When it comes to commodity investing, most of us are familiar with the different types of commodities that we can invest in. Popular choices are energy commodities, such as oil and natural gas, or the agricultural or “soft” commodities like corn, wheat and cotton. Metals are also popular investments, and many people use gold as a type of currency in times of economic uncertainty. Another group of less recognisable metals has also joined the investment conversation – the rare earth metals (REM).
The rare earths story embraces potentially big windfalls laced with plenty of risk. Listed Australian rare earths companies aren’t for conservative investors, as explorers without earnings dominate the landscape. Nevertheless, that doesn’t stop share prices rockting as the market looks forward, factoring in what tomorrow can potentially bring in an industry dominated by China.
The share price of Lynas Corporation, which is among the best known Australian rare earths companies, soared from 37.5 cents in early May last year to a 12-month high of $2.70 on April 12, 2011. At the close of trade on May 27, 2011, Lynas was priced at $2.28 a share. Alkane Resources has also had a stellar run, rising from just 23 cents in June 2010 to a peak of $2.73 on 15th April 2011. It closed at $1.84 on Friday 27th May 2011 (see table below for more comparisons).
Rare earths enable digital technology, such as flat panel televisions, hard disc drives, DVDs, iPods and hybrid cars, so company and industry outlooks will be ruled by demand and supply. Against this backdrop is China, which produces upwards of 90 per cent of rare earths and has dramatically cut exports.
It’s in this global environment that Strategic Elements Limited (Proposed ASX: SOR) plans to raise up to four million dollars to become Australia’s only rare earths focus pooled development fund.
“We believe rare earths is a big growth story because of huge demand, and registration as a pooled development fund means that investors can get exposure to the potential upside of the sector without having to pay tax on capital gains or dividends,” said Managing Director Charles Murphy.
Given China's dominance in the market and its recent reduction in production, there are fears amongst Western governments of a coming global shortage. “These market conditions of a tighter supply and growing demand create a unique investment opportunity to develop a rare earths industry outside of China,” said Murphy.
According to Strategic Elements, it will be the first to seriously explore for these metals in mineral rich New Zealand. The company also has an Australian exploration program to discover large deposits of 17 nonferrous metals such as scandium, yttrium and 15 lanthanides in Western Australia, Queensland and New South Wales. “As well as exploration, Strategic Elements will also invest in mining, processing and materials development by providing capital, technical expertise and industry alliances to early stage small and medium sized Australian companies involved in the rare earths value chain,” said Murphy.
To show how hot rare earths prices are, Shaw Stockbroking senior resources analyst Vince Pisani compares several elements in 2006 to the end of 2010. The US spot price of lanthanum oxide has risen from a $1.80 a kilogram in 2006 to $61 a kilogram in 2010. Cerium oxide has shot up from $1.50 a kilogram in 2006 to $62 a kilogram in 2010. And, neodymium has jumped from $14.80 a kilogram in 2006 to $88.80 a kilogram in 2010.
Rare Earth Metals and Their Uses
Rare earth metals, also commonly known as rare earth elements (REE), are a group of periodic elements made up of the 15 lanthanides along with yttrium and scandium. Although not lanthanides, yttrium and scandium are still considered rare earths because they are often found in the same ore deposits as the lanthanides and exhibit similar properties.
Aerospace components, mercury-vapor lamps
Lasers, microwave filters, high-temperature superconductors
Light Rare Earth Elements (LREE)
Camera lenses, catalytic cracking catalyst for refining oil, high refractive index glass, battery electrodes
Glass and ceramics, polishing powder, chemical oxidizing agent
Rare earth magnets, lasers, carbon arc lighting
Rare earth magnets, lasers
Rare earth magnets, lasers, masers
Heavy Rare Earth Elements (HREE)
Lasers, mercury vapor lamps
Rare earth magnets, lasers, x-ray tubes, MRI, computer memory
Lasers, fluorescent lamps
Rare earth magnets, lasers
Lasers, vanadium steel
PET scanners, high refractive glass
As you can see, the rare earths have many uses, and keep in mind that these uses find their way into everyday technology, such as flat screen TVs, smartphones, tablet PCs and hybrid cars. Add to this their use in wind turbines and military equipment and it's plain to see that the rare earths are critical to the global economy. While we read and hear many reports about the wide-ranging uses of oil in our everyday lives, the rare earths are becoming nearly as important.
