Investing in Rare Earth Metals

Background

Investing in precious metals is not a new idea. Even casual investors have historically diversified their portfolios by investing in gold and silver, both of which yield steady returns at very low risk, counteracting the volatility of some other investments. Recently, though, some “new” precious metals have arrived on the investment scene, bringing more options to investors than the usual silver, gold, and platinum. The rare earth metals, as they are known, are a precious commodity and a sound investment. In fact, that will be even truer in the near future than it is now, due to a number of factors currently at play in the market. We will discuss why that is – and how long you can expect it to last — in a moment, but first, a little background is necessary.

The rare earth metals are, chemically speaking, a group of seventeen elements, including neodymium, dysprosium, terbium, and yttrium, among others. Collectively, they have been occasionally dubbed “21st Century Gold,” due to their value in manufacturing and industry. As with all elements that are grouped together on the periodic table, these metals share certain characteristics which make them similar enough to be categorized together. For our purposes, keep in mind simply that they are similar in their availability, utility and, ultimately, value.

Despite the name, a lot of rare earth metals are not actually rare in terms of their volume on Earth, as they are a rather abundant component of the crust. However, they are rarely found with any density to speak of, which makes them expensive and difficult to mine and produce for commercial usage. Techniques for mining rare earth metals are much more specialized than those for, say, copper or silver, and therefore much more costly. Mining rare earth metals involves first pumping acid down holes that have been bored in the Earth’s crust. This dissolves the rare earth minerals, which can then be treated further with other chemicals to process them for use in production. The necessary chemicals are expensive, and the work hazardous, so the high cost of supplies and ensuring worker safety drives up the cost of the metals. These metals tend to be worth the expense, however, as they have a great deal of utility in modern applications.

 

Consumer Applications and Utility

The primary value in rare earth metals lies in their use in magnets. Rare earth metals are much more efficient than magnets made from iron. A small piece of neodymium, for example, can generate the same magnetic field as a larger and heavier piece of iron, hence the utility for consumer electronics, a field in which the trend is consistently to get smaller and lighter.

To give a sense of perspective on the issue of size, look at some current mobile phones on the market. Although some high-end mobile phones have gotten larger as the market has demanded larger screens, nearly all devices on the market today will fit in your pocket. They are light and thin, a far cry from the mobile telecommunications devices of even a decade ago. These modern phones take advantage of rare earth magnets in their batteries. By contrast, using iron magnets would necessitate a much larger phone, about the size of a briefcase, according to one expert. The same principle applies to other small devices that rely on magnets for either audio production or power, including microphones, PDAs, tablets and other mobile devices.

The need for both magnetism and portability has led to rare earth metals’ use in a variety of other consumer products, such as headphones and solid state hard drives, like those found in MP3 players and notebook computers. Even products where portability is not an issue have been advanced by the inclusion of rare earth metals. Televisions have gotten thinner and flatter, allowing for a pleasingly large screen to be installed in a relatively small space. The advancements in display technology that have given us these flat screens are thanks in large part to the use of the rare earth elements yttrium, cerium, terbium and europium in the production process. Without these minerals, the plasma and LCD screens that have made our televisions and computer monitors thinner, lighter, and more vibrant would not be possible.

Rare earth metals are also used in specialized glasses for optics, such a camera lenses, video cameras, copy machines, and scanners. In short, we make use of rare earth metals every day in some of our routine activities, without even realizing it. The utility and value does not stop there, however, as some of the most critical functions of rare earth metals come into play in other fields, on a much larger scale and in more vital roles.

 

Larger Applications

One of the most valuable properties of rare earth metals is their ability to be used in storing and generating electricity, as with the mobile phone example above. This is due both to their magnetism and their ability to retain stored energy, beneficial characteristics which make them particularly useful wherever the production or retention of energy is a necessity.

One such area is in hybrid vehicles, in which the electric portion of the engine relies on a powerful battery to drive it. This battery must be kept charged, which is often accomplished by capturing the energy normally wasted during coasting and braking. The regenerative process relies heavily on the use of magnets made from an alloy of neodymium, iron and boron, which also play a role in other important systems within the vehicle. Further, the battery pack that powers the electric engine relies on lanthanum to store the generated energy. All cars make use of rare earth metals, but while a traditional, gas-powered car contains about ten pounds of them, a hybrid vehicle requires more like twenty to twenty-five pounds.

The trend toward green energy sources extends beyond hybrid vehicles to consumer electricity, where research and development into alternative energy sources is constantly ongoing. One way of generating energy from an alternative source is using turbines (i.e., windmills) to convert wind energy into electricity, a process which necessitates the use of magnets. A typical turbine generating 2.5 megawatts of electricity contains about two tons of magnets, over a third of which are comprised of rare earth metals. A similar principle can be applied to hydroelectric turbines, which harness the energy of moving water to generate usable electric power and similarly require rare earth minerals to function efficiently.

