Investor Confidence Needs An ETF

By Cyrus S Darabshaw Exclusive to Rare Earth Investing NewsWho controls the price?

Update (October 27, 2010): Wanted: Rare Earth ETFs

This week, lets take a look at an issue that has now been hanging fire for some time – that of having Exchange Traded Funds (ETFs) for rare earth metals. We would like to initiate a debate among our readers on whether it is too demanding to ask for a more transparent price fixing mechanism. Interestingly,  of late, there has been some chatter on this in the REE realm, hence this report.

Before we get into the thick of things, here are excerpts from an article in the New York Times by well-known independent metals’ consultant Jack Lifton, that throws some more illumination on the vexed subject.

He writes – “In the last six months, I have been asked repeatedly to work with one group or another – some of them global institutions, others simply local individuals or syndicates in Toronto, Hong Kong, or London – to structure an ETF usually for rare metals in general, but most often for rare earths in particular”.

“The market for most of the rare metals, of which the market for the rare earths is an outstanding example, is opaque. We have no way of knowing exactly at what prices, and in what chemical state, rare earth materials, for example, change hands within the Peoples Republic of China. We do not even know if the rare earth materials are sold for a profit from the mines. Chinese balance sheets, when available, are rarely subjected to independent audit verification by disinterested third parties! outside of China, and for almost every rare metal, competitive advantage issues dictate that buyers and sellers keep silent about the transactions.”

So, why an ETF for rare earths?

We are in complete consonance with experts like Jack. It has become imperative to have an ETF for rare earth metals.

Why?

Well, for one, since about 97 per cent of the REEs are in China, meaning that country has a monopoly over supply, and since it is a “closed’” society, it becomes all the more imperative that investors need to know what exactly is happening in this sphere in that country to enable them to take informed decisions so far as their personal investments in REEs are concerned.

An ETF would represent a more stable investment vehicle encouraging many investors, who as of now, do not want to venture into this field. It is bound to bring in institutional buyers, who have been found wanting for obvious reasons, so far. It would also serve as an effective source for the dissemination of accurate reports related to the REEs by sites/sources like ours.

As of now, potential investors can only look at the dozen odd junior players in the North American exchanges, and all with relatively low share prices, if they feel like putting their money on rare earth metals. Even a small investor can just about cover the whole field of micro caps with a modest investment in each company. From all accounts, these 12 juniors are the only ones to represent the primary industry outside of China. An ETF would mean investors, and we mean the heavy duty ones, flocking here.

In fits and bursts

There have been developments on the ETF front in the recent past that hold out hope.

1) In mid-January this year, for example, New York-based asset manager Global X Management Company launched the Global X China Materials ETF (NYSE Arca: CHIM), the first ETF offering targeted access to the China materials sector. The Global X China Materials ETF seeks to replicate the S-BOX China Materials Index, which is designed to reflect the performance of the materials sector in China.

As of December 30, 2009, the metals and mining sector represents 66 per cent of the index. At that time, Bruno del Ama, CEO of Global X Management, had said the logic for launching the ETF was because China’s GDP was expected to expand 9.4 per cent in 2010. The country’s economic upswing will help drive demand for materials in 2010 and beyond.

2) There are reports of a Canadian venture setting out an ETF which is currently in its financing phase, called Dacha Capital, (TSX-V:DAC ). Experts are of the opinion that if Dacha Capital succeeds in having rare metals or instruments collateralized by physical holdings of rare metals for sale in an open market with posted offering and acceptance prices, it will have created then the world’s first “transparent” market in the metals it works with, and this although it may not be the last rare metals market pricing mechanism created, could well be a standard for some time.

3) A major Canadian bank, quite active in mining finance, has publicly announced undertaking the raising of $25,000,000 for the purpose of capitalizing an ETF that would offer investment instruments for speculating on rare metals which the new ETF will hold in physical form as collateral for the base value of its instruments.

For now, here is some more market advice offered by Gary Gordon, president of Pacific Park Financial, Inc, a registered investment adviser with the SEC – “With worldwide demand for 15 or more “rare earths” expected to seriously outpace supply, and without a clear path to investing in them, how might you benefit (from an ATF)? If you’re finding it hard to get in on the right commodity fund or specific rare earth metal miner, is there a sensible investment for ETF investors?

Actually, there is, according to Gordon.

Consider the reality that 60 per cent of all rare earth metal consumption is coming directly from Chinese citizens; it follows that the middle class Chinese consumer is buying electric/hybrid cars from Chinese automaker BYD as well as consuming the energy from wind turbines. Though Rareearthinvestingnews does not in any way endorse these tips, Gordon says the best investment to focus on the strength of the Chinese consumer is the Claymore/AlphaShares China Small Cap Index Fund.

