Digging Into Rare Earth Investments: Behind the Sudden Surge in Popularity

by: Zecco

By Richard Bloch

If Google Trends are any indication, there’s been a surge of interest in rare earth elements lately.

Why? Probably because people came to realize China provides 97% of the world’s supply and they might have the US “over a barrel.”

Most articles about rare earths include the obligatory assertion that “rare earths aren’t that rare,” sometimes pointing out that gold or platinum, for example, are 100 to 200 times less abundant than these rare earth elements.

But whether a substance is rare or common in mineral formations is only part of the economic picture. What does it cost to mine rare earth-rich ores and actually refine them into usable products? And if China loses its near monopoly, will rare earth prices fall?

Let’s take Molycorp (MCP) for example. This company recently went public with plans to reopen the Mountain Pass mine that once supplied most of the world’s supply for these elements.

But Chinese competition made it difficult for this mine to stay profitable – especially given the high costs to maintain environmentally friendly refining processes. In fact the Mountain Pass mine was the site of several leaks of radioactive wastewater.

A “bubble occuring”?

Higher prices, however – plus the possibility that China might crack down on its own poor environmental practices – means that Molycorp and many other companies could conceivably compete effectively as an alternative supplier, even with added costs needed to make these mines as safe as possible.

So the question about rare earth mining centers less on the mineral assets themselves and more on refining, processing, and profitability – the same as for any other mineral.

Except for one thing: Rare earths are way more complex because while many investors seem to focus on these elements as a group, the individual elements themselves vary widely in price, availability, and how they’re used.

And even Molycorp CEO Mark Smith appeared on CNBC last week to say “I don’t think short-term prices in rare earth (minerals) are prices people ought to be counting on … they are really spiked right now and there may be a bubble occurring because of all of the news and the frenzy.”

Not like copper or gold

In an interview last year with Clint Cox, a writer on rare earth elements, Smith explained that simply finding rare earth ores doesn’t necessarily mean you’re actually going to be able to refine them.

Rare earths are not like copper or gold, or iron ore. When you discover rare earths you only have part of the equation done. You have to figure out how to process those rare earths. It is a very, very complex chemical, and chemical engineering issue that has to be resolved.

He also pointed out that because there are more than a dozen rare earth elements, knowing which ones you can sell profitably and which ones will sit in storage is difficult to predict.

The rare earth industry has had that problem, where one of the rare earth elements, or maybe two, will all of a sudden become very, very popular and everybody wants to buy them. The problem is, what do you do with the rest of them because they’re all in the ore body, and you have to take them out and separate each one. What do you do with those other materials while they’re not as high in demand? You end up stockpiling them is what you do.

For example, one of the rare earths, europium, was used for color TV phosphors (back when they were new in the 1950s). The PC revolution of the 1980s and 1990s increased demand for another rare earth, cerium, as a screen coating. Now it appears that neodymium is in great demand for making hybrid engines (there’s 2.2 pounds of it in every Toyota Prius).

As for the future? This chart from a British Geological Survey report (PDF) seems to predict shortages of some of these elements, while surpluses for others.

Researching rare earth investments

I found that the RareMetalBlog has a fairly comprehensive list of companies involved in this industry, although you should note that the blog is sponsored in part by some of these firms. Technology Metals Research is also another good resource for news on rare earth elements (and other strategic metals).

Note that most companies in the rare earths sector – except for Molycorp and Rare Earth Resources (NYSEMKT:REE) – trade outside of the US or on the Pink Sheets.

These are all highly speculative investments so you’ll definitely need to do further research. One thing you may want to find out is which specific rare earth elements have been identified in a company’s potential reserves.

Here’s why: There are many varieties of rare earth ores, each of which can yield a different potential mix of these elements. For example compare the bastnasite ore at Molycorp’s Mountain Pass site with the lateritic ore at a mine in China (chart from a USGS report).

Take a look at that neodymium (symbol: Nd) that’s in each Prius. It’s certainly present at the Mountain Pass site but not at the same percentage as the ore in southern China.

Most companies provide information about the nature of their potential rare earth deposits. For example, Greenland Minerals and Energy (OTCPK:GDLNF) provides a similar chart here. If a company doesn’t share this type of information, then it could be really speculative.

Remember, however, that mineral assets alone doesn’t mean a company will succeed – or even begin mining.

If, for example, you find a gold deposit in your back yard, but it costs you $2,500 per ounce to recover and refine it, it’s going to probably stay in the ground (at least for a while). But someone who knows how to refine that gold for more like $500 per ounce will be worth their weight in, well, gold.

As Neo Material Technologies CEO Constantine Karayannopoulos put it, “These are not minerals that you are selling … You’re selling highly, and very precisely, engineered materials that are customized for each customer.”

So digging into rare earth investments means you’ll have to do some homework. And if it’s been some time since you took chemistry or geology, you’ll want to keep a periodic table of the elements handy.

Disclosure: None