In the same genre of conservation, at least one company has found a method of using rare earth mineral to filter and treat water. A filter comprised of rare earth minerals is installed in a portable, personal-sized water vessel. The filter removes not only pathogens, but also toxins and heavy metals, resulting in water that is both potable and portable, from any available source. More on this later.

The medical community relies on rare earth metals for imaging, such as in x-ray scanners, magnetic resonance imaging (MRI) devices, and positron emission tomography (PET) scans. Rare earth minerals also lie at the heart of lasers and jet engines, which is where we can start to see the overlap with perhaps their most integral use—and the one which governments are most likely to invest heavily in.

 

Defense Applications

The uses of rare earth minerals in the military field are vast. Rare earth minerals are so ubiquitous in modern military technology that, according to one presentation from the United States Department of the Interior, they “are used in defense every second…24/7.”

ilitary applications range of rare earth minerals cover everything from communications and sonar equipment to missile guidance systems. Many of the uses discussed above overlap with military needs, including instrument display panels, microphones and speakers for communication systems, jet engines, and high tech optical equipment. Furthermore, the military relies on rare earth minerals for all of a multitude of applications for lasers, including detection systems, rangefinders, and missile guidance. In short, rare earth metals are vital to proper functioning of a modern military, and therefore it behooves government to ensure consistent access to a steady supply.

What is clear from this vast array of uses is that rare earth minerals are in high demand from a number of fields, but what of the supply? That is a matter of some concern for many parts of the world, which further drives up the cost of rare earth minerals, which we will discuss next.

 

Supply

As mentioned above, rare earth metals exist in abundance in the Earth’s crust. What are not abundant worldwide, however, are mines that produce rare earth minerals. The vast majority of such mines are densely grouped in China, which controls between 90 and 96 percent of the world’s supply of rare earth minerals. As long as China has remained an active trader of these minerals, the supply to other nations has been sufficient. However, in July 2010, China reduced its export quota by as much as 72 percent as it builds a strategic reserve of rare earth minerals. The result has been relative scarcity worldwide as the market becomes squeezed by the lack of exports coming from China. The increased demand for rare earth minerals has driven prices up and increased spending, especially by governments who need to ensure the supply of these minerals is sufficient to maintain their military technology. There is a possibility that China will reduce its export quotas even further, causing the supply to squeezed even more drastically.

Some companies have begun to try to work around China’s export restrictions by building mines and facilities for the production of rare earth minerals in countries like Australia and Kazakhstan. Eventually in 2015, it is projected that there will be enough production facilities around the worldwide to overcome China’s trade restrictions and produce an abundant supply of rare earth minerals. In the meantime, however, rare earth minerals – in particular neodymium, dysprosium, europium and terbium – will be in short supply. This is bad news for governments and manufacturers who require the minerals for production of vital equipment, but good news for investors who can take advantage of this temporary shortfall.

 

Spending on Rare Earth Minerals

As reserves of rare earth metals dwindle, it is predicted that governments will begin panic spending, paying as much as is necessary to any supplier who can provide rare earth minerals. To put the effects of China’s trade restrictions in perspective, first consider that the worldwide demand for rare earth minerals is between 50,000 and 55,000 tons per year, according to the CEO of one predominant company in the industry. In 2009, China exported approximately 50,000 tons. In 2010, the year it began cutting trade, that number fell to 30,000 tons. In 2011, it is projected to decline again to around 24,000 tons.

The United States government, as well as those in Europe and other industrialized nations around the world recognize the extreme importance of rare earth minerals to national defense and modern life. It is therefore expected that they will resort to desperate spending in order to ensure these mineral remain in supply during the scarcity period from now until 2015. Companies that are researching, developing, and building facilities in alternate locations outside of China stand to benefit from this government spending, as do investors in these companies.

It should be emphasized that this sector is not in a bubble. Government spending is expected to begin any time in the near future as supplies begin to run low and are not replenished by the usual means—that is, trading with China. Companies that are researching, developing, and building facilities in alternate locations outside of China stand to benefit from this government spending, as do investors in these companies. So what and who are these companies, and what are they doing to profit from the rare earth sector? That is exactly what will be discussed next.

 

Company Profiles

Several companies stand to benefit from the increased attention to rare earth mineral production in the light of China slashing exports. Among these companies are Molycorp Minerals, Rare Element Resources, and Tasman Metals.

