Bubble fear as rare earths soar
October 25, 2010 -- Updated 0116 GMT (0916 HKT)
(FT) -- Fears about Chinese supplies of vital rare earth elements have sent the shares of small mining companies soaring, a surge that executives and analysts warn is turning into a bubble.
China, responsible for about 97 per cent of global rare earth production, has cut exports of the minerals used in high-tech goods from PCs to electric cars, driving up prices of the commodities and creating a worldwide hunt for other sources.
An index of rare earth company shares produced by Kaiser Bottom-Fish Online, a research service, has risen 12-fold since the end of 2008, and 35 per cent in the past month.
John Kaiser, mining analyst, said the market resembled the dotcom boom of the 1990s. "It is a race where any one of the leading names could stumble."There is also a similarity with the uranium bubble of 2006-08, when the surge in the metal's price -- and hysteria about lack of supplies -- sent the shares of uranium explorers soaring. Most of those companies are now back trading at penny levels.
Constantine Karayannopoulos, chief executive of Neo Material Technologies, a Toronto-listed rare earth processor that has two factories in China, said: "I am concerned that, like all bubbles, when this one bursts, it will end in tears."
Six obscure junior miners, based in the US, Canada and Australia, now have a combined market capitalisation of close to $7bn, even though none of them yet mine any rare earths.
The total value of rare earths traded in a year is about $2bn.
Shares in Rare Element Resources, a New York-listed company that had only two full-time employees in 2009, according to its latest regulatory filing, have risen 135 per cent during the past four weeks and nearly 300 per cent since January. The company hopes to start production in 2015.
Mark Brown, chief financial officer and a leading shareholder, said the volatility was explained by the equity being tightly held, and the company had been working on developing its Wyoming mine for a decade.
"The share price has definitely gone crazy. But we have a real project, with a net present value much higher than our market capitalisation today," he said.
Quest Rare Minerals, of Canada, plans to produce heavy rare earths, which are less often found. Peter Cashin, chief executive, said: "I would suggest that not many of the light rare earth explorers will survive."
© The Financial Times Limited 2010
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