Rare Earth Metals

Should You Invest in Rare Earth Metals?

Rare Earths are a group of specialty metals that are highly desirable for technology such as hybrid batteries and electronics.

With China [the world's largest reserves of rare earth minerals mostly closing their doors to further exports it is of viral importance for the U.S.A. to explore new sources of the 17 vital rare earth minerals necessary to continue with the manufacture of steel, electronics and many more items necessary to make our products function.

One company, Rare Element Resources (REE:AMEX), has climbed 360% in the past ten months!

REE has climbed from $2.00 to nearly $15.00 as an ETF


This is a very volatile field of stocks marked by big runs up and then dramatic pullbacks.

If you don't like volatility this is not a good field of investing for you; timing entry points are particularly tricky.

Planet Earth has reached the tipping point in which global population growth and a growing dependence on technology will put all natural resources stocks under price pressure.

Heavy Rare Earths are vital for a wide range of technology products as well as major defense systems -- satellite communications, missile technology, hybrid cars and critical magnets.

Despite the huge run-up in the prices of rare earth stocks of late the long term prospects look very positive.

REE is enjoying a lot of upside because it is one of the few traded on a major U.S. exchange.

Avalon Rare Metals has recently been listed on the AMEX. This should give it the type of extra liquidity that helped lift REE. Many investors avoid buying stocks on foreign exchanges. This is important because all four companies are based in Canada.

Quest Rare Minerals recently received recognition as "Prospector of the Year" for the quality of its discovery at Strange Lake.

Great Western Minerals last month said it is in negotiations to acquire another rare earth company. Despite a recent pullback the stock remains above both its 50-day and 200-day moving averages.

Lianas (LYSCF.PK) aims to become a significant competitor in the supply of non-Chinese rare earth metals. In 2011, production is projected to start in Mount Weld, which is the richest known deposit of rare earth metals in the world. That is net income has been negative for the past three years. Forward P/E is 24.6, and the market capitalization currently stands at over $3 billion. In the last 6 months, the share price surged by 110%. Lynas also trades on the Australian Stock Exchange (LYC.AX).

The demand for higher gas mileage and environmentally friendly cars is on the rise and sure not to slow down. To meet these growing demands, the auto industry is now using new clean power technology: "Green Power Metals".

With China now apparently looking to cut its export quota of rare earths by 35% from the prior period and rare earth metal prices at currently very high levels, which is clearly a threat.

Or is it?

The Solution

Economics 101 tells us that when prices rise two things happen – sellers look to increase the amount they can supply and customers look for alternative or substitute products. That is precisely what we are seeing now.

A host of mining companies have stepped up and advanced plans to open or reopen mines that can produce rare earth elements in economic quantities.

It should also be noted that China's restrictions are export restrictions, suggesting that companies can source production to China to get around the rules. Perhaps that is really China's ultimate goal. China's rulers probably know they cannot win the low-cost-labor game indefinitely, so maybe this is just one more way to convince or coerce the likes of Johnson Controls or General Motors to produce in China - "come to China and you'll get the resources you need."

The Bottom Line

Markets have a way of sorting out shortages. The oil crisis led to more fuel-efficient cars and other less famous temporary shortages led companies to innovate around the problem. This will almost certainly happen with rare earth metals as well. That is not to say that rare earth metal miners are a bad idea; many are expensive but the three to five year prospects look bright for the underlying metals. What is does say, though, is that China is going to discover that the profit-motive and creativity of capitalism is ultimately stronger than its unilateral trade policy.

There are niche equity plays surfacing in this exciting area of investing and we are always looking for value recommendations given current price levels, forward PE ratio estimates and market conditions.

Contact Us for our most recent recommendations in the Mining Equity sector.

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