You might remember a year or so ago (although it honestly seems like far longer) that there was a pretty big uproar about these things called rare-earth metals.
Not many people are really sure what they are, and even fewer can pronounce their names. But they were a really big deal in 2019 and for a good reason...
If you’re anything like me, when you first heard the term “rare-earth metal,” you figured they must be uncommon elements. That must be why they’re called rare, right? Wrong.
Except for radioactive promethium, they’re all actually pretty common and relatively plentiful in the Earth’s crust. Cerium, one rare-earth metal, is even more abundant than copper.
They’re called rare because they’re typically dispersed and not present in heavy concentrations in the minerals where they’re found. So that means it’s harder to economically mine them.
Also, if you’re anything like me, you had no idea why they were so important. I mean, what are they even used for?
Turns out, a whole lot of things, things we all use every single day, like computer memory chips, rechargeable batteries, cellphones, the catalytic converters on our gas-powered cars, fluorescent lighting, even magnets.
Every portable electronic device on the market is packed with them. There are several pounds of rare-earth compounds in every battery of every hybrid-electric and fully electric vehicle on the market.
They’re used as catalysts, polishing compounds, and phosphors in air pollution control systems, illuminated screens on electronic devices, and polishing optical glass (like the specs my colleague Brit Ryle is famous for).
And while there are substitutes for rare-earth elements, they’re not as effective and more expensive.
So you can see why rare-earth metals are so important. But why were they causing such an uproar last year? Well, it’s because of where most of them come from.
Despite being home to the eighth-largest rare-earth reserves in the world (and, at one time, dominating the rare-earth market), the U.S. now imports most of its rare-earth metals from China.
And China dominates the global rare-earth trade. It has the biggest reserves in the world, with about 35% of the global total. It produced 70% of the total rare-earth market in 2018, and that share has grown to 80% since then.
And last year, the country threatened to cut off supply to the U.S. That’s a big deal since we don’t have much of a rare-earth mining industry anymore.
In fact, in 2018, while China produced 120,000 metric tons, the U.S. only produced 15,000 metric tons (up from zero metric tons in 2017).
We achieved energy independence and became a net oil exporter thanks to American ingenuity and fracking. Now the race is on to become rare-earth independent as well.
Back in 2014, the Obama administration added two rare-earth elements to the National Defense stockpile's acquisition list.
But after last year’s threats from China, President Trump doubled down by making the entire supply chain for rare earths “essential to the national defense” under the Defense Production Act (DPA).
It makes sense that we wouldn’t want our military relying on China for the rare earths in its fighter jets and cruise missiles. It also makes sense we wouldn’t want to rely on China to keep our communications network up and running either.
So now there’s government funding coming into the rare-earths space, and there’s more on the way.
Just this past May, Senator Ted Cruz proposed a rare-earths funding bill that would revive the U.S. rare-earths industry with tax breaks for mine developers and manufacturers who buy its products.
If approved, it would let mining companies deduct the costs of building rare-earth mines, processing facilities, and equipment purchases from their tax bills. And their customers would be able to deduct 200% of the cost of U.S. rare-earth products from theirs.
And that’s leading to new exploration for undiscovered reserves and new operations at known deposits that have been out of operation for years.
Six companies now have operations in place looking to extract rare-earth elements from U.S. soil and break China’s stranglehold on the industry.
Most of them are still in the planning or exploration stages, and many of them are still private.
But there are a few ways for savvy investors to get some skin in the rare-earth game early and back a U.S. operation at the same time...
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Rare-Earth Stock #1: The First Mover — First on the list is a rare-earth company that doesn’t have public stock and a public stock that doesn’t have rare earth metals. It sounds strange, but it’ll make sense in a second.
The only active rare-earth mine in the U.S. is owned by a private company called MP Materials. It owns and operates the Mountain Pass mine in California and ships more than 50,000 tons of concentrated rare-earth elements per year.
It’s planning to go public this year via a reverse merger with a special purpose acquisition company (SPAC) called Fortress Value Acquisition Corp. We’ve heard a lot about SPACs this year already, and we’re going to hear more as this merger is completed.
Shares of the SPAC are listed under the ticker symbol FVAC and trade for less than $15.
Rare-Earth Stock #2: China’s Challenger — Next up on our list is an Australian company called Lynas Corp (OTC: LYSCF). As you can see, it has shares that trade on the U.S. OTC markets, and it’s the largest producer of rare-earth elements outside of China.
The company has a partnership with private Blue Line Corp. to develop rare-earths processing plants in Texas because we can’t be independent if we’ve got to send our rare earths to China for processing.
The joint venture has been chosen to receive funding by the Pentagon from the DPA, although neither the company nor the Pentagon has disclosed how much.
Rare-Earth Stock #3: American Dreams — And finally, I’ve got a tiny American company for you. It’s very speculative because it’s not producing any rare earths yet, but it has the rights to mine what could be one of the most prolific deposits of rare earths in the country.
It’s half of a joint venture to mine the Round Tops rare-earths project in Western Texas, and it goes by the name of Texas Mineral Resources Corp (OTC: TMRC). The company has partnered with privately held USA Rare Earth to develop the site and hopes to have it fully operational by 2023.
In the meantime, the partners are also building their first plant in Colorado to process the minerals they excavate at the mine. The companies hope to be producing small amounts of processed materials by the end of 2020.
If they can accomplish that, then the partners can finalize supply deals with potential customers and secure the financing they’ll need for a full-scale plant near the Texas mine.
Rare earths are incredibly important to everyday life, and they’re also considered critical to national security. Even if tensions with China ease over the coming years, we cannot rely on tenuous alliances to supply us with mission-critical resources.
Senator Ted Cruz’s bill is just the first in a long line of government stimulus and spending likely to hit the industry in the coming years. And investors who position themselves early stand to benefit the most.
As the country and the world pivot toward more renewable sources of energy and more electric vehicles hit the streets, the demand for these essential elements will grow even greater.
These three companies aren’t the only players in the field, and they’re far from the largest.
But with their exposure to U.S. resources and their absence of Chinese interference, they stand to be some of the biggest beneficiaries as the U.S. rare-earth industry grows to a dominant position once again.
And that growth may go into hyperdrive as early as next year.