Industrial usage of rare earth metals has shot up over the last few years. And with China controlling much of the world's supply, there's big money to be made from producing them. Dan Fessler picks three companies to consider.
What do your cell phone, a euro banknote, superconductors, fibre-optic communications systems and the motor for your car's windscreen wiper all have in common?
They (and thousands of other everyday products) contain minute quantities of some of the most obscure chemical elements on the planet. They're known as 'rare earth metals' or simply 'rare earths'. So what's the big deal about them?
Simply put, trillions of dollars of modern devices wouldn't be possible without their existence. These 'rare earths' are critical elements in many industrial processes, and the United States Geological Survey (USGS) has identified 17 of them.
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Let's take a quick look at 'rare earths' to get an idea of just how pervasive and critically important they are. And, of course, how to do something that very few other investors even consider: profit from them...
Little-known, rare... and critical to everyday life
The term 'rare earths' comes from the fact that the minerals that contain these unusual elements were quite rare when first found in Ytterby, Sweden.
Occupying slots 21, 39 and 57-71 in the periodic table of the elements, here are a few of the most commonly used 'rare earths'...
Cerium is the most abundant of the 'rare earths.' It's found in automobile catalytic converters and other pollution control equipment. And it helps to reduce sulphur oxide emissions. It's also added to diesel fuel to help it burn better.
Neodymium is used in magnets to make the magnetic field incredibly strong. Cell phones, computers and audio speakers wouldn't exist without neodymium magnets. And miniature motors wouldn't be possible at all without it.
Holmium has the greatest magnetic strength of any element, and is used in medical and dental lasers and nuclear control rods. It's also a colourant for glass.
Dysprosium's magnetic strength properties make it a useful material for certain lasers, fuel injectors for diesel engines, compact discs, and other various data storage applications.
Thulium is one of the rarest and most expensive of the 'rare earth' elements. It has unique properties that make it ideal for laser-based surgical tools.
Yttrium is primarily used to make red phosphors for use in red LEDs and superconductors.
Europium is a key ingredient in certain types of lasers and is a part of the chemical process to screen for Down's Syndrome.
Erbium is a silvery-white metal created for use in photographic filters and as a colouring agent in cheap sunglasses and jewellery. It's also a key element in optical amplifiers widely used in fibre-optic communications systems.
The China factor - again...
While found in relatively high concentrations in the Earth's crust, until 1948 most of the world's 'rare earth' supply came from sand deposits in Brazil and India. But in the 1950s, South Africa became the primary source, with US supplies ramping up and continuing well into the late 1980s.
And while there is still some residual production from those sources, China has stepped to the front of the pack. Its 'rare earth' metal production dwarfs everyone else. As you can see on the chart, the Red Dragon is responsible for nearly 95% of the world's 'rare earth' production.
Over the past decade or so, rare metal usage has increased dramatically, which has resulted in a significant strain on supplies. In fact, there's growing concern that the world may soon face a shortage that could rise to over 40,000 tons annually.
With China using nearly two-thirds of what it produces, it's naturally keen to protect its own interests. The country is stockpiling its supplies and continuing to reduce annual exports of 'rare earths.' The real concern is that within a few years China may decide to keep everything it produces.
As a result of this threat from China, the 'rare earth' sector is on fire, with a worldwide flurry of 'rare earth' exploration. A mine in California is set to reopen by 2012 and Australia is currently developing the richest 'rare earth' deposits outside of China.
Three stocks for 'rare earth' speculators
Unfortunately, the Chinese haven't yet converted the state-owned Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Company into a publicly traded entity, so you can't buy shares. Moreover, it's unlikely that it ever will become publicly traded, given the strategic nature of 'rare earths' and China's dwindling reserves.
But many other 'rare earth' mining stocks are up over 100% since China announced a change to its 'rare earth' export quotas in August. Here are a few to consider...
Lynas Corporation (ASX: ALYC): The company is behind the big Western Australian 'rare earth' deposit at Mt. Weld and has seen its shares soar by 141% over the past six months.
Avalon Rare Metals (TSE: AAVL) and Rare Element Resources (CVE: ARES) are two other rare element miners that have enjoyed a huge surge over the past six months. Their share prices are up 510% and 596%, respectively.
A note of caution, however: like most junior gold mining stocks, all three are highly speculative. As such, they're subject to wild price swings.
That said, 'rare earths' are in short supply and that means there will be profitable opportunities, as new suppliers emerge and try to offset the dwindling supply from China.
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