A Rare Opportunity In Rare Earth Metals

By Aaron Levitt | July 01, 2010 AAA

While most investors are familiar and hold positions in precious metals like gold and silver or industrial base metals through vehicles such as iPath DJ-UBS Copper ETN (NYSE:JJC), odds are they have never heard of tantalum, neodymium or samarium. Nevertheless, these elements are important components of many electronic devices such as cell phones, hybrid vehicles, electric cars and wind turbines. In fact, rare earth metals and minerals are extremely important to modern living and technology. Despite this, many go unnoticed in investors' portfolios. Given the increasing demand and dwindling supplies of such elements, investors may want to take the rare earths for a spin.

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Why Rare Earths
Increasing populations are one of the hallmarks for investing in commodities and with the rare earth minerals the thesis is the same. The adoption of technology and improvements in infrastructure will require more and more of these minerals. Rare earths can be found in lasers, flat panel televisions and new e-readers. Terbium is one of the key ingredients in low energy CFL light bulbs. Interestingly enough, the green revolution is one of the major catalysts for these metals' recent growth. As we focus on energy efficiency, there has been a big push toward hybrid and electric vehicles, and every Toyota (NYSE:TM) Prius on the road uses one kilogram of neodymium and nearly 30 pounds of lanthanum in its lithium battery. The wind energy industry also thrives on rare earths. It takes roughly one ton of neodymium for every megawatt of generating capacity a wind turbine has.

The China Factor
Just as demand for these commodities is increasing exponentially, their supplies are facing deep constraints. China controls 95% of total worldwide production and known supply of rare earth metals, and almost 100% in the case of dysprosium and terbium. Aside from this control, the Chinese government has put major export quotas on many of these metals, reducing global supply. Most recently, the Chinese government cut the export quota on tungsten, used in light bulbs, to 14,300 metric tons, down from 14,600 tons. Continued pressure from China in the form of supply quotas could have these metals facing shortage fears and higher prices.

Potential Investment
Unlike adding an investment in silver to a portfolio through a fund like the Global X Silver Miners ETF (NYSE:SIL), adding rare metals is little more difficult. Although, Van Eck has recently filed for a "minor metals" exchange traded fund, until it launches investors looking to invest in the sector may need to think outside the box.

Several broad-based mega-miners have some exposure to rare earth and minor metals. Australia's BHP Billiton (NYSE:BHP) is one of the largest producers of manganese and cobalt and Anglo American (OTC:AAUKY) operates just one of three worldwide mines devoted to niobium, which is used in high-strength steel. However, these rare earth operations only make up a small fraction of their total mining pies. Most pure players, like Lynas Corp (OTCBB:LYSDY) are exploration companies, which have yet to begin to access their reserves. Investors do have a few choices in the sector.

Analysts predict that Molybdenum prices could rise nearly 31%, up from $19 a pound, by year end as supply constrictions continue. The metal, which is used to make extremely high strength steel, is a byproduct of copper production and four companies account for nearly 50% of its total production. Freeport-McMoRan (NYSE:FCX) has its hand in molybdenum, but for a pure take on the metal, Thompson Creek Metals Company (NYSE:TC) accounts for 4% of global production.

Aside from being a fertilizer and agriculture play, Sociedad Quimica Chile (NYSE:SQM) is the world's largest miner of lithium. As continued adoption of hybrid cars and rechargeable batteries for electronic devices increases, lithium demand is expected to grow to nearly 250,000 tons a year, up from about 100,000 tons. Analysts seem very bullish on this company's prospects, with many having set price targets in the low $70 range, almost double the current share price.

The Bottom Line
Gold, silver and other base metals get all the attention, but the biggest bull market may be in the rare earth minerals. The increases in demand and supply restrictions from China could have detrimental effects on their pricing. Pure players are hard to come by, but investors may want to direct some of their long-term money to the sector. (For more stock analysis, take a look at 3 Industrials Up YTD.)


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