Have you ever heard of lanthanides, yttrium, or scandium? They are three of the 17 rare earth elements (REEs). If you don’t know what these are, don’t feel badly, because you probably have plenty of company. Besides, there’s a good chance you’ll learn a lot about them in the coming months.
Despite the name, REEs are not really rare. In fact, they are relatively plentiful. Cerium, for example, is more abundant than copper. But rare-earth elements are typically dispersed so finding deposits that are large enough to mine profitably is difficult.
Nevertheless, miners keep exploring for them because there is huge and growing demand for these materials and because they are crucial to the manufacture of many products. In defense, for example, they are used to make stealth technology and jamming technology, computers, lasers and aircraft engines and nuclear reactors. They are also used in agriculture, medical equipment, and oil and gas technology. And they are even used in everyday items like cell phones, computer monitors, loudspeakers, and TVs. No wonder they are called “the vitamins of chemistry.”
The High Price Of Clean Energy
But it’s the growing use of wind turbines, electric cars, and solar panels in particular – devices used to make clean and renewable energy and to lower greenhouse gases, that is driving demand.
The vast majority of the world’s REEs come from China, which effectively has a monopoly on them. In 2019 they mined 132,000 metric tons of these materials, America produced just 26,000 metric, placing it a distant second.
“The United States is almost completely dependent on China for the rare earth minerals it uses to build clean energy systems and other products,” explains oilprice.com. And it’s not just the US that wants more green energy and other everyday products - so do other industrial and developing countries.
This leaves the US in a precarious situation, particularly because trade tensions between the two countries have increased dramatically. Could China curtail or even halt exports of REEs? And if they did, how would America’s manufacturers cope?
These are fair and reasonable questions, and recalling the fairly recent past shows just why. In 2010-2011, China imposed quotas on exports of its REEs, and prices of these materials spiked. Concern of another ban on its exports surfaced again in 2019, when trade tensions with China soared. Meanwhile, the US may become even more dependent on Chinese REEs because Vice President Biden and other legislators support the Green New Deal.
What Can Go Wrong?
Developments like these make the premise of investing in REEs sound like a no-brainer. After all, there already is a large market for these materials and now, with demand growing, it’s on a track to get even larger. What could possibly go wrong with investing in this sector?
Very likely, this is exactly how investors in Molycorp reasoned when they bought into the company in the early 2010s. Molycorp was then North America’s only producer of these materials and certainly seemed to be in the right place at the right time. Fueled by restrictions on exports of rare earths by China, Molycorp’s market value rocketed to over $6 billion.
But then China unexpectedly reversed those restrictions, supplies increased, and Molycorp began to slide. The company filed for bankruptcy in 2015.
Another example of how logic could go wrong is cobalt. Although cobalt was expensive, demand was high because it improved the conductivity and charge-ability of lithium ion batteries, items used to power portable electronic devices, but also electric vehicles. Cobalt became a Wall Street favorite – until scientists discovered that its benefits could be achieved much more cheaply by increasing the content of nickel in batteries. At that point, the price of cobalt plunged.
Wall Street Watches
Some analysts forecast that demand for REEs will soar in the next 20 years, while production might increase only slightly. Investors love combinations like this. So what opportunities are available to them?
Unfortunately, not too many. There are few exchange-traded funds (ETFs) in this sector and buying rare earths is impossible reports www.investingnews.com. However, several dozen REE-related mining and exploration companies trade on US, Canadian, and Australian exchanges.
One of those is the Australian company Lynas (ASX:LYC,OTC Pink:LYSCF), one of the leading rare earth producers in the world. Texas Mineral Resources is a small US-based company in this sector; a year ago it opened a pilot plant in Colorado. There are also many small players that are privately owned and others whose shares trade at just two or three dollars (or less) and whose fundamentals are not exactly impressive. Going forward it’s likely that some will become profitable and reward shareholders but at this point they are very speculative.
Meanwhile, additional countries want to get into this game, which could boost supply; potentially additional supplies could also come from other sources. Myanmar is becoming an important miner in this industry. Brazil, Vietnam, and Russia are exploring for these resources and so is India. In 2018, explorers found a deposit of rare-earth minerals off the coast of Japan that is possibly so large that, when developed, it may be able to supply the world for centuries, according to a study published in the journal Nature.
In addition, there is an evolving rare earth recycling industry, which aims to recover REEs from discarded electronics and high-tech products. And some mining companies believe it may be possible to extract REEs from deep sea mud using new recovery techniques. If all of these sources become producers of these materials - or find that they can’t produce them - the rationale for investing in this industry could change dramatically.
In 2019, China supplied more than two-thirds of the world’s REEs, according to the US Geological Survey. But this could very well change going forward. In September, a bi-partisan bill introduced in the House seeks to reverse America’s dependence on China for rare earths, and if passed, there may be new investment opportunities.
All of this is great, but “caution” remains in order. Some REE-related stocks will almost certainly become great investments, but finding them will involve a lot of hard work, research, and willingness to assume risk. It’s not as simple as hanging a list of them on a wall and throwing darts at it.
Some speculators got burned in REEs because they thought nothing could go wrong and learned their lesson the hard way. Savvy investors will learn from their mistakes and proceed cautiously. This is an important and exciting industry but filled with risks nevertheless. On Wall Street, there never is a “sure thing,” and discretion always is the better part of valor.