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TheStreet Open House

Graphite: Next Play in China

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING ( TheStreet ) -- Rare earth elements have gone from being an obscure unknown topic to front page news in a very short period of time. There is now an increasing awareness of the fact that China, specifically its Inner Mongolia Autonomous Region, controls roughly 90-99% of the current global supply of certain rare earth elements. China has recently enacted several new policies to increase export taxes and decrease export supply of these rare earth elements, causing shares of many companies who have any connection to rare earths production to soar.

Molycorp (MCP) went public in July 2010 in an IPO priced at $14 (below its expected range of $15-$17) and then subsequently traded down to as low as $12.10. The latest announcements of export curtailments by China have driven to stock as high as $62.80 -- an increase of 420% in only six months.

Shares of Rare Earth Element Resources (REE) traded as low as $2.79 in August 2010 and subsequently rose as high as $17.92 in December -- a return of 530% in six months. It should be noted that both of these companies are in the exploration stage with respect to rare earths and neither one of them is yet profitable, making these investments highly speculative. Both of the shares are beginning to sag from their 52-week highs.

One stock, which is actually profitable, that has also soared on the back of the Chinese announcements is Inner Mongolia-based Shenzhou Mining (SHZ). During the entire month of July, this previously unknown stock traded a total of 146,000 shares at an average closing price of 77 cents. After several gaps up throughout the fourth quarter of 2010, the stock was soon trading in the $4 to $5 range and I viewed it as overpriced based on hype.

Then on Dec. 29, in what is normally quiet trading between Christmas and New Year's, the stock shot up as much as 75% in one day on more than 33 million shares volume. To put that in perspective, the stock traded 226 times more in one day than it did in all of July and at a price which was more than 1,000% higher. The stock currently trades in the $8 to $9 range.

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