MCP Surges On Earnings, Negates Head And Shoulders

MCP surged on a crushing earnings report and once again rejected the break of the 200 MA and neckline in a would-be brutal SHS top.

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MCP To $75 In The Next 3 Weeks?

Molycorp had a recent surge in volume and broke out of a perfect symmetrical triangle which also doubles as a inverse head and shoulders reversal. This pattern negates the bigger head and shoulders pattern on the 12 month chart. MCP has earnings soon and it appears that a hedge fund or HNWI is betting on a major beat. MCP is notorious for going on a tear after a breakkout and it looks to be headed to $75 with little resistance ahead.

Winners – GWG, MCP, Entry On SQQQ

Winners:
GWMGF – +23%
MCP – +20%

Loser: ZSL -4.5% exit price – $18.48.

ZSL had some solid gains Friday but the gap lower on Tuesday is what caused me to let this one go. Good portfolio management limited the downside risk on this one and silver has since surged so this turned out to be a loser, but not a detrimental loss.

On June 16th I said the bottom was put in on Great Western (GWMGF) and entered at $.623. The stock traded lower during the day making a bottom at $.574 but no new low was made after that day and the stock is now trading at $.81 for a gain of 23%. Short term downside would be the 50 MA and short term upside would be $.90.

On the same day I said that MCP was also a safe buy as long as it stayed above the $46.40 low and since then, it is up 20% though MCP was up as much as 25% a few days ago.

With the tag of the double top today, I went short the Q’s via SQQQ at $21.98. The reason why I like this short so much is because the upside is for the Q’s to fall back to 2840, (2%) (roughly 4% on SQQQ) and 2770 (4%) (roughly 8% on SQQQ), while the downside is less than 10 points. Confirmation above 2880 would be a sell but that level is only 8 points away so the downside risk is very limited.

Japan Gets Desperate, Attempts Damage Control On REM Supply Constraints

A recent discovery in the Pacific could solve the world’s REM supply problem that has been centered by the export-slashing that the Chinese have done over the last couple of years. Japanese researchers say that they have enough REM in newly found deposits in the Pacific to satisfy 1/5 of the world’s demand in just one square kilometer of the deposits.

http://in.reuters.com/article/2011/07/04/idINIndia-58061620110704

“The deposits have a heavy concentration of rare earths. Just one square kilometre (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption,” said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology.

They found the minerals in sea mud extracted from depths of 3,500 to 6,000 metres (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview.

The deposits are in international waters in an area stretching east and west of Hawaii, as well as east of Tahiti in French Polynesia, he said.

He estimated rare earths contained in the deposits amounted to 80 to 100 billion tonnes, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

Details of the discovery were published on Monday in the online version of British journal Nature Geoscience.

The level of uranium and thorium — radioactive ingredients that are usually contained in such deposits that can pose environmental hazards — was found to be one-fifth of those in deposits on land, Kato said.

“Using diluted acid, the process is fast, and within a few hours we can extract 80-90 percent of rare earths from the mud.”

See, everything is okay? Well, let’s consider the source. Japan is the country that is effected most by the tightened supply as the demand for hybrid cars and cutting edge consumer technology is becoming more and more dependent on REO’s and REM’s. Japan’s economy is dependant on being able to export these goods to other countries and the recent supply constraint has made heavy dents in their export trade. They have begun projects that involve R&D of REE deposits in countries with a high geo-political risk such as Mongolia which is a sign of how truly desperate they are.

But let’s take a look at these findings which Gareth Hatch of Technology Metals Research, LLC has already done for us.

http://www.techmetalsresearch.com/2011/07/is-someone-manipulating-the-story-about-rare-earths-under-the-pacific-ocean/

There were a number of reports over the weekend, about a group of Japanese researchers who say that they have found significant quantities of rare-earth elements (REEs) at multiple sites on the seabed of the Pacific Ocean. In a paper published in Nature Geoscience on July 3, 2011, lead author Yasushiro Kato and his colleagues shared the extensive work that was undertaken, to obtain and to analyze 2,037 samples from 78 different sites across the Pacific Ocean.

