"Rare earth" metals, a family of minerals vital to producing the powerful, lightweight magnets
Gold and silver may be stealing the limelight thanks to surging prices, but some obscure metals are also making their way onto investors' radar screens.
Rare earth metals, a group of 17 elements used to make everything from hybrid cars to mobile phones, came into the spotlight last week following reports that China had blocked exports of the commodities to Japan.
Beijing denied the reports, but the dispute underlined the market's dependency on China. The country, which produces 90 per cent of the global supply of rare earths, has already slashed export quotas on the metals this year by 40 per cent from 2009, a move which has pushed up prices and spurred new mining projects.
Potential shortages of rare earths, combined with growing demand for the materials, is sparking new interest in investment opportunities in the area, ranging from newly listed junior miners to an exchange-traded fund poised to list in the United States. But the sector is fraught with risks for investors, market watchers say.
China aside, the biggest reason to invest is the growing demand for the "heavy" or higher-grade rare earths used in hybrid and electric cars, said Jon Hykawy, an analyst at Toronto-based Bryon Capital Inc. "The rarest elements may come into short supply over the next two or three years."
The problem is not finding rare earths, but extracting them economically. The best way to play this sector is to buy several producers because the risk is too high to bet on one, Mr. Hykawy said.
The analyst has "speculative buys" on Canadian-listed Rare Element Resource Ltd. and Great Western Minerals Group Ltd.; U.S.-listed Molycorp Inc. and Australian-listed names like Lynas Corp. Ltd. and Arafura Resources Ltd. Molycorp, which is restarting its Mountain Pass mine in California, and Lynas are closer to production so they are less risky bets, Mr. Hykawy said.
'Strategic' Play
Hedge fund manager Steve Palmer of AlphaNorth Asset Management Inc., likes the "strategic nature" of rare earths, and has invested in juniors such as Stans Energy Corp. and Ucore Rare Metals Inc.
Ucore, which focuses on the Bokan area in Alaska, will benefit from a new desire by the U.S. to reduce its reliance on China for rare earths, which have military applications, he said. A U.S. senator has already introduced a bill promoting a domestic rare earth industry.
Van Eck Global, a U.S.-based provider of ETFs, has filed a preliminary prospectus for the Market Vectors Minor Metals ETF, which will track a minor metals index that includes producers of rare earths. But because it will invest in about 30 public companies, not all of which produce rare earths, it is not really a pure play on the sector, Byron Capital's Mr. Hykawy said.
Investors can also play rare earths through Toronto-based Dacha Capital Inc. (soon to be renamed Dacha Strategic Metals Inc.). The investment holding company began buying and stockpiling rare earths from China earlier this year, and stores them in warehouses in South Korea and Singapore, on the assumption that prices are on a long upward trend.
Dacha faces the risk that China could cut off rare earth exports, but, if that happens, the material stored outside the country would be more valuable while new projects coming on stream will provide new inventory, chief executive officer Scott Moore said. Unlike the risk in spending money in advancing a mining project, "I can sell all my inventory, turn it into cash and redirect it back to shareholders," he added.
Rare, but essential
What are rare earth elements or metals?
They are a collection of 17 elements that have become increasingly important in the manufacture of light weight, super-miniaturized components. The scarcer heavy rare earths, such as dysprosium and terbium, command a premium price compared with light rare earths.
Where are rare earths used?
Batteries and magnets for electric and hybrid cars, mobile phones, iPods, digital cameras, wind turbines, computer monitors, superconductors, solar panels and military hardware like fighter jets and nuclear weapons.