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By Tony D'Altorio

Bautou may look like a quiet, unassuming city in the middle of Inner Mongolia. But the home of two million finds itself in the middle of a global controversy all the same.

Right now, China controls the market for rare earths, a group of 17 key elements used in many of today’s modern technological devices. Precision-guided weapons, night vision, radar systems, hybrid cars and wind turbines: All rely, in part, on rare earth elements.

Rechargeable batteries, for example, need lanthanum, while polished glass for flat-screen TVs and the like require cerium. Automobile exhaust systems rely on rhodium, and high-powered magnetic motors necessitate neodymium and dysprosium. These metallic elements – and twelve others – have unique properties crucial for miniaturization, laser and energy efficiency.

Last year, China produced 97% of the world’s rare earths, sparking concerns. And the situation has only grown more tense recently, after Japanese traders reported their rare earth shipments were halted during a diplomatic dispute with China.

The Biggest Global Producer of Rare Earth Elements

Enter Bautou, right at the center of Chinese production of these types of rare earth elements. And Inner Mongolia Bautou Steel Rare Earth Hi-Tech Company holds the spotlight there. It has quietly grown into the world’s biggest producer of such minerals, contributing nearly half of China’s production.

Listed in Shanghai, the company has a market capitalization of about $9.3 billion. It processes some 55,000 tons of rare earths a year, about 44% of global production. Its interim net profit more than doubled from last year. And that shows in its shares, which are up 172% since January.

Now, Bautou has received approval to develop China’s first rare earths reserves. These should eventually grow to 200,000 tons of processed rare earths, equivalent to roughly 19 months of global production.

The Problems Surrounding the Rare Earth Industry

You don’t have to dig that deep to find that rare earths aren’t actually that rare. They’re just difficult to extract and can often be environmentally difficult. China realized that rare earth elements were worth the effort long ago, accelerating production under the late Deng Xiaoping. He used to compare China’s rare earths to Saudi Arabia’s oil.

Yet the U.S. moved in the opposite direction for years. Once the world’s leading producer, it now mines none of it, mostly because of onerous environmental regulations. The government has begun to look into starting up again. But that means little for now.

In April, the Government Accounting Office reported that rebuilding the nation’s rare earth supply chain could take up to 15 years. And, according to the same source, the U.S. needs patents currently held by foreign companies. Perhaps the country can learn something from Japan, the world’s biggest rare earths consumer. It has no supplies of its own though, so it’s searching elsewhere… without waiting for study results.

This makes sense since most geologists think up to two-thirds of the world’s deposits of rare earths lie unexploited, outside of China. That’s a good thing too, considering how it uses much of what it produces for its own burgeoning high-tech industries.

As China grows, it will have less and less to sell to other countries. Recognizing this, Japanese companies have taken to scouring Canada, India, Australia, Vietnam, Kazakhstan, Brazil and Mongolia to find the next big deposits.

Four Rare Earth Market Investments

Investors should do the same among the numerous companies in the rare earth industry. Two easily traded ones are Molycorp (NYSE: MCP) and Rare Element Resources (NYSE: REE).

Molycorp owns the Mountain Pass mine, formerly the world’s largest source of rare earth elements. But since it’s in California, it will cost a fortune in environmental costs to get the mine going again. Rare Element enjoys a better location in Wyoming, but hasn’t yet produced real revenue. So Canadian company Neo Material Technologies (PINK: NEMFF.PK) and the Australian Lynas Corporation (PINK: LYSCF.PK) might make better choices in the end.

Neo Material has teamed up with Japanese firm Mitsubishi ADR (PINK: MSBHY.PK) to evaluate deposits in Brazil. And Lynas owns the Mount Weld deposit in western Australia, the richest known deposit of rare earths in the world with a state-of-the-art rare earths processing plant.

These investments should prove very profitable over the next several years, as rare earth exports from China continue to decline.

Good investing.

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Source: 4 Rare Earth Market Investments