Price Discovery In The Rare Earths?

by Jack Lifton on February 12, 2010

in News Analysis

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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.

I have seen the press releases for the Canadian venture currently in its financing phase that is now called Dacha Capital,  and, indeed, it turns out that one of the “idea” men behind this venture had spoken to me about it several times during the fall and early winter of 2009-10.

I have been unable to obtain Dacha Capital’s offering prospectus, and I don’t fault the company for not sharing it with me. Dacha is in the process of raising capital, and certainly I am not nor could I ever be personally an investor of the size and depth of pockets a venture such as Dacha would solicit. Also, on a practical level, I am an American, and I do not believe that the Dacha solicitation is being offered at this time to American participants.

I cannot and will not comment on Dacha’s intended operations until I read the prospectus, and I doubt that will be before their first round of financing is completed.

Even after I get to read the prospectus I will only be able to comment on the techniques they plan to employ to secure rare metals or rights to them and on the value to end-users of whatever type of security they are going to sell. I cannot comment on present or future share prices; I am not a student of market psychology. I will comment on their choices of metals to include in their ETF, as soon as I know which of them they are.

I consult with institutional investors and end-users on the probability of commercial success of junior mining and junior mining-related ventures from whom end users would like to buy or must buy raw materials.

To me Dacha may well be a new centralized source for such a function, so I am quite interested.

I called this note “Price Discovery?” because I want to make a point. 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. The various news services that have sprung up in the last decade in particular get their information on volumes and prices by “polling” networks of “metal traders” and “end users.” It is no secret that each of these people have an agenda; they want to make you think they bought lower and sold higher than anyone else.

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.

Disclosure: Neither I nor my family members own any shares or options in the companies mentioned above.

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