The Rise And Fall Of Rare Earth Metals

By Tim Parker | May 10, 2012 AAA
The Rise And Fall Of Rare Earth Metals

If there was ever a poster child for not investing in fads, rare earth metals might be perfect for the role. If you follow the investment markets you may remember that at the beginning of 2011, most people had never heard of rare earth metals. There's no doubt that it's a catchy name that invites intrigue, but who knew that mining for these metals took place?

Without rare earth metals (some people call them rare earth elements), the electronics we use every day would be nothing more than good looking, but non-functioning, devices. Rare earth metals are used in cell phones, batteries, sunglasses, computers, missiles, magnets, wind turbines and lighting, but these 17 elements aren't rare at all. Some of these metals are among the world's most abundant elements; they're only referred to as "rare" because they're difficult to extract.

SEE: Understanding Rare Earth Metals

Separating these elements from other materials takes a lot of acid and, because Western countries like the United States, Canada and many European nations have pretty strict environmental regulations, it's not only impractical to mine them, but can also be politically unpopular.

Because of that, 97% of all mining and processing comes from China and, until just a few years ago, the world purchased these rare earths from China without incident. China began cutting production exports by 40% in 2010, which inflated prices significantly. China denied claims by Western nations that it was driving up prices, citing environmental and future supply monitoring. 2011 saw even deeper cuts in exporting, which made other countries look for alternative sources.

Share Prices
Molycorp's IPO in 2010, and a sharp run up in share price, sparked investor interest in rare earth metals in the United States. Molycorp, backed by $1 billion in private equity, used money raised from its IPO to restart a California rare earth mine that was once one of the largest in the world. The share price rocketed to as high as $77 per share from the IPO price of $14, when domestic investors saw this as the answer to increasing prices for Chinese rare earth supplies.

Financial media fed the hype by filling the Internet with articles about rare earth metals, running broadcasts from the mine and headlining the stock price as it continued to rise. Since then, Molycorp has received negative reaction by some, alleging that it turned into a pump and dump stock.

Other Sources
The United States wasn't the only country finding solutions for the rare earth crisis. Countries like Australia, Afghanistan and Mongolia became centers for a modern day gold rush for rare earths, while electronics companies invested heavily in finding alternative materials for their products that don't involve rare earth metals. Rumors of more supply coming to market, along with reports of significant progress in finding other materials, quieted investor demand, causing the stock to retreat. Today, Molycorp sits just above $32, a 58% drop from its peak price.

Chinese Conflict
Although more supply is hitting the market, it has done very little to lessen the world's dependence on Chinese sourced rare earths. In March of 2012, The United States, along with Europe and Japan, filed a formal complaint with the World Trade Organization alleging that China is trying to keep prices low for its domestic manufacturers and lure manufacturers to China.

Western buyers of rare earth metals acknowledge, as part of their complaint, that China is still the leading supplier and companies outside of its borders don't have equal access to the rare earth metals they need. China continues to counter by saying that it is concerned that the supply of these materials may run out if production isn't closely monitored, making the standoff between China and its Western customers continue.

SEE: Top 6 Factors That Drive Investment In China

The Bottom Line
From the investor's perspective, the rare earth metals trend has dwindled since 2010, and longer-term investors aren't convinced that a long-term investment in companies like Molycorp is worth the risk. Outside of the stock market, though, the rare earth standoff continues.

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