A rare-earth resource company for the bold investor
By
Tom Bulford Oct 13, 2011
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Last Friday, I got a call from Colin Bird, a 67-year-old veteran of natural resources exploration. As we chatted, I put it to him that mining shares are offering pretty good value at present.
He agreed: “Pick a company that had a stock market value of at least £75m before this year’s sell-off, because that tells you that it must have something of substance. Then buy in at today’s low prices and you could make five times your money from here”.
Of course, you need to do a bit more research than that! And if I find anything worth buying, I’ll reveal it in Red Hot Penny Shares. In fact, in the brand new Red Hot report I released yesterday, I talk about one of my top resource tips for the next 12-18 months. Click here to read it.
But it’s always good to hear from an old-hand like Bird. And so I was keen to find out about what’s on his radar right now.
Colin likes Jubilee Platinum (JLP), African Eagle (AFE) and, amongst the oil plays Dominion Petroleum (DPL). But the reason he called was to tell me about his latest venture – one that can give investors exposure to one of 2011’s hottest stories.
Earlier this year investors discovered the rare earth story. Unknown one day, they suddenly were all the rage. And although the tide of enthusiasm has ebbed, the basic story is still the same. Let me remind you.
Why are rare earths so valuable?
Rare earths are a set of 17 chemical elements. Though they are used in small quantities, they are vital to the manufacture of many things. Rare earths are divided into two categories, ‘Light REEs’ and ‘Heavy REEs'.
Light REEs are predominantly used for magnets, and as additives in steel manufacture, auto catalysts and petroleum refining catalysts. They are also used in colour televisions, LEDs, LCDs, medical devices, missile guidance systems and much else. Heavy REES are also used in magnets, as well as fibre optics, fluorescent lamps, ceramics, lasers and more.
Belying their name, rare earths are plentiful. But for producers there are two problems. Rare earths are typically dispersed, and not found in concentrated and economically exploitable form. And, because they are found together, it is not possible to mine sufficient allanite, for example, without potentially mining an excess of monazite.
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China wants them all to itself
Consumers of rare earths are less worried about engineering problems than political ones. China has a stranglehold upon supply. It currently produces over 95% of the world’s rare earths, and at the end of 2009, it announced plans to reduce its export quota.
Ostensibly the move was to preserve scarce resources, but it was widely seen as a move to secure supplies for domestic users. The Chinese State Council plans to consolidate its rare earth industry to allow three major producers to control 80% of the industry, and in August it began a campaign to find and close illegal mines.
This is not a comfortable prospect for global rare earth users. In 2010, world demand for rare earths was 134,000 tonnes, already ahead of global production of 124,000 tonnes – with the difference supplied from stockpiles. By 2014, demand is forecast to grow to as much as 200,000 tonnes.
Several projects are under way, including Mount Weld (Australia), Mountain Pass (USA), Thor Lake and Hoidas Lake (Canada) and Steenkampskrall (South Africa). Meanwhile, advances in recycling technology have made it possible to extract rare earths from electronic waste, and a number of reclamation operations have started in Japan.
New value in an abandoned mine
Rare earth prices have retreated by 20-50% since midsummer on the realisation that supply can grow more than previously thought. But they are still far above prices seen a few years ago, and it is into this environment that Colin Bird launches a new South African rare earth producer.
The company is Galileo Resources (GLR), which listed on AIM a fortnight ago. Galileo has acquired the Glenover project, an abandoned open-pit phosphate mine in the Limpopo Province.
What’s of interest here is that mining on this site from 1957-84 left a series of stockpiles. These have been shown to contain rare earths. That’s what Bird and Galileo are going after.
Samples taken from three of the stockpiles have been assayed by SGS South Africa. On the basis of these tests, the independent consultant, Snowden, has calculated a very preliminary value for Glenover’s total mineral assets of between £4.6m and £12.4m. So what’s next?
With a rig on-site, Galileo is now clarifying the mine’s potential, and Bird is optimistic that this work will enhance the value of the resource.
If everything goes according to plan, he believes production is possible within three years. It seems likely that rare earths will still be strongly in demand by then. If they are and if Galileo does indeed have the supply of them it hopes it has, then it could be a great success.
This is high-risk, of course, and only for the brave hearted. For me, it’s too early for RHPS. But it’s a story and a company I’ll be monitoring closely in the coming months. Stay tuned.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.
Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd.
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