire world in its lust for Rare Earths, America does little about it, more preoccupied with navel-contemplating about how to spend money for “universal” healthcare with wealth it doesn’t have, or the US government’s so-called “stimulus program” for currency junkies that includes bailing out Michigan state by paying people to trade in their so-called “clunkers” (that many were ready to trade in anyway) to get a new and more efficient car. Unfortunately, according to the Department of Transportation, all ten of the leading cars traded in are American brands, while six of the top ten, and four of the top five, purchased are Japanese cars. America’s tax money at work for Tokyo, causing even more public revulsion. America prints money to pay people to buy cars and then crows about “economic growth” which is, in fact, inflationary economic masturbation, really proving nothing.

What would TDL recommend? Japan for example, startled and wide-awake to China’s striving for a perfectly- legal international monopoly on Rare Earths, has actually announced a new program to recycle each of its car’s Rare Earths, thus slowing down usage rather than thoughtlessly discarding older cars onto a rubbish heap like spoiled rich children too often careless about the importance of their possessions.

We would recommend going much further, with America thwarting China’s monopoly by locking up the world’s remaining commercial Rare Earth deposits, although Japan is already competing with China in the quest for such resources while they are still available at Depression-era prices. TDL led you to investing in Rare Earths so early that most other investment advisers were caught flat-footed, and are still discovering what our having spent years studying them had gleaned.

We must avoid sticky-fingered governments in our analysis of the geopolitical situation for our TDLrs, so our first-choice Rare Earth deposits are in Australia, Canada and the United States. Metallurgy is another very exacting consideration, as separating the different Rare Earth Elements in each deposit is a specialized field requiring quality staff adept at disentangling the genetic code of each mine, if you will. Another aspect is that Rare Earths are frequently found associated with radioactive elements, such as uranium and thorium, making mining them dangerous and, while the mined uranium would be a credit, thorium is virtually worthless these days due to its unexciting near-term commercial prospects. While there are a significant number of companies involved with Rare Earths, we have tried to lead you to drink upstream from the herd toward companies that have the best reserves, managements and prospects for early production.

There are actually only about a dozen commercial-sized Rare Earth deposits that have been discovered on this planet so far! And, by good luck, America happens to own one of them, called Mountain Pass Mine, in the Ivanpah Mining District, San Bernadino County, California, privately-owned by a group that includes Goldman Sachs, a beneficiary of Treasury Secretary Hank Paulson’s rescue during the ‘08 crash. The United States government closed Mountain Pass Mine in 2000, due to “ecological concerns” that are surmountable in view of a coming national emergency to obtain these metals. Perhaps everything is a coincidence.

So how could you make money following this train of thinking? From China’s point of view, it should not sell any of its Rare Earths at all, saving them for its own production in coming years. But abruptly halting all sales would alarm and dismay the world, also awakening it to the monopoly. If we were advising China we would recommend gradually reducing the amount exported, year after year. And, believe it or not, that’s exactly what has been happening! In fact China’s exports of Rare Earths have been declining steadily in recent years.

While Japan is also scrambling to lock up Rare Earth assets, Europeans seem hopelessly unaware even of being in a planetary monopoly game. Europe might be beginning to wake up inasmuch as at the end of July ETPSMR (European Technology Platform on Sustainable Mineral Resources) was studying supply options for possible alternatives to China and Russia for many metals and minerals, including Rare Earths. The French nuclear industry is especially concerned about rare metals hafnium, niobium and zirconium, vital in generating commercial power.

Australia’s eyes are opening to Rare Earths, perhaps due to our TDLrs there, albeit still slowly, perhaps because it has less interest in a commodity more important to countries that manufacture things. Australia does own a treasure chest of Rare Earth assets (some of which are already recommended in our new Supervised List #6), already being taken over by the Chinese government. For example, China bought 25% of for stock names, please subscribe on 6 Mar 09 and 51.6% of for stock names, please subscribe on 1 May 09.

We call on all Australian TDLrs to alert your opinion leaders to the new economic system of hoarding raw materials for each country’s own uses, rather than trading the irreplaceable with either easily-printed paper money or phantomic photons on computer screens. As well, all other nations need to keep in mind Aesop’s fable of the Tortoise and the Hare.

