Leading natural resources fund manager Dr Markus Elsässer thinks investors need to be careful when buying into the rare earth story, and believes there are now better commodity opportunities elsewhere.
Elsässer, manager of the Starcap – Pergamon fund, says he has long been involved with rare earth – which includes commodities such as yttrium, europium and dysprosium – but warns those investors being lured into the sector by an increasing number of IPOs.
‘I’ve been onto the rare earth story for more than three years, and had to be patient as at that time noone knew about it,’ he said. ‘It has become more prominent in the media, we have seen hype about anything to do with rare earth, and we see many companies coming to the market with IPOs. But, looking to the future, almost all these companies will fail.’
It is one thing finding rare earths, but quite another thing processing it, according to Elsässer (pictured).
‘The real job starts when it comes to the processing. When you find gold or silver, you have old established methods in metallurgy for processing it. But when it comes to rare earth it is totally new – and a very complex engineering task to process something like yttrium. The poor amateur investors will see these companies which have good PR and announce they have found huge resources of rare earth, but nobody can answer how they will actually get to the product.’
He thinks there will only be three non-Chinese companies able to produce rare earth before 2014: Molycorp Minerals, Lynas Corp and Alkane Resources, all of which appear in his portfolio.
Elsässer is currently also excited about the prospects of companies involved in gallium and lithium, because of the rise in usage of energy-saving light bulbs, hardware, software and batteries.
‘Lithium is an area where investors will be able to take a nice bath in the next few years, as car makers will be moving into lithium batteries. However, they will only be able to be used if it gets cheaper. And the only way to get it cheap is via South America. A US-listed company called SQM is lucky because it has a site in the Chilean desert where the lithium is just lying there at the top of the ground,’ he said.
He says he only buys into high quality companies with excellent management for his fund, as ‘there are a lot of crooks in the resources sector.’ He also thinks that if you buy companies with strong competitve advantages in their field, one can profit regardless of the direction of commodity prices.
However, among the other commodities Elsässer singles out are uranium, because of the continued rise in the use of nuclear power, oil, and silver.
In silver he has benefited from a position in Canada-listed Silvercorp, which he bought at $3 and is now at $12. He thinks there are still returns to be had from the sector as silver is still too cheap. ‘I can’t forecast over 6-12 months, but in the long run silver is way too cheap and we will see higher prices in the next three years. It has been manipulated to very low levels in the past.’
Other top stockpicks of Elsässer include coal firm Southgobi and diamond miner Petra Diamonds