Small cap funds like Brazil Small Cap and China Small Cap focus on the domestic, local economies and not the exporting big boys. These ETFs are tailored to the growth and consumption patterns of the middle class.

Yes, we agree that people have taken a crack at setting up REE ETFs but these have been far and few in between. These attempts promised the moon but slowly fizzled out. ETFs are the need of the hour if the REE sphere has to see some structured and serious investing or else, it will continue to remain a penny stock market.

Other news

In a bit of refreshing news from China, it’s ministry of industry and information technology has said it may be considering plans to raise thresholds for the rare earth industry and enact technical standards for refining enterprises. According to the Shanghai Securities News, a symposium was held in Beijing to solicit opinions from related parties on the access mechanism, which is aimed at optimizing resources distribution and strengthening the rare earth industry.

Rare earth, which includes minerals such as dysprosium, terbium, thulium, lutetium and yttrium, is widely used in the fields of electronics, aviation, atomic energy, and mechanical manufacturing.

Ucore Uranium Inc (TSX V: UCU) has completed the exploration plan for its Bokan-Dotson Ridge rare earth element project in 2010. The comprehensive exploration agenda, continuing under the management of Ucore’s wholly-owned US subsidiary Rare Earth One, has been designed with a concentration on advancement of existing zones with infill and exploratory drill work, while expanding overall project scope. Drilling in 2010 will focus on the rare earth-bearing zones at the Dotson Trend and the Sunday Lake Zone, which yielded significant Heavy REE  (HREE) intercepts in 2009.

This year’s program will target a minimum of 3,000 metres, and will include detailed geological mapping, airborne and ground-based geophysical surveying, detailed mineralogical studies, environmental baseline data collection, and bench-scale metallurgical testwork.

In a statement issued recently, Ucore has made certain forward looking remarks. “A number of near-term events have the potential for material impact on the US rare earth sector, and HREE’s in particular. They include the pending finalization of China’s five-year plan, which promises a staged export withdrawal of HREE’s such as terbium and dysprosium, metals particular to Bokan and in short supply worldwide.

In April, the US Committee on Armed Services is due to issue a report on rare earths in the supply chain of the Department of Defense to the US Senate. The US is the world’s largest consumer of HREE’s for strategic military and high technology applications. In turn, Bokan’s unique positioning as the largest historically estimated HREE deposit in the US, albeit non 43-101 compliant, should serve us well in focusing attention on an increasingly compelling story.

The Bokan-Dotson Ridge project, located on Prince of Wales Island in southeastern Alaska, is 100-per-cent owned by Ucore. The three seasons of drilling at Bokan have yielded some of the highest heavy rare earth element grades on record for a North American rare earth deposit.

Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co Ltd, the rare earth listed unit of Baotou Iron & Steel Group, said its international trading unit had received a nod from the autonomous region’s government to build a strategic reserve of rare earth elements.

The company, which holds a 67 per cent stake in the unit, was authorized by the Inner Mongolian government to set up the reserve in the autonomous region, it said in a statement to the Shanghai Stock Exchange yesterday.

Following an almost 10 per cent surge on Tuesday, the company’s shares sank 1.55 per cent to end at 24.1 yuan on Tuesday. This compares with the benchmark Shanghai Composite Index’s gain of 1.14 per cent.

The regional and Baotou municipal governments are subsidizing the reserve to the tune of 20 million yuan. The rest will be raised by Baotou Steel Rare-Earth, the announcement said.

The company is the world’s largest producer of rare earth elements. They are widely used in the production of mobile phone batteries, missiles and aviation engines. It manufactured 53,997 tons of rare earth oxides, making up 43.5 per cent of global production in 2008, according to Le Yukun, an analyst at Bank of China International Securities Co.

Perth-based speciality metals explorer and developer Arafura Resources (ASX: ARU) has announced a placement of $17.5 million and a renounceable rights issue to raise up to an additional $17.8 million to advance the Nolans Project to meet world demand for rare earths.

Major Shareholder East China Exploration & Development Bureau has been invited to maintain its pro-rata shareholding (24.86 per cent) at the placement price.

The funds raised, together with Arafura’s existing cash reserves, will be used for ongoing drilling and exploration activity with the aim to define the full extent of the Nolans resource; progressing activities of the Nolans Project’s bankable feasibility study and the environmental study and corporate and offer costs as well as working capital requirements.