The Fire Bell Is Ringing!
The People’s Republic of China just fired a direct shot at the U.S. military-industrial complex — metaphorically speaking, of course.
But China’s actions will also jumpstart an entirely new industrial sector in the U.S. and Canada.
I’ve been expecting this moment for many years.
And now that it’s finally here, I want to tell you how to make the absolute most of it.
There’s no time to lose.
The fire bell is ringing!
So let’s dig in…
Mainland China and the United States have many areas of disagreement.
But few issues generate more animosity between the two nations than the status of Taiwan (AKA the Republic of China).
The People’s Republic has long considered Taiwan as part of the entire Chinese nation, despite Taiwan’s 70-plus years of independence from control by Beijing.
So the Chinese Communist party (CCP) opposes any action, by any party, that even hints that Taiwan might be an independent nation-state or anything other than a breakaway province.
Obviously, advanced weapons are a key element of state sovereignty.
Still, over many years, the U.S. government has sold weapons and military support services to Taiwan. And with each sale, all China has done is complain loudly… until now.
Back in May, the U.S. government announced the sale of 18 submarine torpedoes to Taiwan.1 They are variants of the U.S. Navy’s Mk-48 heavyweight torpedo system, manufactured by Lockheed Martin.
Then on July 10, the U.S. government announced that Lockheed would participate in a $620 million upgrade to Taiwan’s air defenses based on the U.S. “Patriot” system.2
Apparently, this was the last straw.
During a press conference this week, Chinese Foreign Ministry spokesman Zhao Lijian said, “China firmly opposes U.S. arms sales to Taiwan. We will impose sanctions on the main contractor of this arms sale, Lockheed Martin.”3
It’s hard to say if sanctions were long-planned or a hasty act set into motion after the torpedo and Patriot deals.
Right now, details of these “sanctions” remain sketchy. China has not amplified the terms. The story is still developing
But the well-informed Chinese newspaper Global Times has speculated that the new sanctions “will likely feature the cut-off of material supply including rare earths, which are crucial to advanced weapons production, and business restrictions on Lockheed Martin’s suppliers that have business in the Chinese mainland.”4
The term “business restrictions” is still pretty vague… but I want you to focus on the bit about rare earths (RE).
This is actually a HUGE deal.
Rare earths are a class of elements whose unique magnetic and electronic properties make them essential for many high-tech devices, including weapons and communications systems.
Without REs, Lockheed’s aircraft won’t fly, its missiles won’t shoot, its radar systems won’t function.
For example, here’s a breakout diagram of the guidance and control section of Lockheed’s Mk-48 torpedo.5
Cutaway diagram of guidance & control section, Navy/Lockheed Mk-48 torpedo.
Look at all those subsystems. Each one is ultra-high technology, and much of the details are secret and top-secret. These devices all deal with generating sonar signals, transmission, reception, weapon guidance and much more. And each one is a precision-manufactured and assembled item, using hundreds of other components.
Now, think in terms of just the electronic circuits and magnets in these components above. They rely on RE to make it all work.
Lockheed may not buy the RE directly from the mouth of a mine in China. But somewhere a supplier does buy the RE, upstream along the industrial chain.
And then, at some industrial level, those RE go into an electronic component, or a magnet, phosphor or other item.
I assure you… Absent the RE within those components, that “torpedo” may as well be an anchor. It’s useless.
So if Lockheed wants to keep its doors open, it and its suppliers will have to get REs somewhere else.
About that, though…
It turns out that well over 80% of the world’s RE supply comes from China.
So Lockheed isn’t just facing a business problem for its corporate managers. This isn’t an issue to solve through creative procurement by supply chain managers…
Meanwhile, who’s to say it will end with Lockheed?
All U.S. defense companies use RE in their systems. They’re all at risk.
Think of Boeing airplanes grounded, Northrop Grumman radars that are blind, Raytheon missiles unable to launch, General Dynamics submarines that can’t sail.
It could become that bad… all because China is now using RE as an economic and industrial weapon against the U.S.
What China has just done is a major problem not just for Lockheed, but for top levels in the Pentagon, for service chiefs and “system commands,” for the White house and National Security Council, for Congress.