Molycorp Minerals (MCP) is a major producer of rare earth minerals globally. The rare earth metals generated by Molycorp are used in nearly all of the applications discussed above, including water treatment. Molycorp has been on the forefront of using rare earth minerals in the treatment of water and developed the portable filtration system discussed earlier. Molycorp’s home base sits atop one of the richest sources of rare earth minerals in the United States. The company has expressed its mission to renew domestic supplies of rare earth minerals in the U.S., and is subsidized by the government to do so. Furthermore, Molycorp recently acquired a majority share of the European supplier AS Silmet, a move that is expected to expand the company’s presence in Europe and Russia. In particular, this acquisition is expected to increase focus on didymium, which is used in the electronics applications mentioned above, as well as in wind turbines.

Of particular interest is Molycorp’s focus on water treatment. The company has invested heavily in the research and development of its XSORBX® filtration system, used in the portable vessel discussed above. This project was developed in conjunction with the United States Army in order to provide soldiers with clean water wherever they were. The project has some fairly obvious additional uses, such as providing filtered water to residents in Third World areas or regions victimized by natural disasters, as well the recreational camping market. On a larger scale, the company’s XSORBX® technology can be employed to filter out arsenic from industrial process streams, as in the mining and smelting communities. The process converts trapped arsenic into a compound that is readily disposed of, making for a more environmentally-friendly process than simply moving arsenic around in its usual state.

Molycorp has developed a new production method which has been demonstrated in a pilot plant to be the lowest cost method of producing rare earth metals to date. In addition, the company recently reported an increase in plant capacity of 33%. In short, Molycorp has lowered costs while increasing development of products and processes that are in high demand, growing production capacity, and expanding its presence in overseas markets, all at a time of increased spending in the rare earth sector. This has put the company in prime position to maximize profits, especially during the expected panic spending period of the next few years.

Like Molycorp, Rare Element Resources (RES) owns one of the largest and richest sources of rare earth elements in North America. The company has been testing its property in Wyoming to fully determine the area’s potential as a supply of rare earth minerals. Based on analysis of several holes drilled into the property, some of them drilled by Molycorp, Rare Element Resources is estimated to have a rare earth resource somewhere in the neighborhood of 4 million tons, “averaging 3.8% total rare earth oxides,” according to the company’s corporate website. This area has been found to be rich primarily in cerium, lanthanum, neodymium and praseodymium. The company recently released its drilling results from 2010, which show not only an expectedly large supply of those four elements, but also a significant amount of europium, dysprosium, and terbium. As the United States looks to build its domestic supply of rare earth minerals, and other countries look to bolster their own reserves to decrease reliance on China, Rare Element Resources’ ownership interest in such a potentially large source of these elements stands to benefit its investors a great deal.

Tasman Metals (TSM) is focused on exploration and development of sources and uses for rare earth elements. Based in Canada, Tasman looks to produce rare earth minerals from areas that have an existing mining infrastructure, as well as political stability, thereby reducing the risk of volatility which could compromise expeditions and damage profits. This is exemplified by its choice of Sweden, Finland and Norway for its operations. In April 2011, Tasman expanded its efforts in the area by launching a new drilling project in Finland. These key locations, continued expansion, and emphasis on European markets put Tasman in position to provide rare earth metals to the nations of Europe, thus maximizing potential to benefit from the governments of the European Union looking to spend heavily in order to build reserves.

 

Summary

A number of co-occurring factors are currently conspiring to make this sector one of significant interest and potential gain for investors. Among these factors are:

  • The utility of rare earth metals in applications that are of particular commercial interest and vital government importance.
  • A growing emphasis and appreciation by governments and consumers for conservation and “green” technologies, in which rare earth elements play a critical role.
  • A demand-driven trend in the electronics industry for smaller and lighter devices, an effort which is assisted by the use of lighter rare-earth magnets.
  • Scarcity of rare earth minerals due to a strategic cut in exporting by China, which controls over 90% of the world’s supply.
  • Increased spending in an effort to bolster supplies globally from sources other than China.
  • Potential for panic spending by governments as supplies continue to dwindle.

All these contributing factors occurring at once have created an investment opportunity within this sector that is ripe for those looking to generate large returns in a relatively short period. The window of opportunity is narrow, however, as projects that are currently in exploratory phases are expected to be fully online by 2015, effectively making up the shortfall in supply and lowering prices from intervening high levels.

Disclosure: Advice is based on observed trends in the market, as well as personal opinion. I am not a licensed financial advisor, but seek only to share advice based on what I am choosing to do with my own money. All investments carry an element of risk and the potential for loss. Not all opportunities are appropriate for all investment strategies. Consultation with a professional is recommended before undertaking any new investment. Individual means, needs and tolerance for risk should be considered before investing. I am not responsible for any losses, liabilities, or other negative outcomes arising either directly or indirectly from use of the opinions offered herein.


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