Join the rush for rare earth metals

Rare earth metals are an invaluable industrial resource. And with consumption far outstripping supply, their price has shot up. Eoin Gleeson considers the case for investment, and tips two of the best bets in the sector.

The conflict over rare earth metals has just hit Defcon 1. Having steadily reduced the supply of the metals for the last few years, China has just taken the shock decision to slash its rare earth exports for the rest of the year by 72%. Such a huge reduction in quotas means that official Chinese exports for 2010 are now well below global consumption. And that's a nightmare for Western industry.

Rare earth metals have emerged as an invaluable industrial resource in the last two years. Their weight and magnetic properties make them ideal for the production of everything from electric vehicles to wind turbines to iPhones. A small quantity of dysprosium, for example, can make magnets in electric motors 90% lighter, while terbium can help cut the electricity usage of lights by 80%.

"Price hikes for many rare earth products have already been staggering this year," notes Mark Watts in Industrial Metals, with many metals doubling in value after a savage collapse in prices during the recession. The sudden shortage in supply now threatens to choke off the profits of a legion of green and consumer tech groups that depend on them. Meanwhile, the US authorities are planning to bring a trade case against the restrictions to the UN, according to Xiao Tu on Bloomberg. But the Chinese won't budge. The truth is that China badly needs to scale back its production of rare earth metals for a while, says Jack Lifton of Technology Metals Research.

Mining rare metals is a hugely destructive process, requiring large quantities of acid to separate the mix of metals found in each deposit. The Bayan Obo region where most of the world's production of rare earth metals takes place has been so badly damaged in recent years that a major clean-up operation now needs to be undertaken before mining can continue.

Besides, the Chinese no doubt feel they've no need to flog off such a strategic resource at today's lowly prices. Britain managed to run down its North Sea reserves at a time when oil was cheap. China may see no reason to do the same with rare earth metals. Ultimately, the whole point of seizing control of nearly 97% of the worlds' supply of rare earth metals was to force green tech and consumer manufacturers to set up in China bringing a steady tide of high-paying jobs and taxes. China isn't about to bend to the will of Apple and Toyota just yet. That's why some unscrupulous Japanese firms have been smuggling rare earths from illegal mines across China, notes Jack Lifton.

Luckily, China isn't the only place you find rare earth metals. Dormant for 20 years, the Americans are moving to redevelop the massive Mountain Pass mine in California. Over the next two years, US miner Molycorp is looking to spend more than half a billion dollars upgrading equipment in an effort to ramp up production at the mine. Australian miners are even closer.

The world's largest known deposits, however, are to be found in an obscure and desolate outcrop of southern Greenland, says Nick Sudbury in the Zurich Club letter. Studies of the site show that the Ilimaussaq reserves would meet at least 25% of global rare earth demand for the next 50 years, says Leo Lewis in The Times. Extraction hasn't yet begun because Greenland only gained full sovereignty over its natural resources on 1 January this year. But the government has wasted no time granting exploration licences to miners looking to develop the resource.

The best bets in the sector

Rare earth metal stocks have been trashed over the last year. Initial excitement about the industrial rush to secure reserves floundered as the prices of the metals fell during the recession. We were worried at the time and urged readers to take profits (and a 143% return) in Australian miner Lynas Corp (ASX: LYC).

497_P08_Sector

Lynas has fallen hard since. With the average rare earths composition of its Mount Weld recovering to pre-recession levels, this small miner is sitting on a very valuable resource again. The firm should start production in the third quarter of next year offering the first significant source of new supply outside of China. A deal with China Non-Ferous metal was blocked. But Lynas completed an A$450m equity offering last October. It's a risky play, but one that could be very rewarding as China chokes off global industry.

However, Nick Sudbury prefers Greenland Minerals (ASX: GGG). It plans to use a sizeable deposit of uranium at its Kvanefjeld deposit in Greenland and has secured an exploration license. This project is at a very early stage, but is well worth keeping a close eye on.

This article was originally published in MoneyWeek magazine issue number 497 on 30 July 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.

Recommended

Back on track: why you should invest in railways
Share tips

Back on track: why you should invest in railways

Rail transport suffered a severe blow in the pandemic. But while post-Covid-19 working patterns may reduce revenue, trends in technology, long-distanc…
22 Oct 2021
Airtel Africa has growth on speed dial. Here's how to play it
Trading

Airtel Africa has growth on speed dial. Here's how to play it

Mobile-phone group Airtel Africa is cashing in on the rise of the continent's digital economy and looks set for years of rapid expansion, says Matthew…
22 Oct 2021
Share tips of the week – 22 October
Share tips

Share tips of the week – 22 October

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
22 Oct 2021
A listed private equity fund going cheap
Share tips

A listed private equity fund going cheap

Some of the fastest-growing businesses are unlisted. This private equity fund can help you profit from them, says David Stevenson.
19 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021