A Strategic Play In Strategic Minerals

By Aaron Levitt | December 20, 2010 AAA

As investors have become more sophisticated in their approach to portfolio construction, many have moved passed just holding stocks and bonds. Commodities have become portfolio staples, and interest in the asset class has surged as inflation expectations remain high. While most investors now maintain positions in funds like the iPath DJ-UBS Commodity ETN (NYSE:DJP), which holds standard commodities including oil, gold and wheat. Many are missing out on a great long term opportunities in the strategic metals sector. (To learn about metals, see A Beginner's Guide To Precious Metals.)
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Why Rare Earths?
Neodymium, Uranium, Lithium, Thorium - don't exactly roll off the tongue, do they. However, these minerals are becoming an ever increasing important part of the global economy. These elements are critical components of many electronic devices such as cell phones, flat panel TVs, electric cars and hard drives. Terbium is one of the key ingredients in low-energy CFL light bulbs and it takes roughly one ton of neodymium for every megawatt of generating capacity a wind turbine has. As world's population continues to grow, so will the demand for these materials. The market value for strategic metals is expected to reach 200,000 tons by 2014, or roughly valued at $2 to $3 billion. Chinese requirements of rare earths are forecasted to exceed supply by 2012.

A recent report from the Department of Energy also highlights the supply/demand concerns. As rare earths find their way into more electric vehicles, solar panels and energy efficient lighting, a potential roadblock is brewing. Mostly due to its incredibly lax environmental policies, China currently produces more than 95% of global supply of rare earths. China has stated that it would not use its dominance of these materials as a bargaining tool or bully other nations. However, it has recently cut exports of the minerals on environmental grounds.

In spite of this, the global market of rare earths remains robust. While it controls most of the refined supply, China only holds 37% of the world's reserves of strategic minerals. The United States has 14 million metric tons of rare earths and India holds approximately 1.3 million metric tons. Both Chile and Bolivia are estimated to hold nearly 77% of the world's supply of lithium.

A Strategic Portfolio Position
Demand for strategic minerals like lithium and europium will continue to increase as they critical components of a variety of new technologies. Energy efficiency measures, consumer electronics, new infrastructure and green renewable energy will all play a major role in this demand escalation. Some of the major mining firms have exposure to these "other" minerals. Anglo American (OTCBB: AAUKY) operates just one of three worldwide mines devoted to niobium, and Freeport-McMoRan Copper & Gold (NYSE:FCX) has its hands in molybdenum production. This rare earth production only accounts for a small percentage of their overall mining pie.

For a pure U.S. rare earth play, Molycorp (NYSE:MCP) is the only rare earth oxide producer in the Western Hemisphere. The company recently secured the final permits to break ground on its Californian facility, with full production by in 2012. Shares of the company have more than doubled from their $14 initial public offering price in July as interest in strategic metals has risen. For a more diverse way to play the sector, the recently launched Market Vectors Rare Earth/Strategic Metals ETF (Nasdaq:REMX) follows 26 different companies engaged in the mining of the 49 strategic elements. This includes investment in Molycorp, as well as Titanium Metals Corporation (NYSE:TIE) and various producers of tungsten and manganese.

As a way to play a cleantech boom investors may also want to take a look at the Global X Lithium ETF (NYSE:LIT). The fund tracks a variety of battery makers as well as Chemical & Mining Co. of Chile Inc. (NYSE:SQM), the largest lithium producer. Also from Global X is the Global X Uranium ETF (NYSE:URA) which can used to track nuclear powers growth and the need for more uranium.

The Bottom Line
Commodities such as gold and oil get all the attention, but the biggest long term bull market may be in the strategic minerals. The increases in demand and supply restrictions from China could have detrimental effects on their pricing. Investors with long enough timelines may want to allocate some capital to the sector either through the REMX or LIT.

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