Rare earth has been an increasingly hot topic over the past few months, and in light of recent coverage of the niche sector, retail investors are left wondering whether, after a precipitous climb, it is too late to invest. Shares in miner Rare Element Resources Ltd (REE), for example, are up more than 320% in the last 90 days, and more than 40% in the last two trading days alone. Let’s take a closer look at what the rare earth is, and what is driving the recent price acceleration in rare earth stocks.
Rare earth elements are the key resources used in computers, lasers and many emerging energy products, including wind turbines, hybrid vehicles, electric motors, light emiting diodes (LEDs), thin-film solar and high perforamce batteries (for example, electric car batteries. These elements include cerium, lanthanum, neodymium, and praseodymium, among others. Currently, more than 90% of rare earth minerals are mined and processed in China. While China does most of the raw materials grunt work, the processed materials are typically shipped off to Japan, from whom the United States predominantly purchasea rare earth-infused products. This morning, the China Daily cited a government official as saying China plans to cut rare earths export quotas by up to 30 percent in order to conserve resources and limit environmental damage from mining.
Many feel that the recent halt in exports and further quota cuts are the result of an ongoing dispute with Japan stemming from a recent incident in which a Chinese fishing boat collided with an Japanese coast guard vessel in disputed waters. It also could be, however, that China is using the ‘row’ as an excuse to do something they had already planned on doing. The export ban applies only to raw materials, and perhaps the government wishes to force foreign buyers to purchase more manufactured goods from China. Besides, the environmental degradation excuse is not in keeping with a government that has shown no remorse for such byproducts of rapid industrial and economic growth. China has also argued that at the current rate of production, the supply of rare earth resources could run out in 15-20 years, but numbers coming from the notoriously veiled Chinese government leave some room for skepticism, especially given ulterior motives possibly present.
No matter the cause, the United States and others have put themselves in a position of relying on Chinese export of raw rare earth materials, and now are left scrambling for ways to eliminate that precarious dependence. The response has resulted in takeover rumors for rare earth mines in North America. Earlier this month, the US House of Representatives passed the Rare Earths and Critical Revitalizations Act of 2010, which outlines the need and urgency to discover and develop rare earth sites in the US.
The other thing about rare earth minerals is that they are not, in fact, rare at all, but simply occur in low concentrations and are difficult to mine. Vancouver-based Rare Earth Resources Ltd (REE) and Colorado-based Molycorp Inc (MCP), which owns the Mountain Pass rare earth mine in California, are two of the hottest names in the sector mooted as takeover targets. Molycorp announced Monday an agreement for a $150 debt facility from BNP Paribas to finance a rare earth supply chain process in the US. Also on Monday, Glencore International (GLEN.UL) said it would develop a rare earth project in cooperation with Wings Enterprises. The recent flurry of activity is an indication that the rare earth sector is set to explode as the government urges investment and cooperation. Other names to watch in the sector include Avalon Rare Metals, Inc. (CA:AVL) and Mediallion Resources Ltd. (CA:MDL).
Rare earth stocks are a purely speculative play. While momentum traders have found success trading these fast-movers, given the recent price spike, the risk is too high for the retail investor at these levels. Look for further developments in the sector to gain confidence for a potential investment. We will be watching the rare earth stocks closely and will be sure to keep you updated.
*Disclosure: No relevant position
