Should You Buy Ucore Rare Metals?
Rare earth element stocks have fallen off investors’ radars in the past couple of years. Prices of both the stocks and the elements have been falling significantly after spiking in 2009-2011. But with interest at a low level I think it is time for investors to consider rare earth element mining companies again.
For investors who aren’t familiar with them, rare earth elements (aka REEs) are comprised of the 15 lanthanides (a group of elements that have similar chemical properties) as well as yttrium and scandium. While most investors haven’t heard of elements such as cerium europium or gadolinium, these are extremely important elements found in both high-tech gadgets utilized by defense contractors and clean energy producers as well as in everyday objects such as cellphones and computers.
Rare earth element stockpiles and in-ground reserves are predominantly controlled by China, and given the rising demand for these elements, the United States and other Western governments are concerned that this monopoly can jeopardize national security and economic growth.
This is especially true for a small group of the REEs called the heavy REEs. These are especially rare, and they tend to have prices that are substantially higher than their counter-parts, the light REEs. The heavy REEs consist of dysprosium, terbium, europium, neodymium, and gadolinium. Yttrium is sometimes included in this group. These elements are so rare outside of China that there are no major mines that aren’t controlled by China that produce more than trace amounts of these elements. Therefore, projects that are in the exploration or development stages that will be producing these elements are extremely important.
This is why investors might want to consider Ucore Resources (UURAF.PK). Ucore owns the Bokan Mountain project in Alaska that is going to be producing dysprosium, which is very important in making modern high-tech magnets used by defense contractors. It is so important that in 2012, the company announced that the Department of Defense is going to be partnering with Ucore in order to aid in the resource’s development. In other words, the project is so important that the U. S. government is going to help Ucore bring it into production.
This eliminates one of the key risks in owning junior mining companies — we know that the company is going to be able to get funding for its Bokan Mountain project. This is a big deal, considering that many companies in Ucore’s position are forced to issue stock or sell part of their future production in order to fund their projects. Ucore will likely be able to borrow the money it needs.
This assumption was partially realized just last week, when we learned that the Alaskan legislature is planning to lend $145 million to Ucore in order to develop the project. While this won’t be enough to build the Bokan Mountain mine, it is a good start. Furthermore, it shows that the company is in a position whereby it should have a relatively easy time receiving financing for its Bokan Mountain project.
Ultimately, Ucore is still a risky investment. It has a market capitalization of just $55 million, no revenues, and several large expenditures ahead of it. But the company’s shares should do extremely well as the company gets closer to production. The path to production will be unhindered given the importance of Bokan Mountain to the Defense Department.
Finally, the company’s share should perform extremely well as REEs, and especially heavy REEs such as dysprosium, rise in value. Everything that caused these elements to rise in price a few years ago is still in place. Prices simply moved too far too fast, and investors became overly optimistic. Now that investor enthusiasm has dampened, it seems like an appropriate time for long-term, contrarian investors to take a position.
Ucore shares rose sharply upon announcing the $145 million loan. However, the shares are still trading at less than a third of their 2011 peak of $1.13 per share, and they are trading at half the level they traded at in 2012, when the company announced its strategic partnership with the Department of Defense. Therefore I think that 31 cents per share is a good entry point for long-term investors.