Strategic Elements plans to take advantage of this rising demand in rare earths. It says that it has a vertical integration strategy and will be investing in Australian Advanced Minerals, a 100 per cent owned Research Company that will focus on licensing of intellectual property relating to the spectral, electronic or magnetic properties of rare earth elements. “Rare earths allow for smaller, lighter batteries and motors so we will see applications in everything from mobile phones to rechargeable batteries of hybrid cars to advanced ceramics and even fast trains that run on friction free magnets,” said Murphy.
Sourcing and Mining of Rare Earth Metals
The problem is finding them and being able to extract and refine them at an economical price point. Rare earth deposits exist all over the world, and most deposits can be categorised as being either a light rare earth element (LREE) deposit or a heavy rare earth element (HREE) deposit, and most deposits will be found with uranium. In fact, in many uranium mines, rare metals are simply left in tailing, as refining the rare earths is not economically viable for the majority of miners. In general, HREE deposits are considered more valuable than LREE deposits, since the heavy rare earths are considered rarer. Additionally, the heavy rare deposits will also typically contain a large amount of LREEs, making such discoveries much more lucrative.
There are numerous mines and projects around the world, but notable deposits can be found in parts of Canada, Australia, Russia and China among other locations. While rare earth deposits may be plentiful, the costs associated with mining and refining the minerals is a major barrier to entry.
China's Rare Earth Stronghold
The cost of such rare earth mining projects is the primary reason why China has historically been world's largest producer of rare earth metals. With less than 40% of the world’s proven rare earth reserves, it is China’s massive price undercutting (a luxury made possible by their low cost of labor) that allows them to control the world’s rare earth supplies. That makes many outside of China very nervous. For example, in late 2010, the Chinese government announced plans to limit rare earth exports to ensure that local producers who use rare earth metals in the inputs will have the ability to access the metals. With most other projects and mines abandoned around the world in the early 1990s due to China’s aggressive pricing, China became the only viable player in the rare earth industry. However, increasing global demand for rare earths has prompted many miners to reopen previously abandoned projects and seek out new deposits across the globe.
Rare Earth Investments
Investors looking for ways to play the industry do not have a multitude of options. The rare earths are not traded like gold, silver or copper, and few ETFs offer prospective investors exposure to the metals. Therefore, the easiest and perhaps most direct way to gain exposure to the rare earth industry is through the miners themselves. While there are a few mid-caps out there, there are also juniors that may or may not have the means or partnerships to actually produce their deposits. See the list below for six Australian companies exposed to rare earths.
Upcoming IPO Strategic Elements offers investors the chance to get in on the ground floor. In company documents it says that it has over $2 million cash in hand and will invest in Australian companies across the rare earths and rare metals mining, processing and materials development sector. The company says that it targets "emerging growth companies identified as having large scale potential upside and assists with capital, technical expertise and industry alliances". You can view the IPO prospectus here.
The Bottom Line
Rare earths have burst back onto the economic landscape in recent years. Demand is expected to continue to grow in the coming years and you can expect rare earths to remain in the headlines. With more projects starting up in an effort to hedge against the possibility of China limiting exports, the rare earth industry should see immense growth. However, keep in mind that the costs associated with new projects are incredibly large, and cash flow will be of the utmost importance for these miners if they want to ensure that their rare earth projects see the light of day.
SHARE PRICE CLOSE
12 - month low
12 - month high
Greenland Minerals and Energy
Price current to market close, 27 May 2011
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