Insider buying at Molycorp could signal rebound for rare earth metals ETFs

Nov 26th, 2012 | By | Category: Commodities

Directors of rare earth mining giant Molycorp put their money where their mouths are last week, snapping up stock in the NYSE-listed company. The insider buying, which involved President and CEO Mark Smith, EVP and General Counsel John Ashburn and Director Charles Henry, follows August’s punchy $25m stock purchase by Chairman of the Board Ross Bhappu.

Insider buying at Molycorp could signal rebound for rare earth metals ETFs

Molycorp’s Mountain Pass rare earth mine in California.

This unequivocal demonstration of faith in the company – and, by extension, the outlook for the rare earth metals industry – could point to the start of a rebound for rare earth exchange-traded funds (ETFs).

While rare earth ETFs have sold off lately, as the price of rare earths metals has tumbled, investors would be wise to pay attention to this batch of insider buying, as large purchases can be interpreted as a bullish sign.

Directors are presumed to be well-informed of the company’s business and future prospects. They know everything that reasonably can be known about their company’s business prospects, employees, customers, suppliers and competitors.

Therefore, when insiders go into the market to trade their own company’s shares, they have deeper insight into their company’s likely future prospects than can be captured in the more definitive information appropriately released to the public.

Some investors have already acted on the story, with Molycorp shares jumping 19% on Friday. The buying also appears to have rubbed off on other rare earth companies, with Australia-based Lynas gaining more than 14% over Thursday and Friday. This has lifted rare earth ETFs, such as UBS’s UBS-ETF STOXX Global Rare Earth and Van Eck’s Market Vectors Rare Earth/Strategic Metals ETF, which both hold Molycorp and Lynas as major weights.

For the uninitiated, rare earth metals are typically mined as by-products in operations focused on precious metals and base metals. Compared to base metals, they have more specialised uses and are often more difficult to extract. Currently, 17 elements in the periodic table are considered rare earth metals including such elements as Cerium, Terbium, Dysprosium and Yttrium.

Owning their unique properties, these elements are considered indispensable in modern industry and are used widely in areas such as new energy, new materials, energy conservation and environmental protection, aeronautics, electronics and information technology. Catalytic converters, hybrid cars, magnets, wind turbines, flat screen televisions and smartphones, for example, all contain vital quantities of rare earths. With all these areas expected to grow in the coming years, the fundamental long-term outlook for rare earths remains compelling.

For investors looking to gain exposure to the rare earth industry, without taking on too much company-specific risk, the aforementioned ETFs provide an efficient means of access. Details as follows:

UBS-ETF STOXX Global Rare Earth (UB65)
The UBS-ETF STOXX Global Rare Earth seeks to replicate the price and yield performance of the STOXX Global Rare Earth Index. This index tracks the performance of companies that generate at least 30% of their revenues in the rare earth sector, which is defined as all companies whose operations include the exploration, extraction, transport, processing or any other business involving any of the 17 rare earth elements. Major holdings include Lynas (16.6%), Molycorp (16.5%), Alkane Resources, China Rare Earth and Rare Element Resources. In total there are 12 holdings. The fund is listed on the London Stock Exchange, the Deutsche Börse and SIX Swiss. TER 0.62%.

Market Vectors Rare Earth/Strategic Metals ETF (REMX)
The Market Vectors Rare Earth/Strategic Metals ETF seeks to replicate the performance of the Market Vectors Rare Earth/Strategic Metals Index. This index gives investors a means of tracking the overall performance of publicly traded companies primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. Major holdings in the rare earth space include Molycorp, Lynas, Alkane Resources, China Rare Earth, Avalon and Rare Element Resources. In total there are 27 holdings. NYSE listed. TER 0.57%.

Note to UK investors: The Market Vectors Rare Earth/Strategic Metals ETF has been registered with HM Revenue & Customs’ UK Fund Reporting regime, meaning it is treated on a similar tax basis to UK funds, as opposed to a punitive tax treatment which can apply to offshore funds outside the regime.

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