Reuters, the BBC, Nikkei and others reported that there is an estimated 100 billion tonnes of rare earths in these deposits. Which is rather interesting, because the scientists themselves made no such claim in their paper…

What they do report, are two regions of the sea bed with so-called REE-rich muds:
■one in the eastern South Pacific containing 0.1-0.22% total REEs (including 0.02-0.04% heavy REEs), in layers 10 to 40 meters thick;
■one in the central North Pacific, containing 0.04-0.1% total REEs (including 0.007-0.02% heavy REEs), in layers 30 to greater than 70 meters thick.

The authors compare these muds to the ion-absorption-type clays found in China, which are presently the world’s primary source of heavy REEs. They comment that the mud in the eastern South Pacific has heavy REE content that is “nearly twice as abundant as in the Chinese deposits“. Of course, those Chinese deposits are not sitting under “great water depths (mostly 4,000-5,000 meters)” and below the surface of the sea floor. It is because they are readily accessible and processable, that the Chinese ion-absorption deposits are exploited, despite their very low concentrations of REEs (heavy or otherwise).

Doing a couple of rough calculations, the authors estimate that a 10 meter-thick bed of mud in the eastern South Pacific, with an area of 1 square kilometer, could yield approximately 9,000 tonnes of rare earths. They also estimate that a 70 meter-thick bed of mud in the central North Pacific, with an area of 1 square kilometer, could yield approximately 25,000 tonnes of rare earths. These numbers are not too shabby (if we again forget about the 2.5-3 miles of water sat above them, and their remote location from any significant land masses). As I’ve said elsewhere, I can’t see these deposits ever being commercially exploited, but the empirical work done by the Japanese researchers which is presented in this paper, is impressive.

What the authors do NOT estimate, is a size of the total mineral resource, and wisely so. While they mention that the thick distributions of mud at numerous sites might mean that the REEs on the sea floor “could exceed the world’s current land reserves of [110 million tonnes]“, they acknowledge the considerable challenges and significant variability present on the seafloor, and thus state that “resource estimates for large regions cannot be made until more detailed data are available for areas lacking cores.”

Perhaps the lead author later just threw out a wild-ass, ridiculous guess at the size of the deposits, in response to a reporter’s question. But if he did not, and if the scientists themselves are not making the claim that there are “an estimated 100 billion tonnes of rare-earth deposits”, as reported by Reuters, Nikkei, and the BBC – just who IS making this claim? Who has inserted these comments into this story, and fed them to the mainstream media, and why might they have done that? Can we find clues in the current pricing turmoil, worries about supply from China, and the increasing politicization of the rare-earths story?

So while the “estimates” are impressive, they might not even be close to the numbers stated in the Reuters article above. Additionally most of the deposits that were discovered are in locations that are largely inaccessible, at least within the near future anyway.

Let’s go back to the original article-

The team found that sites close to Hawaii and Tahiti were especially rich in rare earths, he said.

He gave no estimate of when extraction of the materials from the seabed might start.

Really? Maybe that’s because a project that size will take a minimum of 5 years to commence, and that is assuming that the government somehow rams through all permits and provides tens of millions in grants.

Realistically, this project will not commence for another 7 years. Some rare earth skeptics have said in the past that rare earths are not all that rare, citing the vast deposits in China, Africa, and Russia. However, this argument has been defeated many times over as the physical supply has never been the issue. It is beyond well known that there are deposits rich with HREE and thorium, but the accessibility and production timelines are not satisfactory enough to commence by the time supply will really be an issue, which by some estimates will be as soon as late 2012. Two companies outside of China will be into production by early 2013, they are Molycorp (MCP) and Great Western Minerals (GWMGF).

