Bargain-hunting in rare earths

Rare earth stocks have gone from marketplace darlings to market dogs. But if we can live with the risks, there are many good reasons to take an additional look.

Remember rare earths? As well as how prices of these metals, that are necessary raw materials for technologies including wind turbines, hybrid cars as well as flat-screen displays, had soared? Technology manufacturers scrambled to find reliable sources of supply as China utilized its position as owner of 95% of global production of rare earths to restrict supplies to manufacturers outside of China. And investors scurried to find a rare earth stock or perhaps two to add to their portfolios.

As well as now?

Shares of Molycorp (MCP, news), the highest-profile U.S. rare earth miner, were down 33% in simply you week (Sept. 16 through 23) recently. Lynas (LYSDY, news) (LYC.AU in Australia) dropped 17% in Sydney and 12% in Brand new York on Sept. 26.

After falling an additional 3.5% on Sept. 30 to $32.87, Molycorp is 58% off its 52-week high. Lynas, at $1.07 in Brand new York on Sept. 30, is 64% off its 52-week high.

The plunge in the price of rare earth stocks is, of course, partly a result of macroeconomic fears -- of a slowdown in the Chinese economy, of a slide by the U.S. economy back into recession, of a chaotic default by the Greek government that will return the international financial program to the brink it faced in 2008.

Mainly because rare earth stocks such as Molycorp as well as Lynas are highly speculative issues -- Molycorp has simply begun full-scale mining, as well as Lynas is still waiting on approval from the Malaysian government to open a processing plant to turn rare earth ores into useful forms of rare earth minerals -- their share costs are more volatile than the highly volatile global financial markets.

The rare earth story isn't all macroeconomics. The drop in the cost of rare earth stocks -- and the odds that these shares may definitely not only recover and move up to brand new highs -- is a result of changes in the rare earth marketplace that have nothing to do with global macroeconomics. As well as the trajectory of any individual stock in any rally is strongly influenced by company-specific news.

In other words, if you want to figure out whether or not to invest in exactly what are currently very depressed rare earth stocks, you should understand what's been happening in this once-hot sector because it dropped from the headlines.

Let me take we back to days of yesteryear -- 2009 or perhaps and so, for many of us -- whenever rare earth stocks burst on the investment scene.

China, that controls about 95% of the global provide of rare earth elements, got the ball rolling with the risk of an export boycott. Because rare earth elements are a key ingredient in many of the world's emerging technologies, the risk was a big deal. Adding a bit of 1 of the 17 rare earth elements to a magnet in the engine of an electrical to hybrid vehicle increases the power as well as efficiency of the engine, mainly because rare earth magnets are the strongest type of permanent magnets now made. Rare earths improve the color in TV screens and in lasers. You will also find rare earth elements in tunable microwave resonators, as well as terbium, 1 of the rare earth elements, is a key ingredient in low-energy light bulbs.

We're definitely not talking about trace amounts of these elements, either. The electrical engine in a Toyota Prius uses about 2 pounds of neodymium in its permanent magnets. Each Prius battery also uses 20 to 30 pounds of yet another rare earth, lanthanum. As well as it takes about a ton of neodymium to make the big magnets used in each megawatt of wind-turbine capacity.

Fortunately, despite their name, rare earth elements aren't especially rare. They're found in reasonably high concentrations in the Earth's crust, with you, cerium, coming in at the 25th most abundant element in the crust. Global production came to about 140,000 metric tons of refined rare earths in 2008.

But supplies of the rare earths that can be profitably mined aren't distributed evenly across the world. Partly that's the luck of the geologic draw. But mostly it's a function of the huge environmental costs of mining these rare earths. The traditional way has been to bore holes into promising rock formations, pump acid down the holes to dissolve many of the rare earths, and then pump the slurry into holding ponds for extraction of the rare earths. That extraction leaves behind a lake of water mixed with acid as well as various and sundry dissolved minerals.

It's a great deal, a lot cheaper if a company can get away with spending just regarding nothing on controlling the resulting water and sludge. The world's low-cost manufacturers of rare earth elements are definitely not huge and efficient open-pit mines but small, completely unregulated mom-and-pop mining companies in China. (The Chinese government is now trying to force many of these companies from business. The motive is many combination of a desire to limit environmental damage in China as well as to exercise greater control over exports. I'd say that the latter dominates.)

Over the past 20 years, the accidents of geology as well as the realities of unequal regulation slowly led to the closure of most of the rare earth mines outside of China. The Mountain Pass, Calif., mine, the world's richest proven reserve of rare earths, stopped production in 2002, for example.

Rising demand began to change that pic. Companies like Lynas as well as Molycorp crept back onto the stage with plans to start brand new mines or perhaps resume production from old mines.

It took the Chinese overplaying their hand, however, to turn that small trend into a speculator's dream. The Chinese started to reduce the amount of rare earth metals that can be exported. Companies outside China began to worry about the very real possibilities of paying higher prices as well as of not being able to purchase required raw materials.

This appears to be a key goal in China's strategy. By restricting exports, China would definitely force high-technology companies that need these rare earths to relocate production to China, accelerating the transfer of intellectual property to Chinese companies. It's no secret that China wants to create major wind, solar as well as hybrid-car industries.

The restrictions on production have increased in 2011. Beijing just regarding closed down its industry in early August to assess pollution issues (at least that's the official story). China is also creating a government-controlled monopoly, Bao Gang Rare Earth, that would definitely consolidate the 35 companies that now mine rare earths in northern China. Three similar government-controlled companies will consolidate production in the south of the nation.

The growing demand for rare earths from brand new technologies, plus China's moves, had 2 immediate effects. First, prices for rare earth minerals, especially those of the heavy rare earth elements, soared. Costs for many rare earth elements climbed 10 times from 2009 into 2011. 2nd, the scramble was on for alternative sources of supply. Quickly, there was a lot of capital available to restart mines that had closed mainly because of low prices as well as stricter environmental regulation outside of China.


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