When it comes to commodity investing, most of us are familiar with the different types of commodities that we can invest in. Popular choices are energy commodities, such as oil and natural gas, or the agricultural or "soft" commodities like corn, wheat and cotton. Metals are also popular investments, and many people use gold as a type of currency in times of economic uncertainty. Silver, copper and platinum have also gained popularity as investment options for those searching for ways to diversify their holdings. Another group of less recognizable metals has also joined the investment conversation – the rare earth metals (REM). This article will highlight the basics of what these "rare" commodities are, their uses and what role they may play in the future.
TUTORIAL: Fundamental Analysis
Rare Earth Metals and Their Uses
Rare earth metals, also commonly known as rare earth elements (REE), are a group of periodic elements made up of the 15 lanthanides along with yttrium and scandium. Although not lanthanides, yttrium and scandium are still considered rare earths because they are often found in the same ore deposits as the lanthanides and exhibit similar properties. "Rare" is a bit of a misnomer when describing these elements, as the rare earths are actually plentiful in the Earth's crust. In fact, cerium, one of the light rare earth elements (LREE), is found in at 68 parts per million (ppm), which is similar to copper. Below is a breakdown of each rare earth element and its common uses:
|Scandium||Aerospace components, mercury-vapor lamps|
|Yttrium||Lasers, microwave filters, high-temperature superconductors|
|Light Rare Earth Elements (LREE)|
|Lanthanum||Camera lenses, catalytic cracking catalyst for refining oil, high refractive index glass, battery electrodes|
|Cerium||Glass and ceramics, polishing powder, chemical oxidizing agent|
|Praseodymium||Rare earth magnets, lasers, carbon arc lighting|
|Neodymium||Rare earth magnets, lasers|
|Samarium||Rare earth magnets, lasers, masers|
|Heavy Rare Earth Elements (HREE)|
|Europium||Lasers, mercury vapor lamps|
|Gadolinium||Rare earth magnets, lasers, x-ray tubes, MRI, computer memory|
|Terbium||Lasers, fluorescent lamps|
|Dysprosium||Rare earth magnets, lasers|
|Erbium||Lasers, vanadium steel|
|Lutetium||PET scanners, high refractive glass|
As you can see, the rare earths have many uses, and keep in mind that these uses find their way into everyday technology, such as flat screen TVs, smartphones, tablet PCs and hybrid cars. Add to this their use in wind turbines and military equipment and it's plain to see that the rare earths are critical to the global economy. While we read and hear many reports about the wide-ranging uses of oil in our everyday lives, the rare earths are becoming nearly as important. (To find out more about the oil and gas industry's prominent position in the economy, check out A Guide To Investing In Oil Markets.)
Sourcing and Mining of Rare Earth Metals
As mentioned, most REMs are not rare in the Earth`s crust. The problem is finding them and being able to extract and refine them at an economical price point. Rare earth deposits exist all over the world, and most deposits can be categorized as being either a light rare earth element (LREE) deposit or a heavy rare earth element (HREE) deposit, and most deposits will be found with uranium. In fact, in many uranium mines, rare metals are simply left in tailing, as refining the rare earths is not economically viable for the majority of miners. In general, HREE deposits are considered more valuable than LREE deposits, since the heavy rare earths are considered rarer. Additionally, the heavy rare deposits will also typically contain a large amount of LREEs, making such discoveries much more lucrative.
There are numerous mines and projects around the world, but notable deposits can be found in parts of Canada, Australia, Russia and China among other locations. While rare earth deposits may be plentiful, the costs associated with mining and refining the minerals is a major barrier to entry. The typical rare earth project can cost anywhere from $500 million to well over $1 billion. This is the reason why investors should be careful when a miner claims to be involved in REM production. Since the cost and time to make such projects viable and economical are quite substantial (often over $500 million and many years before production becomes economically viable), many of these junior rare earth miners may simply have the mining rights to a rare earth deposit that they might have no real intention of producing. (For more insight, see A Beginner's Guide To Precious Metalsand A Beginner's Guide To Mining Stocks.)
China's Rare Earth Stronghold
The incredible cost of such rare earth mining projects is the primary reason why China has historically been world's largest producer of rare earth metals. With less than 40% of the world's proven rare earth reserves, it is China's massive price undercutting (a luxury made possible by their low cost of labor) that allows them to control the world's rare earth supplies. That makes many outside of China very nervous. For example, in late 2010, the Chinese government announced plans to limit rare earth exports to ensure that local producers who use rare earth metals in the inputs will have the ability to access the metals. With most other projects and mines abandoned around the world in the early 1990s due to China's aggressive pricing, China became the only viable player in the rare earth industry. However, increasing global demand for rare earths has prompted many miners to reopen previously abandoned projects and seek out new deposits across the globe. However, as previously noted, these new projects will not come cheaply or quickly. (For related information on China, see Top 6 Factors That Drive Investment In China.)
Rare Earth Investments
Investors looking for ways to play the industry do not have a multitude of options. The rare earths are not traded like gold, silver or copper, and few ETFs offer prospective investors exposure to the metals. Therefore, the easiest and perhaps most direct way to gain exposure to the rare earth industry is through the miners themselves. While there are a few large-caps out there, there are many more juniors that may or may not have the means or partnerships to actually produce their deposits. In addition, such small firms often trade at much larger betas and less liquidity, so investors must do their homework when investing in rare earth miners. (Junior exploration companies hold explosive growth potential, but how do you choose the right company? To learn more, check out Strike Gold With Junior Mining.)
The Bottom Line
The rare earths have burst back onto the economic landscape in recent years. Demand is expected to continue to grow in the coming years, one can expect rare earths to remain in the headlines. That said, with more projects starting up in an effort to hedge against the possibility of China limiting exports, the rare earth industry should see immense growth. However, keep in mind that the costs associated with new projects are incredibly large, and cash flow will be of the utmost importance for these miners if they want to ensure that their rare earth projects see the light of day.
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