Once a high flyer, the rare earth sector has come under increased selling pressure for several years. Up until recently there has been no bottom in sight, but major industry developments may soon turn the tide. Below I have presented two investment opportunities in the space that each may benefit from these events. The first is a house hold name for those of us who follow the industry closely and the other is a miner in Texas, which has flown under the radar. Both present high risk/high return investment profiles and those considering an investment should conduct a fair amount of due diligence before doing so.
China controls over 90% of the global supply of rare earths, mostly in Inner Mongolia. As a result of its dominance as the major global supplier there is increased concern over its ability to manipulate supply and pricing. Since 2009, China has implemented a series of reductions in exports, which drew the attention of the U.S., the E.U. and Japan, countries that confronted China at the WTO on these export and production restrictions. Most recently, China stated that it will cap rare earth production at 93,800 tonnes for 2013 as part of its efforts to rein in unlicensed production in the sector.
The stranglehold China has on the industry has driven up demand with several countries doing everything in their power to stockpile rare earth resources. In the 1990s many mines in the U.S., Brazil, Canada and other countries were closed because world prices were undercut by China, but now that prices have stabilized and costs come down, mining for rare earths has reemerged. It has taken several years for these mines to restart production, but for the most part, larger operators of these mines are already operational.
As a added vote of confidence in the value of these assets, just this past week, Russia stated that it will invest $1 billion rare earths production by 2018 to become less dependent on China.
The Mountain Pass mine in California, owned and operated by Molycorp (MCP), resumed operations in August of 2012 and is home to one of the world's largest and richest deposits of rare earths. The deposits include light, mid and heavy rare earths including lanthanum, cerium, neodymium, praseodymium, yttrium, samarium, europium, gadolinium, terbium and dysprosium. Completion of the Mountain Pass mine remains on schedule and within budget. In addition to Mountain Pass, Molycorp has 26 locations across 11 countries.
Just this week, there have been rumors that China's State Reserve Bureau could start buying up the minerals for a national stockpile soon which analysts believe could lead to an increase in rare earth prices. Molycorp was up over 5% on the news.
As a speculative play on the industry, I came across Texas Rare Earth Resources (OTCQX:TRER), which is principally focused on its 950 acre Round Top project. A Preliminary Economic Assessment by an independent third party found that there are an estimated over 1 billion metric tonnes of resources containing over 1 billion pounds of rare earth elements. A revised PEA, which was originally projected to have a capital cost of $2.1 billion is now estimated to be between $150 million to $350 million. A key concern in the exploration of these mines is how expensive it is to ultimately extract the rare earths from the ground. If Texas Rare Earth is able to show evidence that cost has been significantly reduced it will be the target of interested parties globally.
Amidst the volatility of the rare earth sector I strongly believe there to be significant value in these assets. Along with the events mentioned above other news worthy items such as "Holmium: Key element in the future of warfare?" which details Holmium, a heavy rare earth element with "the strongest magnetic force of any element," and its significance in military and defense programs, remind us of the importance of rare earths and their applications. Both Molycorp and Texas Rare Earth Resources' stock prices have been significantly discounted and now, I believe is the time to revisit these investment opportunities.