Dacha offers REE investors a second home

With a near three-fold rise in its share price over the past three months, Dacha Strategic Metals (DSM-V) is catching the attention of investors looking for a new way to enter the red-hot market for rare earths.

Run by Stan Bharti’s Toronto-based resource group Forbes & Manhattan, Dacha says it is creating “the world’s first and only corporate stockpile” of rare earth elements (REEs) and other metals it considers strategic, providing an alternative way for investors to gain exposure to the sector without some of the risks inherent to mining companies.

Dacha acquired a Chinese trading company last October which allows it to buy and sell rare earth materials within China, as well as import rare earths into China. The company nevertheless remains subject to the country’s export tariffs and quotas for rare earths, however it can work within these boundaries to stockpile minerals and trade them.

Dacha (which means second home or cottage in Russian) stores most of its metals in a London Metals Exchange-sponsored warehouse in Busan, South Korea, with a smaller portion also held at a licensed warehouse in Shanghai.

The company says it is focusing on a select few REEs at first, ones which it believes are mispriced and offer attractive investment opportunities. Of the 15 lanthanide elements plus scandium and yttrium comprising the rare earths, Dacha is initially focusing on stockpiling certain heavy REEs such as Terbium, Dysprosium, Gadolinium, Lutetium and Yttrium, plus a few light REEs such as neodymium.

As of July 11, the company’s metal inventory contained 86,000 kg of various REEs worth $126.9 million on paper, calculated using the estimated spot price of each metal. This is up from an estimated inventory value of $96.1 million on June 24, $63.3 million on May 27, and $23.2 million on Dec. 31, 2010. Dacha reported in March and April that it has spent close to $24 million acquiring the metals.

As of Dec. 31, 2010, its last reported financial quarter, Dacha recorded net earnings of $1.5 million, with earnings of $5.2 million over the preceding nine-month period.

After a slow first year, Dacha’s stock began taking off in late May, climbing to a high of $1.19 on July 12 from 45¢. Taking into account about $3 million in equity investments and cash on hand of around $5.2 million, the company says its net asset value now stands at approximately $1.76 per share based on its 77 million shares outstanding, or $1.45 per share on a fully diluted basis of 101 million shares outstanding.

Had the company completed a planned $100-million share earlier this year, the value of Dacha’s holdings might have been higher still. The company had to cancel the financing in March after only receiving about $6 million in expressions of interest, according to a report by the Financial Post. Believing its shares to be undervalued, the company has since started a share buyback program, under which it has bought and cancelled 850,000 shares so far at an average price of 91¢ each.

Like many juniors which have recently joined the feverish hunt for REEs, Dacha sees an upward-trending market over the next few years as the use of green technology increases and as China makes further cuts to exports amid a dearth of supply throughout the rest of the world. And with only two light rare earth mines outside of China forecast to come online in the next two years, and no heavy rare earth mines expected until 2015, Dacha is looking to book profits for some time to come.

At presstime on July 13, Dacha’s shares were trading up 2¢ to $1.18 on volume of 852,000 shares.