Dacha offers REE investors a second home

With a near-threefold rise in its share price over the past three months, Dacha Strategic Metals (DSM-V) appears to have finally caught 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 shopped around for REEs in early 2010, and acquired a Chinese trading company last October. It can now buy and sell rare earth materials within China, and import rare earths into China as well. The company remains subject to the country’s export tariffs and quotas for rare earths, but 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 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 the most underpriced, and offer attractive investment opportunities. Of the 15 lanthanide elements plus scandium and yttrium that comprise 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 its last reported financial quarter on Dec. 31, 2010, 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 took off in late May, climbing to a high of $1.19 on July 12 from 45¢. Taking into account $3 million in equity investments and cash-on-hand of $5.2 million, the company says its net asset value stands at about $1.76 per share based on 77 million shares outstanding – or $1.45 per share on a fully diluted basis, with 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 receiving $6 million in expressions of interest, according to a report by the Financial Post. Believing its shares undervalued, the company has started a share buyback program, under which it has bought and cancelled 850,000 shares at an average price of 91¢ each.

Like many juniors who have joined the feverish hunt for REEs, Dacha sees an upward-trending market over the next few years as green technology gains popularity, and as China makes further cuts to exports amid a dearth of supply worldwide.