Monday, May 20, 2019

"Xi Jinping visits China rare earth plant amid talk of use as trade war weapon "

We have some experience with the rare earth equities.

"...Words like "uranium", "rare earths", etc. seem to be magic to
 those unsuspecting who are often fleeced..."
Gerald M. Loeb
The Battle for Investment Survival
Simon & Schuster, 1935

Back in May 2009 when, for the wider public the group of elements were just industrial curiosities we posted:
China tightens grip on rare earths

With a Name Like Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., it has to be good
( 600111:Shanghai)

Regarding the only U.S. producer we had three triples here on the blog, live, in real time, short and long.
From the July 2010 IPO:
"Rare Earth Metals: Molycorp IPO Very Weak (MCP)"

To June 2015's
Rare Earth: Largest U.S. Producer, Molycorp Has Filed For Bankruptcy Protection (MCPIQ)
Oh we had fun with this one.
We posted on it pretty much from Tombstone to tombstone.*
There are a lot of lessons for commodity investors wrapped up in this tale.
And for equity investors as well. The stock went from being part of Goldman Sach's odds & sods ends bin to "UPDATED-Rare Earth: "Molycorp Looks Like One Of The Greatest Private Equity Deals Ever" (MCP)
And along the way looked at other...ahhh....opportunities:
Luxembourg-based Rare Earth Company Hoping to Mine in South Africa by 2014 Does Oversubscribed IPO in Toronto (FRO.tsx)
Alrighty then....

So yes, some experience.

From the South China Morning Post:
42 minutes ago
  • China produces 90 per cent of the world’s rare earth minerals, used in hi-tech production such as electric vehicles
  • Rare earth minerals one of the few goods not hit by incoming US tariffs on US$300 billion of Chinese goods as trade war escalates
Chinese President Xi Jinping visited one of the country’s major rare earth mining and processing facilities on Monday, in his first domestic tour since the recent escalation of the US-China trade war.
Xi’s visit, reported by the official Xinhua news agency, comes amid growing discussion in China that Beijing could consider banning the export of such minerals as a weapon in the trade war with the United States.
Rare earth minerals were among the few items excluded from the latest US government plans to implement tariffs on almost all of China’s remaining exports to the United States, highlighting their strategic importance. These tariffs, which are set to be levied on Chinese goods worth an estimated US$300 billion, could go into effect as early as July, according to the Office of the US Trade Representative.
The state media report, which includes one sentence of text and two pictures, made no mention of the trade war, but speculation is mounting that rare earth minerals could form a key part of China’s retaliation.

China is the world’s largest producer and exporter of rare earth minerals, which contain at least one of the 17 rare earth elements, many of which are vital to a number of low-carbon technologies, such as high-performance magnets and electronics.
It accounts for 90 per cent of global production, however the government has been carefully managing mining levels and it was reported last year that amid production quotas, the country became a net importer of rare earth minerals last year.

Jin Canrong, a professor of international relations at Renmin University in Beijing, wrote an article last week suggesting that China could ban rare earth exports to the US as a way to punish the US for
imposing additional tariffs
. China does not import enough goods from the US to retaliate in pure tariff terms.
The Chinese government has weaponised the trade of rare earth exports before, slashing the export quota by 40 per cent in 2010. The US, Japan and the European Union filed a compliant against the Chinese quota at the World Trade Organisation in 2012, with the WTO ruling against China. Beijing dropped its export restrictions in 2015.
According to the report, Xi visited JL Mag Rare Earth Co, a major rare earth processing company based in Ganzhou, Jiangxi province and “studied” the local rare earth industry. Ganzhou is the heartland of China’s rare earth mining and processing industry....MORE
The last time China withheld production prices exploded, the issue went to the World Trade Organization, the WTO ruled in March 2014 that China's actions were blatantly in violation of the terms of trade China agreed to upon accession to the WTO in 2001, China acquiesced, began flooding the market with product, prices crashed and the prophecy of December 28, 2010 was  fulfilled:
...My short side radar is starting to glow. The perfect play for the Chinese would be to maintain a very tight supply to Japan and the West until MCP, Lynas and REE go into production and then crash the market.
There is currently no way to figure discounted cash flow values for these mines so folks are taking proven, probable and even possible reserve numbers, multiplying by their favorite integer and then forgetting to discount back. That spells opportunity to those panthers sharp enough to wait patiently in the tree until the moment comes to pounce....
Today there are two western miners that are producing, one of them is in trouble and I can't help thinking about a joke from the 1986 oil price collapse, when WTI dropped below $9.85 from $23.30 six months earlier and $35 in 1981: 
Investor: I'm getting nervous, I'm hearing bankruptcy rumors about everybody in the patch, how slow is it? 

 Oil CEO: Well, we're down to two hookers, and one of them's a virgin. 

 Investor: Oh. 
The one that isn't in trouble (except for the Chinese leaning on Malaysia to shut 'em down) is Lynas, a trade we've been thinking about for almost a year but just waiting, like the panther, for the moment to pounce, biding our time, like the panther waiting....just a little bit closer and....
Okay, maybe not really waiting to pounce, maybe waiting for something to land within a few inches.
So I don't over-exert myself:

LYC.AX 1.9750-0.0250 (-1.25%)
Risky as hell and overpriced because Wesfarmers made a rejected takeover bid and the punters have hope but still the only Western source worth looking at right now.