Dacha Strategic Metals (DSM) trades rare earth elements(REE). It's a simple business. A couple of years ago they believed that REE prices would spike. In anticipation they bought up a bunch of REE, especially Heavy REE. They now store these metals and try to sell them. There have been a few sales over the past couple of years, a many of them in 2010 at lower prices.
The rarity of sales are surprising when we consider the price appreciation of rare earths. What is management waiting for? Another parabolic price increase in rare earths? In any parabolic curve one risks tremendous downside with an extended wait. Ask all the oil speculators who waited for $200/bbl oil in 2008. Still waiting.
So with that said, the starting point is knowing whether or not Dacha is a $1.00 dollar selling for $0.50 (or $0.94 of assets per share selling for $0.38/share 5/11/2012).
With thinly traded assets I believe acting as the end user is prudent. I always remembered Michael Burry's Mortgage CDS trade. Essentially, the quoted price didn't reflect reality. So what would I pay for each rare earth if I was an end user and needed it?
Dysprosium oxide: Currently dysprosium oxide is being held with a value of $16.8M. They have 15,000 kg giving a spot price of $1,118/kg. It is listed at 3N purity (99.9%). The exact purity is questionable though as it was listed at 4N in September.
I was able to get a couple of bulk quotes of dysprosium oxide.
"We can offer Dysprosium oxide, 99.99% (Dy2O3/REO), $1390/kg" -a US based company
I got an offer from the same company for 99.9% Dy2O3 for $1190/kg.
aliexpress gives a quote of $1,140/kg for a purity that isn't quite known (2N-3N5).
When everything is all said and done, channel checking showed dysprosium oxide is likely held at fair value.
Terbium oxide: Currently terbium oxide is being held on the books of Dacha's balance sheet at $29.1M. They have 14,000 kg giving a spot price of $2,075/kg. It is listed at 4N+ purity (99.99%).
"Terbium Oxide Powder TbO, 4N
Purity 906 grams @ $5.10/gram =
$4,620.60"-US Based company
"For your information, our current price for Terbium Oxide 99.99% 5kg is at
USD5,150.00/kg"-Chinese company
The US company above told me that they couldn't offer larger quantities of terbium, they only sell by the gram. Which is interesting because another company also sells terbium oxide 4N by the gram. When I went to check out, 25g was only $40 ($1600/kg).
Finally a fourth, US domiciled, company offered large quantities of terbium oxide for $1,635/kg. Same purity Dacha has, 4 weeks to delivery.
This should be pretty easy to figure out who I would order material from.
I understand that terbium is not quoted often. But if I was a large end user of terbium oxide (the typical customer of Dacha) I would probably call around. After calling around, I would purchase terbium from the cheapest and most reliable terbium provider in a country with good business practice.
I may be biased though. I had several occasions in my old job where after ordering from Chinese companies we realized "greater than 99% pure" meant a couple of % of bug legs. If I can get a cheaper product from the US it's not even a question of who I would order with.
As far as DyFe goes I had difficulty securing quotes. I can't say one way or another if the value of the inventory is high or low. Using historical Shanghai Metals Market data for dysprosium iron alloy (2,650,000 RMB/MT or ~$420/kg with conversion rates today) suggests they held it higher than what it was actually worth(recorded at $525/kg on Dacha's balance sheet as of 3/10/2011). Unsurprisingly there was a 20% premium baked into this (similar to the other metals). Perhaps this is due to the Chinese export tax. But obviously this can't be completely true since I was able to source material in the US.
DyFe, Dy oxide, and terbium oxide make up 90% of the inventory. I believe that the prices given by Dacha are somewhat optimistic. We'll need to estimate book value if this is simply asset arbitrage. As of 4/30/2012 they had metals and cash worth $88.6M ($0.94/share, 94.3M shares fully diluted). They have liabilities of $1.6M. So book value as stated is ~$87M as of the linked May 3rd release.
Let us exercise the thought that the metals inventory may be bought at lower prices. We'll also use updated inventory figure(5/11/2012, REE prices are declining). If we lop off 20% for the DyFe inventory (held at $17.1M) and terbium (held at $29.1M) we find a "conservative" value of $36.96M (46.2*80%). Add back $23.5M (the other metals), $7.3M for cash and subtract $1.6M for total liabilities and we arrive at a book value of $58.3M.
I discarded all other assets as they were small and consisted primarily of a loan payable from Forbes and Manhattan Co, which has with no revenues or assets. In their 2010 annual report there's ample evidence of poor prior investments. I believe their acquisitions of rare earth metals proves that even a blind chicken gets feed occasionally.
Conclusion
There are simply too many moving parts to consider this a simple investment. While the simpleton in me says this is an asset play there are big hurdles to overcome.
First, management lacks discipline and seems to be using this as a personal vehicle. The Forbes and Manhattan Loan is just one example. The rallying cry is that the Chairman is a significant owner.
Well, so what? He also has a directorship with more than 20 companies(Dacha 2010 Annual Report). If this fails he'll just move on to the next company, where I'm sure he has a plethora of options. Head's he wins, tails we lose.
Their history is nothing spectacular and I have little reason to believe in their leadership. This has been well documented by other bloggers.
Second, my research shows that I can get some metals at lower prices. Chinese restrictions or not, I had no problem getting terbium, their largest stockpile, at lower prices. This is not to say I am right and they are wrong. But I am of the belief that if it smells funny I should stay away. This smells funny to me.
Finally there are multiple mines on the horizon. While the demand for rare earths is likely to increase, so too will the supply. We are only a few years away from mines in Greenland(2016) and other parts of the world producing Heavy REE. I am no macro expert though and certainly don't try to be one, this is simply an afterthought.
No position, long or short.