Regarding this particular deposit in the Pacific, one person in the comments section of the Gareth Hatch response, brought up the best counter to this discovery,

“Not wanting to answer for Gareth, but take a look at Nautilus Minerals (TSX, AIM: NUS) As far as I am aware this company is the furthest along when it comes to development of deep-sea mining, and they still have a long way to go yet”.

Nautilus submitted a mining lease to the government of New Guinea in Q3 2008, and received approval for the lease just five months ago (January 17th, 2011). They are still in the process of getting the build program approved by their BOD and by conservative estimates, the project will not be producing until 30 months after approval. In other words Nautilus, which is the farthest ahead in deepwater REM mining, won’t even be into production until early 2014 assuming that their build program is approved tomorrow, when in actuality it could take months or even years for that to happen.

Additionally, I would be skeptical of any Japanese company that gains the rights to begin exploration and development of this project, or I should say I’m skeptical of any Japanese company having success at anything given their country’s stagnantly declining labor force and staggering debt to GDP which now exceeds 230%. It is also now politically unpopular for Japanese politicians to be in favor of anything nuclear, and naturally, thorium is found at REM deposits and according to the Reuters article, this deposit contains a significant amount.. Though thorium is many times safer than uranium, this fact is misunderstood by politicians and the public and as a result of Fukushima, there will be an increasing amount of pressure to further regulate nuclear power which will create regulatory hurdles that will result in massive headaches for anyone looking to produce in the sector.

Now, will there still be a knee-jerk reaction to this story? Most likely. But the important points to remember are that this deposit’s resources, while potentially impressive in nature, are not going to be online anywhere close to the time that supplies of REM’s will have dried up. The bottom line is that this story smells a lot like damage control from a cornered and desperate government that is trying to keep their heads above water.

Great Western Minerals Looking Into Exxaro And Richards Bay

TORONTO (miningweekly.com) – Great Western Minerals could more than double production at its South Africa rare earths project if it strikes a deal to extract the valuable elements from waste that companies including Exxaro Resources and Richards Bay Minerals generate from their titanium operations.

Great Western CEO Jim Engdahl said that his company was in talks with miners that produce monazite as a by-product to reprocess it, which could create an opportunity for both sides.

Monazite hosts both rare earths and radioactive thorium, and Great Western earlier this month won a licence to store radioactive materials at its Steenkampskraal mine in the Western Cape.

“The problem that the other mines have is that they do not have a licence to store and process thorium,” Engdahl told Mining Weekly Online.

“We have an opportunity to deal with a problem that other mines have, and turn that into an opportunity for them as well as us.”

Speaking in a phone interview, he said that TSX-listed Great Western was talking to “several” companies in this regard, declining to name them.

Exxaro Resources and Richards Bay Minerals, a joint venture that mining giants Rio Tinto and BHP Billiton own, are the biggest companies that produce monazite as a by-product in South Africa, from their titanium operations.

Neither company was available for comment on Thursday evening.

“It could add many, many years to the life of the project, and increase production by at least two times,” Engdahl said.

Great Western aims to start producing at Steenkampskraal in the first quarter of 2013, and in April already unveiled plans to double output to 5 000 t/y.

http://www.miningweekly.com/article/great-western-eyeing-rare-earths-from-sa-titanium-tailings-2011-05-26

Earlier last month GWG not only released plans that would double their YOY production (approx 2700 will now be approx 5000) from the Steenkampskraal project, but they also cut the production timeline down to Q1 2013 which beats other estimates that were previously as far away as 2014-2016. According to this article, they could yet again double production if they complete a deal to purchase minerals from either of these two titanium that are left over from production.

GWG is making all the right moves and is a much better valuation than Lynas at this point. They are expanding their reserves and taking advantage of every opportunity that presents itself.

Lynas now faces a shareholder bid for asset:

THE contentious attempted sale by Lynas Corporation of a rich rare earth and metals deposit to a related party has taken a new turn, with two prominent dissident shareholders preparing an audacious bid to pinch the prized asset from under the nose of the miner’s chief executive, Nic Curtis.

