Dacha Strategic Metals is in the rare earth elements business but, interestingly enough, Dacha is not a mining company. And perhaps more interesting to Dacha’s investors, yesterday the company hit a 52 week high closing at $0.89. Dacha has effectively created the world’s first and only stockpile of rare earth elements and offers investors and industrial consumers the ability to participate in the physical ownership of these critical elements. Similar to a physical trust.
As of June 24, 2011, in addition to its metal inventory, which had an estimated fair market value of $96.1 million, Dacha’s equity investments had an estimated fair market value of approximately $2.7 million along with a cash position of approximately $4.7 million for a total of $103.5 million, or $1.39 per share, based on 74.4 million shares outstanding.
We recently discussed the value proposition of Dacha Strategic Metals with the company’s President & CEO, Scott Moore, and addressed the company’s normal course issuer bid share buy-back that was announced earlier this month.
Dacha Strategic Metals is not a mining company but operates in the rare earth element sector. Please tell our readers about your business model and the history of the company?
We have a unique, but very simple business model which provides an investment alternative for investors interested in gaining exposure to rare earth elements without the risks inherent to mining companies. Quite simply, Dacha’s objective is to achieve, long-term capital appreciation through the buying, holding and selling of rare earth elements, which are predominantly supplied by China.
Just over a year ago, anticipating that the prices of rare earth elements would begin to appreciate quite rapidly, we began working with this model and started accumulating a stockpile of the particular physical rare earth elements that we perceived had the greatest potential to gain value.
Since we began, we have acquired approximately 300 tonnes of rare earth elements from within China – most of which we acquired when Chinese export quotas were at their lowest – and have proven the liquidity of our inventory through making, selective, opportunistic sales to downstream customers. We began implementing our business model in April 2010 with an equity raise of $22 million which we deployed into an inventory of approximately $20 million, and we recently announced that as of June 24, 2011 that our inventory is worth over C$96 million. Each week we update the inventory chart on our website (CLICK HERE to view) and on a monthly basis we put out a press release announcing our Asset Value, which is inclusive of our metal inventory, marketable securities, and cash. If a substantially material change has occurred with our inventory we would also press release that change in a timely manner.
Are there comparable companies to Dacha in the marketplace or did you conceptualize this business model?
At present there are no companies in the rare earth market with a similar business model to Dacha. The majority of rare earth element companies in the market are exploration and development projects – as you mentioned earlier, we are not a mining company. In actuality, we can be more closely compared to a physically backed ETF – such as a gold bullion fund. But there are obvious differences, we trade on the TSX-V as a corporation and do not have the associated “management” or “commission” fees as a traditional fund would. The Central Fund of Canada (TSX-CEF) and the Uranium Participation Corp. (TSX-U) are two similar companies except that Dacha has the ability to hold multiple metals and trade in and out of their positions.
Shortly after you went public you announced that Dacha acquired an operating license in the People’s Republic of China for rare earth elements through the acquisition of a trading company in China. Could you explain the nature of that license and what terms are associated with it, if any?
Our China license allows Dacha to buy, hold and sell rare earth elements within the Chinese market. It does not allow us to have export quotas but does allow us to import rare earths, such as concentrate. However, I should note that Dacha is more tax effective outside of China and as such we are focusing our inventory to be held outside China. As Dacha operates out of Barbados, our effective tax rate on income is 2.5%, therefore providing an investor with almost the full upside on the metal price. This is one area where the market may be discounting us as they may not realize the tax effectiveness of the model.
Rare earth elements is a relatively new sector of the mining investment community, what are the key demand drivers that are shaping the industry and what is the price sensitivity of the marketplace?
I think that probably most of the investing public has rushed into rare earth equities without really understanding the industry – it is a complex and opaque market. Rare earths are a relatively small, but important group of minor metals that allow our modern world to function more efficiently; for instance, they make our everyday electronics smaller, faster and more efficient and make your compact fluorescent bulb work. Each element has different special properties, so demand drivers are actually different for each specific element and in most cases price is in-elastic to the finished product – such small quantities of these materials are used in most products, appreciation in pricing has very little impact on the price of the overall end product, up to a certain point, of course. As many of these materials are un-substitutable and irreplaceable, prices can still experience an upward trend from here. Rare earths are really a specialty chemical business not a mining business as the mining part of the chain may only represent 10% of the actual costs of processing the material into a “finished” saleable commodity.
Some rare earth elements are actually not that rare and heavy rare earth elements are generally considered to be the more sought after elements for miners. Could you give our readers an overview of the sector and highlight some of the key elements that Dacha is focusing on and why?
We have chosen to focus mainly on the heavy rare earth elements (like dysprosium and terbium). This is another key factor of our model: rather unlike an exploration or mining company who is restricted to the elements of a specific deposit, our business model allows us to diversify across the spectrum, to “cherry-pick” the elements that we feel have the most potential upside as the market conditions continue to develop. Likewise, when we feel certain elements have reached their peak, we are able to liquidate those particular elements and focus on others.
When we set out to purchase our inventory we felt that the heavy rare earth elements had the most potential upside over both the short and long term – and in fact, as I mentioned previously, we have seen tremendous appreciation in our inventory over the past year and we feel that there is lots of upwards momentum still to come. Additionally, with recent announcements out of China that they intend to temporarily shut down some of their heavy rare earth operations in the south, we see lots of upside for the heavy rare earths in the short-term as well.
Conversely, we believe that with the small handful of mines set to produce the light rare earths like cerium and lanthanum in the next few years the light rare earths could see a marked decline in value as these projects move closer to production.
Dacha recently announced a normal course issuer bid, what are your corporate plans as we head into 2012?
Our plans are to keep doing what we have been doing. The next few months promise to be an active time in the rare earth market and we are going to be watching it carefully. We are expecting to see continued increases in our metal inventory which may offer potential opportunities to make opportunistic trades to realize profit from our inventory. Like I mentioned, we update our inventory and asset value regularly, and I would encourage anyone interested in the rare earth space to monitor the progress of our inventory on a regular basis. We expect to have an exciting and profitable year.
This interview appeared in 5 Most Interesting Rare Earth Stocks – Part 2 – CLICK HERE for the article.