The Best Way to Play the Rare Earth Run-up
Fri, 31/12/2010 - 15:06 by Rich Smith
Earlier this week, I noted that high-flying rare-earth minerMolycorp (NYSE: MCP) looked overvalued, and more likely to decline in price than Exxon Mobil (NYSE: XOM), another stock sitting atop its current 52-week high. Profitless where Exxon is wildly profitable, dividend-less where Exxon pays 2.4%, and priced at a book value three times that of the oil giant, I saw little hope that Molycorp would continue to outperform the market going forward.
As you've probably heard by now, a day after I made my call, China imposed new quotas on the export of so-called "rare-earth" metals from its shores. Shares of rare-earth plays like Molycorp, Rare Element Resources (AMEX: REE), and General Moly (AMEX: GMO)promptly leapt to the moon.
But you know what? While Mr. Market clearly disagrees with me on this one, I'm still right. Eight times book was too much to pay for Molycorp Monday, and it's still certainly too much today, even after the shares gave back their early Tuesday gains. After all, "rare-earth" metals aren't really "rare" at all. In fact, some rare earths are even more abundant than gold … or lead. The thing that makes these metals "rare" is that, because they're more dispersed across the Earth's crust, it's generally considered unprofitable to mine and refine them. (I guess the marketing department nixed the term "unprofitable earths.")
That said, if you absolutely, positively must join this less-profitable-than-gold rush, there are better ways to do so than by investing in Molycorp, Rare Element, or General Moly. As I mentioned earlier this week, Freeport-McMoran (NYSE: FCX) also engages in rare-earth mining. Profitable and selling for 15 times trailing earnings, with a 1.7% dividend, it offers a much safer way to play the trend than do its profitless peers.
At only 11 times earnings, Thompson Creek (NYSE: TC) looks even better. Like Molycorp, it's only just getting ready to open a dedicated rare-earths mine. Unlike Molycorp, though, Thompson Creek is already wildly profitable. Before the Chinese quota crackdown, analysts were expecting it to grow its profits 22% next year. Add in any price spike in response to the export-throttling, and it could do even better.
Foolish final thought
Thompson focuses primarily on molybdenum production -- but then again, "moly" is an integral part of most names in this sector. Given my druthers, I'd be buying a company that's got more than just its name going for it -- Freeport if you love dividends, Thompson if you don't.
© 2010 UCLICK L.L.C.