Melbourne-based software millionaire Mark Suhr and the chairman of online recruitment website Seek, Bob Watson, are finalising a formal bid for the Crown and Swan deposit this week, capitalising on the dramatic collapse of the rare earth miner’s proposed deal with related party Forge Resources.

The lawyer acting for the two businessmen, Chris Curran, of Turner Freeman, said Lynas had backed itself into a corner by readily accepting Forge’s offer. He said the board would have trouble justifying a rejection of a similar or improved offer so soon after declaring the asset non-core and ready for sale.

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“We think Lynas have shot themselves in the foot there,” Mr Curran said. “If we put in a similar bid to the one before, they would be in a very awkward position to not approve it.”

The drama is likely to further aggravate Lynas’s major institutional shareholders, who had made clear they wanted no distractions from the rare earth miner’s core promise of bringing its prized Mt Weld rare earths deposit into production.

The planned $20.7 million sale of the Crown polymetallic deposit to Forge had attracted significant shareholder criticism over the asset’s valuation, conflict-of-interest concerns, and perceived inadequate disclosure of the financial benefit Mr Curtis stood to receive.

A 2007 Lynas investor presentation boasted of the Crown ore body’s ”over $50 billion metal content” and ”positive project value”. Lynas had continued to promote the deposit to investors until last year, before deciding the asset was ”non-core”.

Mr Curtis would have boosted his stake in Forge to close to 40 per cent if the deal had proceeded. He owns less than 1 per cent of Lynas.

With the corporate regulator’s attention roused, Lynas was forced to delay its shareholder vote, and was in the process of revising its disclosure documents before the deal was pulled.

Lynas said it decided to abandon the deal based on the feedback from its predominantly offshore major institutional shareholders. It is also understood institutional shareholders were concerned Mr Curtis would have been distracted with his involvement in Forge if the deal proceeded.

With no related-party concerns, the Suhr-Watson bid will not be required to be approved by shareholders. Mr Curran said the bid was “well advanced” and that a Lynas independent director had been “responsive” after being sounded out.

The two businessmen had been instrumental in generating shareholder momentum against the Forge deal. The deal has also triggered concerns over Mr Curtis’s influence on the Lynas board, prompting a push for more independent directors on the board.

Lynas management is understood to be furious with Mr Suhr, with one source insistent Mr Suhr had a history of destroying shareholder value.

http://www.smh.com.au/business/lynas-faces-shareholder-bid-for-asset-20110515-1eo9b.html

Finance and share related issues are unacceptable when you are in a race to get into production in a market that has very few competitors. GWG is extremely undervalued and their IR department should be pushing for a reverse split to increase exposure and possibly uplist into the AMEX in the future.

A Technical Look At 5 REE Producers

For those of you who are looking to get into the volatile REE market I’ve decided to write up an analysis with 5 of my favorite REE producers. You may have heard good cases from the fundamental side of these companies but in REE market which has been extremely volatile, it may be hard to find a solid entry point. I’ll do my best to suggest some opportunities.

I’m not going to discuss fundamentals because that would take up my entire night, and the point of this commentary is not to debate valuation and supply etc. This analysis is for those who know these companies already and are not intersted in more fundamental analysis on them.

Stans Energy

Stans Energy (STZYF) is a producing REE miner in Russia. I was nearly turned off to opening a long position here but Monday’s price activity has ignited a pullback that makes this stock look a lot more attractive. On Monday, there was a bearish engulfing candlestick that has wiped out all of last week’s gains and in addition, the weekly chart also has this week’s candlestick engulfing last week’s candle on very high volume. I think that this means that we may see more weakness next week and currently we are right on support ($2.00) though I don’t think that this is the bottom yet. Wait for the market to tell you to get into this, I will be keeping an eye on it and I plan to buy when I believe that it has bottomed.