So what happens now?
Can Lockheed, as well as the U.S. government and defense establishment, find a substitute source for Chinese RE?
Here’s the good news… Yes! Absolutely!
And here’s your opportunity, too.
I first encountered rare earths when I studied geology at Harvard 45 years ago. (Yikes!)
In the 1970s, several mineralogy professors and geochemists there were working with moon rocks, some of which contain elevated levels of RE. Fascinating science…
I dealt again with RE — and complex weapon systems —– when I served in the Navy. In fact, I once visited the site where Mk-48 torpedoes were made. Interesting place…
More recently, I began covering RE in 2009, in another newsletter with Agora Financial. I’ve followed developments ever since.
I’ve visited RE sites from Alaska to South Africa to Kyrgyzstan. I’ve spoken with eminent chemists and metallurgists. I’ve even visited U.S. national laboratories where there’s ongoing research into RE. Oak Ridge, Livermore, Sandia and Ames come to mind.
One of the reasons I’ve stayed so interested in RE is that I knew this day would come. At some point, China was bound to take advantage of its near-monopoly, denying REs to nations it saw as competitors.
I also knew that when it happened, Wall Street would suddenly become interested in companies that are working on RE deposits outside of China.
Whiskey is not an “investment” newsletter, but here are some points and companies to consider.
First, RE are a lot like other minerals, in that they must be discovered, extracted and processed.
The trick is to get as much as you can out of the ground, then separate out all the useful material without spending too much money. Also known as… “grade is king.”
The issue with RE, however, is that the Chinese have dominated the space for over 30 years. China has poured immense human and material resources into building out its RE industry. This makes for tough competition, in terms of cost curves, and competitors gaining a toehold and making money.
It’s no surprise, then, that big mining companies like Rio Tinto or BHP don’t play on the RE field. It’s too tough to beat the Chinese at this game.
Right now, the Western RE space (i.e., non-Chinese) is small, considering how important the product is.
The two largest Western companies that work in the RE sector are an Australian play called Lynas (market cap about $900 million) and a Canadian play called Neo Performance Materials (market cap about $220 million).
They both trade over the counter (OTC) in the U.S., and on the Australian (ASX) and Toronto (TSX) exchanges, respectively.
Then you get into the “junior” space — small-cap companies listed on the Toronto Venture Exchange (TSX.V) or OTC in the U.S.
It’s a higher risk arena for investors, to be sure. You have to know what you’re doing.
Still, here are some promising names. I know them, based on my years of following the space. Just keep in mind that this is not an investment letter. We don’t track a portfolio here at the Whiskey bar.
For all the risk of small-cap stocks, however, these guys offer strong upside in a world where Lockheed just got shut off by China.
But again don’t “chase” the share price if you dip your toe into this lake. Always use “limit” orders, and set your bid low.
Medallion Resources (market cap $5 million): Small, but a strong and innovative business model based on using U.S. and globally sourced mineral sands, containing high levels of RE, as feedstock to produce RE “magnet” materials. Medallion’s approach works in the short term because it eliminates the cost and time of building a mine. In other words, there’s no mining risk.
Defense Metals (market cap $6 million): Small, but controls a superb, high-grade RE-bearing ore deposit in British Columbia that’s rich in “magnet” materials. The company is drilling on the site, and results have been promising to date.
Ucore Rare Metals (market cap $37 million): Controls an outstanding, high-grade RE-bearing ore deposit in Alaska. It also controls patents on advanced, and proven chemical separation and metallurgical technology to extract RE.
Sixth Wave Innovations (market cap $25 million): Controls patents on advanced, and proven chemical separation and metallurgical technology to extract RE, specifically “molecular imprinted polymer systems” (MIPS).
There are other companies in the RE space as well, in varying stages of progress. But I don’t want to overwhelm you.
Again… I’m not making “investment recommendations” here. I’m just listing companies with which I’m familiar. Companies where I know the management teams, have looked over the assets and examined the business models.
I’m discussing these ideas now, because it all gets back to China sanctioning Lockheed.
Like I said at the outset, it’s big news…
The game is on. The fire bell is ringing.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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