Rare earth metals are at the core of every major technology today.
Smartphones, laptops, wind turbines, electric cars, and medical devices — you name it.
They're also widely used in defense technology, like jets and guided missile systems.
Neodymium, dysprosium, praseodymium, and terbium, for example, are all used in high-strength permanent magnets. They are used in virtually every modern vehicle and aircraft, and they improve efficiency and reduce size and weight.
The guidance systems used by missiles and smart bombs rely on the fluorescent properties of terbium, europium, and yttrium oxides.
Display systems, optical systems, and night vision all rely on glass containing or prepared with rare earth elements, such as cerium and lanthanum. And high-tensile strength ceramics and next-generation armor plating require yttrium, ytterbium, and scandium.
The smartphone in your pocket?
It contains as many as 11 rare earth metals; there are 17 in all.
Obviously, the demand for these technologies is on the rise. And so, too, is the demand for rare earth metals.
There’s just one problem.
China has a monopoly on rare earth production and refinement. The country controls 95% of rare earth production, giving it enormous leverage in the market.
Such dominance has created a volatile market — one that China manipulates at will.
In 1992, the Chinese president, Deng Xiaoping, was famously quoted saying that “the Middle East has oil, China has rare earths.”
Since then, the country has sought to systematically bring the world’s rare earth sector under its umbrella of state-owned companies.
In 1995, China bought the biggest American rare earth magnet company, Magnequench, which was based in Indiana. In doing this, China took control of the most important portfolio of rare earth patents in the world.
In 2010, China tightened its export quotas, shrinking supplies to the rest of the world. And China also imposed duties of 15–25% on its rare earth products.
Prices for rare earth metals (and their corresponding stocks) shot through the roof as a result.
That alone was problem enough. But this was also a matter of national security. As I said, rare earth metals are an integral part of military technology. The F-35 fighter jet, for example, contains nearly a half ton of rare earth metals.
As tensions cooled, China relaxed its regulations, and rare earth prices crashed back down. This devastated rare earth companies outside of China.
The biggest example of that was Molycorp.
Once America’s top rare earth producer, the company ran up $1.7 billion of debt when China restricted rare earth supplies in 2010.
But it was unable to service that debt when prices crashed back down. Molycorp filed for Chapter 11 bankruptcy protection in 2015 and now focuses on refining rare earth metals, as opposed to mining them.
What happened with Molycorp is a prime example of what can go wrong for rare earth metal companies.
However, now that we have that episode behind us, there is a good reason for optimism in the rare earth segment.
For one thing, governments, including the United States government, seem to have learned that China is less than reliable as a partner.
As a result, governments have issued directives to prioritize domestic rare earth production.
Alaskan senator and chair of the Energy and Environment Committee, Lisa Murkowski, for instance, introduced the American Mineral Security Act of 2015 (S.883). It directs the White House and the officers of its Cabinet (the Interior and the Agriculture and Energy, including the Bureau of Land Management, USGS, and Forest Service) to “facilitate” domestic production of energy-critical elements through all available means.
Meanwhile, U.S. congressman Duncan Hunter has introduced legislation that requires the U.S. military to obtain rare earth elements produced in the U.S., even if it means subsidizing those industries.
The bill would divert funds from military aircraft and missile weapons systems to support domestic production of rare earth metals and other vital materials. It would also provide five-year, interest-free loans to U.S. producers, which would give them time to fix up abandoned and neglected facilities.
These and other efforts elsewhere in the world have begun to loosen China’s stranglehold on the market. As a result, China's share of global rare earth supply is expected to fall from 90% to 75% over the next five years, as more productive mines come online.
This has opened up new opportunities for investors, who can now reenter the rare earth segment at the ground floor.
Rare Earth Stocks
The first company investors should look at is the Vancouver-based Leading Edge Materials Corp. (TSX: LEM).
Leading Edge Materials is the 100% owner of the Norra Kärr rare earth element (REE) deposit. Located in Sweden, Norra Kärr is one of the world’s principal heavy REE resource. It’s uniquely endowed with the most critical REEs: dysprosium, terbium, and yttrium (Y).
It is the only notable heavy REE deposit within the European Union, and it has the capacity to supply all of Europe’s heavy REE requirements for more than 20 years.
In addition to REEs, Norra Kärr also has the capacity to be a major supplier of hafnium, zirconium, and the industrial mineral nepheline.
The mine is surrounded by nearby infrastructure, services, electricity, supplies, and skilled labor, which give it the lowest construction capital requirements among its peers of large and long mine life heavy REE projects.
Another interesting stock is Ucore Rare Metals Inc. (OTC: UURAF).
Ucore has 100% ownership of the Bokan deposit in Alaska. That’s the highest-grade heavy rare earth project in the U.S. Again, this is the state from which Senator Murkowski hails. And in addition to the federal effort, the Alaska State Legislature is investing up to $145 Million in the Bokan project at the discretion of the Alaska Import Development and Export Agency (AIDEA).
Rare Element Resources Ltd. (OTC: REEMF) is another Canadian company that operates in the U.S. It’s Bear Lodge Project in Wyoming is in its early stages, with a planned feasibility study. Measured and indicated reserves total 18 tons of rare earth oxide. The U.S. Forest Service is currently preparing the Environmental Impact Statement (EIS) on the location.
And Australia’s Peak Resources Limited (ASX: PEK) is reportedly in talks to join ERP Strategic Minerals, LLC and Pala Investments Limited, which are looking to restart Molycorp’s Mountain Pass Rare Earth Mine in California. The Mountain Pass mine has been languishing in bankruptcy since Molycorp left it behind.
ERP wants to buy the mine for $1.2 million and for Pala and Peak to operate it. That project is a long way off, however. Getting Mountain Pass up and operating will take the approval of multiple regulators, which includes the Committee on Foreign Investment in the U.S. (CFIUS).
Finally, there’s always the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX). The ETF disperses risk by investing in multiple rare earth companies around the world.
Call it like you see it,
Founder and Publisher, Outsider Club