Rare earth elements (REE) are the materials almost totally controlled by China. Over 90% of them are produced in and exported by China. REEs are the essential materials critical for the car industry. Therefore when China sneezes, the whole world REE market gets shocked. I was shorting Molycorp (MCP) early last year when it was about $40 or so. MCP is considered the most promising REE company which may start to produce substantial amount of REEs so that the US will not be so much dependent on China for REEs. When China announced early last year that she would reduce its production capacity to reserve its REE resources, people got extremely excited about MCP. I clearly remembered that MCP jumped higher and higher almost on a daily basis around the mid-2011 when some analysts predicted that MCP could climb to $100 or above. What a bold analysis for a company which has even yet to produce any REEs! However, as a typical Wall Street fable would unfold, people simply followed such so-called analysts blindly and chase the stock to a level clearly unsustainable, a recipe for disaster. MCP jumped from $40 to almost $80 within just a few weeks with a P/E ratio around 60-70. In a hindsight I wish I could be brave enough to short more when MCP peaked but I didn't. No one can tell in advance when such a saga will end. Shortly after its peak, MCP started to tumble, following a typical downward trend: lower high and lower low. MCP just got another kick and plummeted 17% in the last week of 2011, following the announcement that China would increase its export quota of REEs. The poor investors chasing MCP to its peak have lost over 70% within a few months and now it is changing hands for about $23 per share. Even after losing so much, MCP is still having a P/E of 25, a still very expensive level.
Having said that, I'm starting to become more interested in REE companies after such kind of haircut. There is an Australian company called Lynas Corporation (LYSDY). It is projected to start REE production next year. After an over 50% haircut, it is traded around $1 now. Of course, given no earnings yet for this company, it is difficult to assess whether it is still too expensive at this price. But such kind of early start-up companies are very sensitive to headline news. It may go crazy simply based on some positive rumors or down to toilet for any negative news. So this may be a good candidate for pure speculation, if you are a risk-taker. Here is what I'm thinking to do. If LYSDY further drops well below $1, which is very possible for news from China, I may buy it to bet for a strong rebound, especially if it indeed is ready to manufacture REEs. Lynas is trading in the Pink Sheets, an over-the-counter (OTC) market for small companies and usually traded thinly and extremely volatile. So don't chase it. And be ready to lose everything if you really want to take the risk. Of course, the reward could be huge if you are lucky enough to bet at the right time and price.
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