Investing in Rare Earth Stocks: Our Top 3 Picks for 2020
In May of 2019, China threatened to cut off its supply of rare earth elements (REEs) to the U.S. as part of an ongoing U.S.-Sino trade war.
The news sent shockwaves through various markets because America depends on China for a staggering 80% of its rare earth imports. Rightfully, a lot of people began to ponder what 2020 would bring for the rare earth supply chain and related stocks.
After all, if America were cut off from China’s rare earth minerals, it would inevitably be forced to look elsewhere for its supply. Investors quickly flocked to a number of Australian and Canadian rare earth stocks, with the idea that these companies would benefit the most from U.S.-China tensions.
And for a brief period of time, they were right:
Western Australia’s Lynas Corp. (ASX: LYC), the only other major rare earth producer outside China, was up 16% in a matter of days.
Toronto-based Avalon Advanced Materials Inc. (TSX: AVL), which was exploring a feasibility-stage rare earth project, surged by 33%.
And Canadian-based junior miners including Geomega Resources Inc. (TSX-V: GMA), Ucore Rare Metals Inc. (TSX-V: UCU), and Commerce Resources Corp. (TSX-V: CCE) climbed 13%, 48%, and 21%, respectively.
In the months that followed, though, every one of those rare earth stocks got effectively obliterated. It was a short-lived victory for rare earth stocks, to say the least:
If you’re seriously thinking about investing in rare earth stocks, this market tale is one you should keep in mind before pulling the trigger. While enticing at face value and a potential oasis for swing traders, the rare earth market is actually a very dangerous place to be for the unacquainted.
There are a few reasons investors get burned trying to invest in rare earths, but the most critical factor likely has to do with the fact that many rare earths elements are deceptively categorized.
To put it simply, many REEs aren’t actually rare at all. The USGS (United States Geological Survey), for instance, describes rare earth elements as “moderately abundant.”
You see, when most people hear that China controls as much as 96% of global REE production, they assume the nation won some kind of geologic lottery. The truth, though, is that rare earth deposits can be found all around the world; China is just willing to dig them up at the lowest possible margins.
In other words, most REEs aren’t rare in the sense that there aren’t a lot of them on earth; they’re rare in the sense that the international community doesn’t produce a lot of them.
The reason for this is that rare earths are often very difficult to extract. Ultimately, it’s not about how much you have underneath your feet, but rather how efficiently you can extract and process them.
In short, if you plan on investing in rare earth stocks, you should beware of junior miners who have no history of profitable production but are promising what seems too good to be true. As alluring as massive deposits can be at face value, more often than not, companies will be burning more cash than it’s worth.
Instead, what you’ll really want to be looking for as a rare earth investor is who has the highest margins. These are the companies that will be able to outlast their competition and maintain a stranglehold on the market.
Below, we’ll talk about a few of our top picks for rare earth stocks under this general line of thinking, but a few caveats first.
Some of you hard-core REE fans won’t like this, but I’m just going to call it how it is: At a time when there are roughly 630,000 publicly traded stocks throughout the world, there are much better places to invest than rare earths.
Historically, this has been a disastrous market for speculators, so you should know you're getting into risky territory here. That said, there could be some light at the end of the tunnel, as technology continues to drive demand for rare earths. We don’t love this segment by any means, but it can’t get much worse than it’s been the last decade.
According to Zion Market Research, the global rare earth market will grow in value from $8.1 billion in 2018 to more than $14.4 billion by 2025. The margins aren’t going to suddenly knock it out of the park, but at least there will be growth on the top line.
As for what REEs encompass, the primary list includes lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, and yttrium.
Some analysts also include a list of radioactive elements: actinium, thorium, protactinium, uranium, neptunium, plutonium, americium, curium, berkelium, californium, einsteinium, fermium, mendelevium nobelium, and lawrencium. But the former list is more generally accepted.
With that all said, here are our top three picks for companies producing any of the REEs above:
Rare Earth Stock #1: Lynas Corp. (ASX: LYC)
Lynas Corp. is the only REE pure play outside of China that investors will want to pay serious attention to right now.
The Australian mining company explores and mines for rare earth minerals such as neodymium and praseodymium.
In 2019, it posted its third consecutive year of profitability, with EBITDA of $100.7 million and revenue of $363.5 million.
Being the only profitable pure play rare earth company outside of China that we know of, Lynas Corp. stands to benefit the most from any existing trade tensions between the U.S. and China.
China, however, is actually one of Lynas’ top customers for neodymium and praseodymium, so any slowdown in the nation’s economy will negatively impact the company’s top line. In fact, Lynas began to see a slowdown in demand in 2019 because of a weakened Chinese economy.
Still, Lynas remains the world’s second largest rare earths producer and the only integrated rare earths miner and processor outside of China. It has trusted relationships with key customers, making it one of few bellwethers in the REE segment.
Of all the rare earth stocks to own, Lynas Corp. makes the easiest case for the top pick.
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It contains full details on how you should be investing in rare earths.
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After getting your report, you'll begin receiving the Wealth Daily e-Letter, delivered to your inbox daily.
Rare Earth Stock #2: Freeport-McMoRan (NYSE: FCX)
Freeport-McMoRan is more of a play on copper than REEs, but we’re including it on our list because of the fact that pure play rare earth stocks are virtually nonexistent these days.
Located in Phoenix, Arizona, Freeport-McMoRan mines more copper than any other publicly traded company in the world. Still, it is one of the few companies outside of China with any exposure to rare earth elements.
The company has operations in North America, South America, and Indonesia. In North America, this includes two pure molybdenum mines and four mixed copper-molybdenum mines, all of which are wholly owned.
In South America, the company has one mixed copper-molybdenum mine. Its Indonesian operation produces no REEs.
All told, Freeport-McMoRan is producing about 95 million pounds of molybdenum every year at an average price around $12 per pound. That works out to $1.14 billion in revenue on an annual basis, which is a mere fraction of the company’s $15.9 billion top line.
Clearly this isn’t a pure play, but it’s still one of the best options investors will have on REEs outside of China. The company last reported an annual net income of $2.6 billion.
Rare Earth Stock #3: Avalon Advanced Materials Inc. (TSX: AVL)
If you’re the gambling type and you’re looking for something especially speculative, Avalon Advanced Materials might just be the stock you’re looking for.
Not for the faint of heart, Avalon Advanced Materials is a Toronto-based mining firm in the development stage.
While not yet a producer, the company does have three advanced-stage projects that have access to common elements like lithium, tin, and indium, but also a number of REEs, including tantalum, niobium, and zirconium.
Avalon’s leading projects include its Separation Rapids Lithium Project near Kenora, Ontario, its East Kemptville Tin-Indium Project in Yarmouth, Nova Scotia, and its Nechalacho Rare Earths asset at Thor Lake, Northwest Territories.
In early January 2019, Avalon announced a partnership with Australian firm Cheetah Resources to participate in the development of the rare earth resources at the Nechalacho Project.
Avalon is valued at a market cap of roughly $35 million, making it a tiny player compared to our other two REE stock picks. The company is not yet generating any money and has effectively no cash on hand.
Is it a great stock to own? I wouldn’t say so, but when we’re talking about rare earth companies, the pickings are undeniably slim.
Until next time,
Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and Topline Trader. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.
Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.
Outside the office Jason is a lover of science fiction and the outdoors. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.
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