Rare Earth Miners mine rare earths deposits and mineral resources that are used in the production of everything from magnets to hybrid vehicles, flat panel televisions, digital cameras, disk drives, ipods, Mp3 players, etc. Over the last few years the supply concerns of Rare Earths have been a major catalyst for the exponential price increase in the cost of these rare earths deposits that are so vital to the continued production of many technology products and devices sold around the globe.
A few of the Rare earth miners that I follow closely are Lynas Corp(Lysdy.pk) , Molycorp(Mcp), General Moly(Gmo), and Avalon Rare Metals(Avl). Avalon Rare Metals will be our rare earth miner in focus for today and is soaring 8% higher on big volume.
A brief bio on Avl courtesy of yahoofinance: http://finance.yahoo.com/q/pr?s=AVL+Profile. Avalon Rare Metals Inc. engages in the exploration and development of rare metals and minerals in Canada. The company primarily explores for the rare earth elements, such as neodymium, terbium, and dysprosium; and other rare metals and minerals, including lithium, tantalum, cesium, indium, neodymium, terbium, dysprosium, niobium, gallium, zirconium, and calcium feldspar, as well as tin. Its principal property includes the Nechalacho Rare Earth Element project located at Thor Lake, Northwest Territories…(yahoofinance)
Check out the Avl mining projects in the works: http://avalonraremetals.com/projects/ This is the Thor Lake project: http://avalonraremetals.com/projects/thor_lake/thor_lake_intro/
Over the past 52 weeks, Avl has traded in a range of 2.29-10.11. Despite the huge pullback from Avl highs, I think rare earth deposits will continue to be scarce over the long term and this will drive both rare earth prices and these small cap miners much higher in value…As you can see from the yahoo finance chart below on Avalon Rare Metals and Molycorp, both of these stocks hit all time highs in early 2011 before getting crushed. I think in 2012, we will see a big bounce in these rare earth miners and several other miners. We also may see some M & A in this space as the bigger players gobble up a few of the smaller competitors. Another one of my top picks is Australian Miner Lynas Corp. Check out Lynas at http://www.lynascorp.com/.
Options Trade#1: Here is the yahoofinace Avl options chains for April 20, 2012 http://finance.yahoo.com/q/op?s=AVL&m=2012-04. If I were to try and capitalize on a move higher this spring on Avl, I would look at selling the Avl $3 April 20, 2012 Put Options for .55 cents. If I sell 20 contracts, I will collect a premium of $1,100 minus trading fees. Keep in mind, I need $6,000 in cash in my account in case I get exercised at $3 per share and have to purchase 2000 shares of Avl stock. Best case scenario, I collect the $1,100 premium and do not get exercised, but I am very comfortable getting long 2,000 shares of this stock at $3 if I do get exercised. I will get exercised only if Avl shares close below $3 at the April 20, 2012 expiration date. The net purchase fee of Avl if I am exercised will be $6,000-$1,100 premium collected for selling the Put Options. That means I will get my 2,000 shares of stock for only $4,900 plus trading fees. That is one of the beautiful things about selling Put Options on a stock that I already want to go long on. I think Avl could run back to 7-8 dollars in 2012 if the Rare Earth Miners continue there move higher after get crushed last year. Over the next decade we could see a huge move higher in the value of these Rare Earth Miners and especially a few of my top picks: Avl, Gmo, Lysdy.pk, and Mcp.
Options Play#2: Here is the yahoofinance options chains on Avl for April 20, 2012 http://finance.yahoo.com/q/op?s=AVL&m=2012-04
If I were to buy Call options and take a speculative play on a continued move higher in Avl shares over the next 3 months, I would consider purchasing the Avl $3 April 20, 2012 Call Options for .50 a contract or $50 a contract(.50 x100 shares per contract=$50). If I buy 40 contracts, that will cost me $2,000 plus trading fees and no matter what the stock does, my total capital at risk is the cost of the options contracts plus trading fees. If I just buy to open the Call Options contracts, I do not have to hold $12,000 cash in my account as collateral to purchase the actual shares in case of getting exercised. So, for 2k plus fees, I would get long exposure on 4,000 shares of Avalon Rare Metals at a strike price of $3 (40 contracts x 100 shares per contract =4,000 shares). If Avl runs to $5 in the next few months, the contracts will be then worth $8,000 plus depending on how much time value is left before the expiration date of the Call options. Remember the “Premium paid for buying Call options is three fold”: the time value premium + the intrinsic value (how much the option is in the money)+ volatility in the stock= Options Premium paid.
Fyi, A “Call Option is in the Money“ if the actual stock or asset we are purchasing the contracts on is trading higher than the strike price of our Call Options contracts that we may own. For example, if we own $3 strike Call Options on Avl and the stock is trading at $3.15. The stock is .15 cents in the money or $15 per Call Options contract we own on the Avl stock. Therefore, in this example the intrinsic value of the Avl $3 strike Call Options contract would be .15 cents or $15 per contract. It is also important to remember that if our Option at expiration is even 1 cent in the money our broker has on obligation to exercise the shares on us. Therefore, if you do not want to purchase the shares, you need to call your broker and tell them to let the options expire worthless.