Great Western Minerals

Possibly my favorite REE producer, though they have political risk in South Africa, Japan has interest in the area and Great Western Minerals (GWMGF) has to be on their radar. I’ve been providing some analysis on this company though I haven’t done much since I called the breakout before .70 – the stock has run away since then.

This is a very bullish chart for three reasons: The lower trendline is providing moving support which we are sitting on. The flat support is meeting the moving support – we’re sitting on that as well. Currently, we’ve formed a bullish flag after the break up above $1.00. This is a buy with a stop at $.95.

Lynas Corp

Similar story as GWMGF here for Lynas Corp, (LYSCF) (though not a bullish as Great Western) a star gap forms at the beginning of the year which was followed by more or less a month long consolidation period. It doesn’t appear that it can go much lower but it doesn’t appear to have much bullish momentum yet either. It did find support at the 50 day MA but volume hasn’t picked up and the oscillators particularly the stochastics aren’t showing that a breakout is coming soon. On the contrary, a decisive breakout may not occur and thought the MACD appears to be rolling over, I’d only be a buyer here with a tighter stop loss than normal as this could find resistance right at the 20 Day MA.

Ucore Rare Metals

Probably the most likely buyout candidate out of the existing juniors, Ucore Rare Metals (UURAF) looks attractive here with a nice symmetrical wedge pattern. Selling volume has been lacking and I expect the price to bounce off of that lower trendline and test resistance at $.925. Any breakout above resistance should as always be on high volume to confirm the move. If the wedge plays out, the price target could be as high as $1.15 – $1.20 as the top of the pattern is $.94, the low is $.68, and the breakout point would likely be $.90 (.94 – .68 + .90 =. $1.16). I’m a buyer here with a stop near $.75.

Molycorp

Last but not least, the celebrity of REE producers, Molycorp (MCP). A nice cup and handle has formed over the last month and a half and we are now close to trendline support. This chart is going to either break the 2+ month support trend and enter a correction, or it is going to breakout above (about) $55.50 and complete the cup and handle pattern. The price target for the breakout would be $70 ($55 – $40 + $55 = $70). I think that this cup and handle is a legitimate indicator due to the volume decrease throughout the last month of trading. That volume decrease signals that the stock is trading lower as a result of consolidation and profit taking rather than bearishness towards the fundamentals. I’m a buyer with a stop at or just below $50.

The technicals for these companies in order from best to worst are:

Great Western
Molycorp
Ucore
Stans
Lynas

Great Western has the most momentum and I like the bull flag as well as the moving support trend. The reason why I don’t think MCP is in a better position is because MCP has attracted a LOT of bears and a lot of investors don’t like the high valuation without earnings. Ucore has as solid wedge, but that’s about all it has to go on, Stans doesn’t look great yet, but it will very soon and Lynas isn’t quite showing a bull or bear bias yet but I’m certainly waiting to see how that plays out.

Reversal in MCP Signals Buy

Last week Molycorp had a long overdue key reversal in share price closing at 33.89 after an open of 39.48. This signals a buying opportunity for perhaps in my opinion the hottest and most undervalued stock in the exchange. Up 150% from the IPO in late July, Molycorp has chomped its way up the ladder as the only American REE producer despite how the average volume is only now beginning to stay above 1-2 million.

Note: MCP has turned positive on the day and the last candle may actually be green after the close. As expected, the low on the day was 31.40, right near the 20 Day SMA.

The bearish divergences on the slow stoch all correctly forecasted the pullbacks and the most recent one was no different, a large volume key reversal took place shortly thereafter. The MACD has also just reversed to the downside which is a good indicator of the stock beginning to cool off, but I don’t expect that to last.

It looks like the 20 Day Simple Moving Average which is rounding out at the 31.30 level is the temporary support, and it appears the most amount of buying volume is sitting close to that mark. Barring the FOMC statement, this stock is without question a buy at this level.