CORRECT: Bearish Shorts Are On The Rise In The Rare-Earth Sector

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("CORRECT: Bearish Shorts Are On The Rise In The Rare-Earth Sector," published
at 3:56 p.m. EDT, misstated that tantalum is a rare-earth element in the eighth
paragraph. The error also appeared in an earlier version published at 12:45 p.m.
EDT. A corrected version follows.)



By Brendan Conway and Tatyana Shumsky



Of DOW JONES NEWSWIRES



NEW YORK -(Dow Jones)- The rare-earth minerals sector is drawing near-record
short interest as bearish investors bet against its previously high-flying
stocks.


The industry, whose minerals are used to help power everything from vacuum
cleaners to smartphones, had been a darling of the equities market over the past
year. Investors snapped up shares of Molycorp Inc. (MCP), Avalon Rare Metals
Inc. (AVL), and Rare Element Resources Ltd. (REE) as the minerals they produce
were viewed as short in supply, likely to be hit by Chinese export curbs and all
but certain to enjoy steady future demand by a broad range of tech customers.


That all came to an end in recent months after a confluence of negative events
sideswiped the industry, causing short-sellers to swell. Shares of rare-earth
mineral companies have been punished amid doubts that the Chinese supply crunch-
-the country supplies 95% of world output--is as bad as surging prices imply.
Last week's sales by executives at industry leader Molycorp may also have
weighed.


"Short interest in the three quoted rare-earth miners outside of China has
continued to build since April and stands just off record highs," said Will Duff
Gordon, research director for Data Explorers. "Despite the recent substantial
share-price correction in all three stocks, it seems that short sellers still
believe them to be overvalued."


The non-Chinese rare-mineral stocks have seen share prices fall between 33%
and 42% from their highs in the early part of this year. The proportion of
Molycorp shares on loan, a proxy for bearish short interest, hit a high of 11.5%
on June 15 and has since hovered slightly below that mark, according to Data
Explorers. Avalon and Rare Element have also seen more bearish-looking "short"
activity in recent months.


The "rare earth" name is something of a misnomer. The 17 metals are found in
deposits all around the globe and aren't limited to China.


The range of uses is wide. Certain rare-earth elements, like yttrium, have
been used to make specialty steel stronger and more durable over the years, but
the industry blossomed with the rise of certain high-technology products over
the past decade.


Companies like Dyson Appliances Ltd. rely on neodymium magnets to create the
powerful suction vortex in their vacuum cleaners. Apple Inc. (AAPL) and
BlackBerry maker Research In Motion Ltd. (RIMM, RIM.T) use terbium to make their
phones smaller, lighter and faster.


Other countries largely dismantled their mining operations as China undercut
competitors and came to dominate processing over the years, according to market
participants. The country is in the position of restricting supply to some
degree, but recent price gains mean that extracting the metals elsewhere is once
again profitable.


Outsiders are only now beginning to rebuild that capability.


Some of Molycorp's recent declines may be linked to large insider share sales
conducted over the past month. Chief Executive Mark Smith reported a sale of
nearly 175,000 shares last week, or about 16% of the executive's holdings as of
May. Smith owns a little over 1% of the company, according to Thomson One
Analytics.


A Molycorp spokesman said that the short interest may not be driven by
sentiment, and may instead be the result of complex arbitrage trades. He added
that Smith's sales were "prudent personal financial planning" and said the "
vast, vast majority of [Smith's] personal net worth is tied up in the single
stock." He added that the executive's interests "remain completely aligned with
shareholders" and his financial success "still depends almost completely on the
success of the company."


"The peaks of all three of these stocks were a good 40% above where they are
now, so some froth has been blown off the beer," said Christopher Ecclestone,
mining strategist at Hallgarten & Company. He said the two companies besides
Molycorp "don't have a ghost's chance of production in the next two years, maybe
more."


The stocks of Molycorp, Avalon Rare Metals and Rare Element Resources jumped
this week as Hong Kong customs data showed exports for the first five months of
the year fell 8.8% from a year earlier. That reflected the government's recent
success controlling the rare-earths trade.


The action comes as Wall Street has grown more positive on the stocks, largely
to reflect the jump in prices. J.P. Morgan Chase & Co. stock analysts led by
Michael F. Gambardella raised their Molycorp target price recently to $105 from
$87, in part "to reflect the continued rise in rare-earth prices."


But some bullish analysts are voicing doubts that the surge in prices will
last. Dahlman Rose & Co. analysts Anthony Young and Anthony Rizzuto said this
week that the underlying metals have already priced in tighter Chinese quotas,
adding that they are "uncertain current levels are sustainable." The analysts
have a "buy" rating on the stock, though they reduced their price target, to $
120 from $125.


Investors who want to short shares borrow the stock and then sell it, betting
that the price of the shares will fall and that they can buy them back at a
lower price, for return to the lender. In order to borrow the shares, the
investors have to pay the owner a fee, normally an annualized percentage of the
stock's value.



-By Brendan Conway and Tatyana Shumsky, Dow Jones Newswires; (212) 416-2670;


brendan.conway@dowjones.com



--Chuin-Wei Yap contributed to this article.



(END) Dow Jones Newswires
06-23-11 1751ET
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