After long and patient study, we decided to start our own Rare Earth Average in 2003 and the Crash of ‘08 provided a magnificent opportunity for TDLrs to acquire those stocks at bargain-basement prices. DREI (the Dines Rare Earth Index) unsurprisingly already had had a rise of 413% in 2007 and most recently up 376% since Oct 2008. But it’s not too late to buy REE stocks because the investment community has still been sluggish to buy into Rare Earths.

When we first recommended the Rare Earths in Supervised List #6, they were dirt-cheap and totally neglected. For example, for stock names, please subscribe had a market cap of merely a stinking US$28 million! But even now the cap is still only US$52.9 million, a piddling amount for a vital asset that could be traded for easily-created “money.” We ourselves have been buying this stock on dips because it is only a matter of time before the investment community recognizes its terrific profit opportunity. We do allow the press to publish excerpts from TDL (albeit not our actual recommended stocks, reserved for our paying subscribers) and they should soon begin to publicize more widely what might be a fantastic opportunity to make money in Rare Earths.

Personally, while our politicians have no idea who TDL is, if we were in a position to advise them, we would prohibit the sale of America’s Rare Earth companies to any external owner. Why? Just in case China, for example, decides to play communist again, and seize some of our assets there, we could do the same with their Rare Earth assets here, if any. Cameco, as a uranium-mining company in Canada is an example of emerging Mercantilism: only a limited share of the company can be bought.

While we recommend spreading out in Supervised List #6, for stock names, please subscribe is emerging as one of our top REE favorites, and the footnote below is partially why, for serious market students. See its chart, page 12 of this feature.

We were interested in for stock names, please subscribe partially because it was under the radar screen of virtually all Security Analysts; management itself might not have been fully cognizant of the huge value of its Rare Earth holdings, and its market cap is still only $24 million, so there is still plenty of potential upside remaining (see chart, page 14).

We also added virtually-unknown for stock names, please subscribe to Supervised List #6, because it processes Rare Earths, and is thus an upstream investment that should benefit from “The Coming Rare Earth Boom.” for stock names, please subscribe has a strategic partnership with Japan’s Mitsubishi related to Rare Earth opportunities outside China, starting with for stock names, please subscribe developing a heavy Rare Earth resource at the Pitinga Tin Mine in Brazil. Mitsubishi is Japan’s largest general trading company, and it has chosen for stock names, please subscribe to identify and develop Rare Earth resources around the world. for stock names, please subscribe produces, processes and develops neodymium-iron-boron magnetic powders, Rare Earths and zirconium-based engineered materials; headquartered in Toronto with other operations in China and Thailand.

We ourselves are still buying Rare Earths and will try to hold much of our positions for a minimum of two years, as we are looking for historic “killings” rather than trying to grab small profits here and there. This newsletter’s “style” is to go for long-haul home runs rather than base hits.

Please keep in mind that all mining stocks are speculative and should not be bought with money that cannot afford to be lost. Always remain in the High State of Appropriateness when investing.

“The Coming Electric Vehicle Shocker”

The world’s automotive industry is headed for yet another upheaval, fueled by substantial governmental financial initiatives to encourage a shift to electric cars, starting in America, Canada, Denmark and England. With around 35% of our carbon emissions produced by transportation, and 58% of that caused by automobiles (and over half of all driving less than 25 miles), it is clear that the shift to electric cars will be sooner than many think. The Vancouver Sun on 13 Jul 09 reported that the city’s council is considering forcing developers to include car-charging stations in at least 10% of all new condo parking lots. Tax-rebate initiatives of thousands of dollars for plug-in hybrids and all-electric vehicles, with varying battery technologies, has already begun, but Rare Earth metals must be part of all of them – even though it is not yet mentioned in the world’s press, we predict that it will be.

Now that Japan has helped eviscerate the US’s automobile industry, it can safely turn its combat to upcoming challenges from China, Korea and India. Japan has technology but is desperately underendowed with critical raw materials, so that nation is now quietly building up commodity stockpiles, and also buying shares in mining companies. (For example, Japan Australian Uranium Resource Development Co (JAURD), representing three leading Japanese utilities, plus Itochu Corp, in June 2009 invested $49 million for 35% of for stock names, please subscribe uranium production in Western Australia.)

