This Could Send Rare Earth Metals Prices Soaring
What oil was to the 20th century, rare earth metals are to the present digital age. The so-called rare earth metals have a total of 17 elements in the periodic table. These include the so-called lanthanides (atomic numbers 57 through 71) and two metals that share many of their characteristics: scandium and yttrium.
In theory, rare earth metals should be at the forefront of commodities investments. Metals such as dysprosium or neodymium, two of the most sought-after rare metals, are fundamental to the production of smartphones. Rare earths are also used in personal computers (PCs), electric motors, solar panels, and missile guidance systems. But production remains concentrated in China, which produces some 90% of the demand.
Rare Earth Metals Better Than Gold in 2011
In Europe and North America, despite some noteworthy efforts by now-bankrupt companies like Molycorp Inc (OTCMKTS:MCPIQ), the many would-be rare earth metal miners that mushroomed during the commodities surge of 2008–2011 have all but collapsed. Their stock valuations are now a pittance compared to what they were when they started; they range from $0.02 to $0.06 a share. Meanwhile, rare earths have a rather opaque market, in the sense that there are no actual quotations for the value of these minerals, such as there are for gold or silver. The prices are established through direct negotiations between miner and purchaser.
The major investment thesis behind the rare earth metals exploration boom of a few years ago—that the concentration of production in China leaves too much supply risk should that country decide to cut off supplies to the rest of the world—has failed. For starters, production of the kinds of items needing rare earths concentrates in China to such an extent that physical demand for production beyond China’s borders has stayed weak.
Still, the issue of security of the supply of rare earths outside of China is one of the most debated topics in the industry. It is a problem that periodically gets international attention but that, so far, has not found any solution. A good case can be made by the defense industry, which needs rare earth metals to make such military hardware as laser guidance systems. But when China still holds about 95% of the world’s production—efforts from the World Trade Organization (WTO) to impose limits notwithstanding—how can anyone else compete?
China’s Monopoly Remains the Main Obstacle
The Chinese monopoly is ironclad. It can produce rare earths far more cheaply than any other country. The environmental regulations are also weaker in China. This has encouraged everyone to buy from China, rather than investing in the development of alternative supplies.
In 2011, two companies came as close as anyone ever did to defeating the Chinese monopoly; the Western manufacturers Molycorp and Lynas Corporation Limited (ASX:LYC) appeared on the scene.
Molycorp is now all-but-defunct. Lynas Corporation still produces in Malaysia, but it is drowning in debt while its stock price has dropped from a peak of AU$2.55 in 2011 to the current—and rather mortifying—AU$0.06. In other words, the moment that rare earth metal prices fell, Molycorp filed for bankruptcy, as other rare earth metal explorers witnessed a disintegration of their shares’ value. New investment projects have melted like snow in the sun.
But even if the profit motive has failed to motivate rare earth metals mining and processing in the West, there is always the expectation that logic of profit should be the decisive factor, along with issues that have a national interest and that also involve military security.
That’s why one or two miners in North America, in particular, might survive and eventually thrive. The general public remains blissfully unaware of the importance of rare earths in daily life. They know even less about the consequences if supplies of such elements become scarce.
That Scenario is Closer than Most People Think
China could decide to block rare earth exports. Such a scenario is realistic, and it would ruin the interests of many corporations. An example? In 2010, China retaliated against Japan over an incident involving the Senkaku islands, the Japanese navy, and a Chinese fisherman. The Pentagon has published papers and has urged the United States Congress to address the shortage of domestic U.S. sources of rare earths.
So, the bullish case for the establishment of a rare earth metals company in North America with a decent capitalization has much going for it. Total reliance on China, especially given the rising “cold war” between itself and the U.S., is unsustainable. Lynas Corporation reported higher production for its latest quarter (July 2016). But Lynas is not the answer. It does not make the kinds of rare earth metals that command the highest prices. Lynas itself has warned that rare earth prices continue to fall and there are no signs of a sustained recovery.
Yet the way production is distributed now means that bottlenecks due to ever-increasing demand are possible. Demand for heavy rare earths by 2035 is expected to almost multiply, sevenfold and 26-fold in the cases of Dysprosium (Dy) and Neodymium (Nd), respectively. (Source: “Can We Build A Clean & Smart Future On Toxic Rare Earths?,” China Water Risk, July 20, 2016.)
Everyone would rather shed their reliance on Chinese rare earth metal suppliers. Meanwhile, reliable access to rare earths is one of the fundamental needs of the U.S. Department of Defense. The Molycorp experiment crashed under a high debt burden. Molycorp stock cost up to $70.00 per share in 2011. By 2015, it was worthless and the company declared bankruptcy.
Any Rare Earth Metal Stocks Are Worth Considering
The public is blissfully unaware of the importance of rare earths in everyone’s daily lives. But the tighter regulatory controls and environmental standards compared to China have priced—make that blown—Western rare earth element (REE) efforts out of the market. And consequently, there are much higher costs, which make the production of Western rare earths unprofitable. Not to mention, the costs required for new mining projects are unlikely to attract the interest of private investors, as the market is almost never profitable. Here are two interesting REE stocks still around for investors to follow.
Great Western Minerals Group Ltd (CVE:GWG.H) has failed while Lynas Corporation still produces too few so-called heavy REEs (the kind that are most in demand) to challenge the Chinese. This has weeded out the already short list of potential producers beyond China. Investors might want to look at Peak Resources Ltd.‘s (ASX:PEK), which has a project in Tanzania.
There is also Alkane Resources Limited (ASX:ALK), which has some heavy rare earth metals and sufficient quantities of heavy rare earths and plenty of zirconium and yttrium which, if nothing else, is necessary in aerospace. Alkane recently signed a global marketing, sales, and distribution agreement with Minchem Ltd for its zirconium materials worth some AU$100 million (US$120 million) annually. (Source: “Alkane Resources: Major Zirconium Agreement Signed For DZP,” Investing.com, August16, 2016,)
Alkane is one of the few projects that has survived the rare earth metal speculation boom of the past few years. It has reached a production stage and can start generating revenues to pursue greater ambitions. ALK stock once trade for about AU$2.00 per share. That was back in 2011. Now it has surged from the past year’s AU$0.19 to AU$0.25 a share, to AU$0.35 after the marketing deal. Unlike Molycorp or Lynas or most other rare earth metal stocks, Alkane has actually done well. As the others get left behind, Alkane starts to look more and more promising.
It’s a stock to watch. Peak Resources, while still around, is trading at $0.05 a share. It has an interesting project, but it recently issued a private placement to fund the completion of the bankable feasibility study. (Source: “Peak Resources restructures Ngualla BFS funding package,” Mining Review Africa, April 27, 2016.)
If rare earths have captured your interest—and their importance should be clear—there is another commodity that will benefit from a similar demand: lithium. Lithium is essential to the batteries powering anything from your smartphone to your future car. Click here to learn more about lithium and related investment approaches, in our report: “17 Million Drivers No Longer Pay for Gas?”