The Business Thesis
A large number of industrial metals trade within an inefficient pricing system where elements of a free market supply/demand are inhibited. Many of these metals play a strategic role in the production of many different products because they have particular properties that prohibit substitution and make them irreplaceable in the manufacturing process.
The small markets in which these metals trade are not well capitalized. There are few participants, limited liquidity and high transaction costs. As a result, these markets can become inefficient and mispriced. Dacha believes this is the current state of the rare earths market. Dacha’s ability to inventory strategic metals and establish trading relationships opens the door for capital to flow into these smaller markets.
Why Rare Earths and other Strategic Minor Metals?
Certain heavy rare earths and minor metals are critical in the manufacturing of many products we use today. These elements are a small value component yet are critical because in many cases they cannot be substituted due to their unique chemical properties. Supply side response is limited and a substantial multiple-fold increase in price would have little effect on the pricing. These factors in addition to potential political conflict, lack of near term future production and mispriced inefficient markets, create the investment thesis Dacha has to offer.
Stockpiling
We will initially focus on stockpiling certain heavy rare earths ie. Terbium (Tb), Dysprosium (Dy), Gadolinium (Gd), Europium (Eu) and Yttrium (Y). On our list of critical strategic metals are Indium (In), Gallium (Ga), Selenium (Se), Tellurium (Te), Rhenium (Re) and Hafnium (Hf). We will constantly refine our definition of critical as the markets change and look for catalysts that will create critical shortages and potential investor gains in these markets.
Investment Criteria
Management of the Company intends to use the following criteria, among others, as the principal bases upon which investments will be made.
- Value within the overall product. Preference is given to minerals which represent a relatively small percentage of the overall cost of production.
- Substitution Risk. The level of substitution risk at various price points for certain strategic minerals. Changes in technology require constant monitoring to reassess substitution risk.
- Supply Response. The ability for supply to increase at various price points. High cost mines that will come online at certain price levels must also be addressed. Time to production is also a factor considered.
- Investment Alternatives. Consideration is given to various investment alternatives and the ability for investors to access the market. More value is created when purchasing materials for which it is difficult for investors to gain access.
- Size of Market. Smaller markets will be more sensitive to changes in demand or new pools of capital and may demonstrate a skewed increase in prices.
- Price history and volatility. Consideration is given to the entry price as well as several other pricing factors including volatility, seasonality and the cyclical nature of the specific strategic minerals.
- End Product Sensitivity. Factors to consider are demand elasticity, cyclical demand, product replacements or substitutes.
- Costs. Consideration is given to the costs of storage, transportation and transaction fees.