What is so rare as a day in June, the poet asks? The answer..a sector in play, on a perfect day. The rare earth sector is experiencing an explosion of investment interest as China continues to place restrictions on Rare Earth Oxides (REO).
Resource investors are drooling over the potential price explosion like Homer does for donuts. Every year around this time a new craze emerges to capture the imagination. We lived through “hula hoops”, “beanie babies” and “cabbage patch kids”. Now rare earths have become the latest “must have” for the holidays. The drums are beating strongly in the investment jungle and they are pounding out “rare earth-must have!!!” It is vital for us to choose judiciously and not be swept up in the St. Vitus Dance of speculative fever. Have no doubt—the mania phase is upon us. It is being exacerbated by China using export quotas to bring to public attention a once arcane sector of the mining industry, propelling rare earth miners onto the front pages. For many years end users relied on China’s production as mines outside of China were shut down due to the environmental issues involved. However a transition is occurring and assets outside of China are gaining a lot of investor interest. Of course share prices have doubled and tripled. Question on the table is which of these exotic metal miners will lead the sector as many companies are far from production and only a few could benefit from the near term supply crunch.
In the interest of time and space I will not belabor readers with metallic elements that end with “iums”. Suffice it to say rare earth oxides are critical in the manufacture of high tech equipment such as ipods, electric cars, wind turbines, magnets, lasers, cell phones and many other new uses. Demand in rare earths is expected to increase exponentially over the next generation. This immediately brings into prominence the importance of many of our industry leaders names like Apple (AAPL:NASDAQ) and General Electric (GE:NYSE) springing to the forefront. The use in hybrid cars and energy saving products are an integral part of green energy push. Demand is increasing and China controls about 97% of these precious oxides. China will continue to issue quotas before the onset of the Lunar New Year in February. This may generate a price spike in rare earth stocks in the coming months.
Other countries are concerned of a supply squeeze especially Japanese manufacturers like Toyota and Honda whose success with their hybrid vehicles, depends on having a supply of rare earth metals. Japan has already reported supply disruptions and expects to run out of rare earths by April of 2011. Japan must free itself from its present domination by the Chinese as their economy is highly dependent on the use of rare earths. Japan has shown its interest in rare earths with major deals outside of China. Sojitz, a major Japanese trading giant recently made a deal with Lynas and Hitachi and Sumimoto has signed agreements with Molycorp (MCP:NYSE), the only near term producer in the Western Hemisphere.
Of the 200 or so rare earth companies that are being promoted only a few near production. Most companies are many years away and mining rare earths is extremely difficult due to environmental and regulatory issues and separation costs.