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Rare Earth Stocks

Rare earth metals are essential for many of the technological advancements we rely on today. Gadgets from cell phones to laptops require them, as do hybrid vehicles and solar panels. Your television couldn't function without rare earth metals, nor could any of your batteries.

Rare earths are a group of 17 elements that are actually not all that rare; they're found in fairly high quantities in the crust of the Earth. But since the reserves are spread out and concentrated in very small groups, they're not so easy to acquire.

They are, however, in high demand — demand that is growing even greater as both high-tech products and renewable energy sources become more advanced and more popular.

And the world's supply is highly concentrated in one area: China.

China controls somewhere around 80% of the world's production of rare earth metals. While that's down from recent years, there is still cause for concern.

That's because almost 100% of "high-value" rare earth metals still go through China. Nearly all “high-value” rare earths have to be sent to China for value adding and refining.

The U.S. has its own supply of rare earth metals — about 12% of global reserves.

The problem is, mining and production of rare earth metals can be a highly pollutive process. Until very recently, China was more concerned about extracting and processing the metals than these environmental effects, and this is how it was able to grow into almost the sole supplier of rare earths.

But it was also this pollution China cited when it decided to reduce its export quota back in 2010. That year, Beijing's drastic pullback on exports sent prices sky high. 

Dwindling Supply

In 2009, China's export quota for rare earth metals was around 50,000 tons. But in August 2010, the government cracked down, reducing quotas to 30,258.

China currently produces 90% of global rare earth supplies, while consuming 80%. In 2015, China will export 30,000 tonnes through official channels.

And every year, twice a year, it returns to review that limit. So far, the yearly quota has been stagnating, but that could change at any time.

Over the last 10-15 years, world consumption and demand has increased by 8-12% per year.

By 2020, demand is expected to increase by 50%.

Japan was the first to take the hit from these reduced rare earth supplies. China and Japan have always had a strenuous relationship, and land disputes were frequently triggers for trade issues. In 2010, the trigger for rare earth export reduction was a quarrel between a Chinese fishing trawler and the Japanese Coast Guard over a group of islands.

But then supplies were limited for the U.S. and the rest of the Western world, too.

The thing is, pollution was only one of the reasons China began to cut its rare earth supply. China was already the world's largest rare earth consumer, but an increase in domestic demand caused the nation to reconsider where its supply was going.

Naturally, China decided to keep more supply at home.

Exploring Options Outside China

The World Trade Organization began investigating China's restrictions and diminishing quotas in 2012. In March of 2014, the WTO found that China had broken WTO rules. China cited environmental concerns for the restrictions, but WTO was not impressed with this line of defense.

And it's left nations around the world with two options: reduce dependence on rare earths or start mining their own.

The U.S. recently decided to take matters into its own hands. The Department of Energy provided Ames Laboratory with $120 million to create a Critical Materials Institute (CMI) lab, which would have three tasks aimed at moving the United States away from Chinese rare earth dependence, as outlined by the Department of Energy:

  • Diversifying global supply chains to mitigate supply risk

  • Developing material and technology substitutes

  • Promoting recycling, reuse, and more efficient use to significantly lower global demand for critical materials

Asian nations, particularly Japan — the world's biggest rare earth importer — are also exploring other options. A number of Japanese companies are working with India Rare Earths to build a processing plant in Kazakhstan.

Kazakhstan is the world's largest producer of uranium, and amid the rare earth crisis, this has drawn interest. Rare earths can often be found in the waste byproducts of uranium mining — a fact that will likely make uranium mines an even more attractive location for rare earth producers in the years to come.

But the pollution of rare earth processing is still posing a problem. Many countries are reluctant to be the location for the processing plants, particularly amid the growing concerns of climate change and the radioactive contents of the waste.

Shortages are going to be a growing concern until the extraction and processing techniques can be cleaned up or until an alternative resource is found.

Where to Look

But high demand and short supply makes for lucrative market conditions — if you know where to look.

A number of rare earth mining and production companies operating outside of China are going to experience demand growth, particularly as China cuts its exports even more in the coming years.

Global demand will also continue its growth. Climate concerns and falling prices are making sustainable power sources like solar more popular and attractive options. High oil and gas prices could soon lead to even more popularity for hybrid and electric vehicles. And as schools are already trading in textbooks for tablets and children are receiving smartphones at younger ages, gadgets like these will become even more ubiquitous than they already are.

Every one of these things requires rare earths as part of the production process. Supply shortages from China will lead to skyrocketing success for other rare earth companies.

Here are some of the more popular rare earth companies operating outside China.

Molycorp (NYSE: MCP)

Based in Colorado, this U.S. company is one of the leaders in rare earth mining and production. Its Mountain Pass, California resource was purchased in 1950, a year after it was discovered, and the company expanded construction and modernization on the location in 2011.

The goal in this expansion is to ramp up extraction rates to 40,000 metric tons of rare earth oxide equivalent.

Molycorp has locations in 10 countries and over 2,400 employees. Its subsidiary Molycorp Magnequench specializes in neodymium-iron-boron (NdFeB) powders for the manufacture of bonded magnets. Magnequench also possess the ability to tailor the magnets to specific application requirements.

Great Western Minerals Group (TSX-V: GWG)

Great Western Minerals Group is a Canadian company with exploration and mining activities in South Africa and Canada. Its Steenkampskraal Mine in South Africa is a low-cost, high-grade rare earth element mineral property.

The company also has two subsidiaries focused on processing: Great Western Technologies Inc. (GWTI) and Less Common Metals (LCM).

GWTI, based in Michigan, is the company's specialty metal alloy processor. LCM processes rare earth alloys for global magnet manufacturers that supply major automobile manufacturers.

Avalon Rare Metals, Inc. (TSX: AVL)

Also headquartered in Canada, Avalon Rare Metals owns the Nechalacho Deposit in Canada's Northwest Territories, where it focuses on “heavy” rare earth elements. These heavy elements are particularly useful for renewable energy operations and high-tech products.

Its other stakes in Canada include the Separation Rapids property, ownership of the Warren Township Calcium Feldspar Project, and the tin-indium Miramichi project among others.

Avalon also has a U.S. listing on the NYSE AMEX.

As always, be sure to do your due diligence before tapping into these and other rare earth companies. If you think rare earth investing is right for you, this is a good place to start.

But there are plenty of other rare earth stocks out there, and the industry is likely to grow more now that China's quotas have tightened so much at a time when demand has nowhere to go but up.


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