China is displaying remarkable patience, stealth and sensitivity to Australian politics by buying into Rare Earth miners for stock names, please subscribe and for stock names, please subscribe so slowly, as previously mentioned. If China had acquired both companies outright, their production would have been taken off the world’s markets and shipped directly to China, pressuring Rare Earth prices higher yet. Aware of that menace, desperate Toyota has actually bought into a Rare Earth mine in Vietnam, the first car company to have become vertically integrated with Rare Earths, to produce its own batteries and power trains. A Chinese monopoly of Rare Earths might portend the death knell of the flickering recovery by Ford and General Motors, so America is in deepening trouble, without a clue. We recall warning about a terrorist attack on an American city in our 6 May 1988 TDL (page 2), also that America was unaware it was being stalked by terrorists, but it took thirteen years and 9/11 for Americans to listen. America might be heading for such a financial equivalent unless it awakens immediately. TDL is doing all it can, and then withdrawing into the High State of Detachment From Result.

Neodymium is a supermagnet vital in motors, from hard drives to electric vehicles, providing power for many smaller, lighter and greener devices. TDLr manufacturers might want to keep an eye on neodymium-iron-boron permanent magnets (Nd2FeB14), first introduced in 1982 by Hitachi Metals and for stock names, please subscribe, subsequently commercialized in 1986. These magnets were crucial in the miniaturization of laptop computers and audiovisual recreational equipment in hard-disk drives and voice coils. They are vital components in the small electric motors used by the automotive industry, including brake systems, starter motors, seat adjusters and car stereo speakers. They’re also used in medical magnetic resonance imaging equipment (MRIs). Super magnets made of neodymium are nearly ten times stronger than regular magnets, and their ability to withstand very high temperatures make them ideally suited for deep drilling, especially by the petroleum industry.

China is planning seven 10 gW wind farms in Gansu province by 2020. A breathtakingly ambitious overall power capacity target of 100 gW by 2020 is eight times its current level! China’s top domestic wind firms, such as turbine makers Sinovel Wind, Goldwind Science and Technology, and Dong Fang Electric, would account for around 80% of the first phase of the building. China does not yet appear to have confronted the issue of building the high-tension power lines to transmit the electricity generated thousands of miles, from Inner Mongolia to high-energy demand areas, but police states don’t need to be overly concerned about delaying-tactic lawsuits from property owners.

A Toyota Prius needs around 65 pounds of Rare Earth metals: lanthanum in the rechargeable battery and neodymium in the drive motor. The world’s entire installed capacity of wind power is 120 gigawatts and, by the end of 2008, China’s installed capacity of wind power was around 10 gigawatts. One wind turbine requires over 700 pounds of Rare Earth Elements. That’s right – a three-megawatt wind generator uses more than 700 pounds of neodymium. For the average nuclear reactor, around 1,000 megawatts, or 1 gigawatt, there might be 100,000 tonnes of neodymium-iron-boron permanent magnets needed! China might well need the entire world’s production of Rare Earths for itself, but how would other nations react to that Malthusian development?

Grownups believed that little Johnny was cute but dumb. People would offer him the choice of a nickel or a dime. He always took the nickel. Another kid asked Johnny one day, “Don’t you know a dime’s worth more than a nickel?”

John replied, “Yup, but if I took the dime, grownups wouldn’t keep making the offer!”

What Are “Rare Earth Elements”?

This special group of elements has the unique properties becoming exceptionally useful in emerging technologies, such as electric cars, windmills, solar panels, cell phones and other products requiring small motors and batteries. Rare Earths are also used in many items from iPods to bicycle frames. As examples, neodymium is used for permanent magnets in wind turbines, ocean energy turbines and electric drives and lanthanum for nickel-metal-hydride batteries. (Rare metals such as gallium, germanium and indium are used in solar panels, but rare metals are different from Rare Earth Metals) We predict the impact of such growth on these commercial areas will especially send Rare Earth prices soaring as China is reserving increasing amounts of them for its domestic markets even while it has been increasing export taxes and reducing export quotas.

The “REE” Rare Earth Elements group is considered to include these 15 lanthanide elements: lanthanum, cerium, praseodymium, promethium (does not occur naturally), neodymium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium. The elements yttrium and scandium are also lumped in with Rare Earths because they have similar chemical properties, making 17 REE’s in total. In the oxide form, the group is collectively discussed as Rare Earth Oxides (REOs).

Three of the many reasons we are so bullish on Rare Earths are: 1) Their rarity in the face of soaring demand for devices that are considered “green” makes upward price pressures likely despite deflation. 2) The geopolitical urge to stockpile Rare Earths for demand by many countries, as a hedge against future shortages that might interfere with commercial production, and 3) military demand, for example to use in “smart bombs” (precision-guided missiles), as many governments would pay virtually any price for them.

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