rare earths offer unique investment opportunit

Rare earths offer unique investment opportunity
Experts see promise in market growth but urge caution


By Myra P. Saefong, MarketWatch
TOKYO (MarketWatch) -- Rare earth elements are a mere mention in school textbooks, but as their uses in consumer goods continue to grow with the invention of new high-tech gadgets -- and as China tightens control of the market -- they've been flagging heavy interest among commodities investors.

"This hot commodity play has some room to run still," said Brent Cook, author of the investment letter Exploration Insights.


'[Rare earths are] a hot new suite of minerals, that no one can say or spell, needed for all the high-tech gadgets the X, Y and Z generations know and love.'
Brent Cook, Exploration Insights


Rare earths are a "new thing that no one has actually lost money on yet," he said. "It also helps that there is no way to value these things using the conventional NPV [net present value] metric - hence, the sky's the limit."

Rare earths, comprised of about 17 elements, serve as vital components in everything from lasers and optical fibers to petroleum refining, automotive parts, computer monitors, lighting and televisions.

"This is a near perfect story from a promoter's perspective," said Cook, who is also a geologist. These elements are "a hot new suite of minerals, that no one can say or spell, needed for all the high-tech gadgets the X, Y and Z generations know and love."

Some consumer goods wouldn't even exist without rare earths.

But, said PFGBest senior market analyst Phil Flynn, "many green technologies that seem economically feasible today may not be feasible tomorrow due to shortages of these elements."

"China has been aggressive in controlling the [rare earths] supply that they have and buy what they do not have," he said. "The rest of the world is scrambling to find alternative supply."

With that in mind, it's no wonder that some investors are looking to mimic China's apparent strategy -- to get a foothold in the market and find a way to keep it there. China already controls more than 95% of the world's rare earths market. See in-depth look at market for rare earths.

Misunderstood
But commodities investors need to realize that the term "rare," in this case, is a bit of a misnomer.

"Rare earths are not that rare," said Lawrence Roulston, editor of Resource Opportunities. "The most commonly occurring rare earth metals -- cerium, lanthanum, neodymium and yttrium -- are actually more common in the Earth's crust than lead."

"Once exploration gets underway, it won't be hard to find new deposits that contain rare earths," he said.

The world's market for them is also relatively small, amounting to maybe $1.5 billion in annual sales, according to Cook.

"It will only take production from a couple of large mines to swamp the market," he said. That market will "grow for sure, but investors must be careful they don't end up with a company producing the elements that we will see oversupply in."

And an oversupply of these not-so-rare elements is possible, as manufacturers realize the current difficulty in procuring refined rare earths.

The battery sector may have even found a way to avoid using them altogether.

The current electric-hybrid vehicle market is dominated by NiMH batteries, which use rare-earth metals, said Dan Squiller, chief executive of PowerGenix, a manufacturer of rechargeable nickel-zinc batteries.

But lithium-iron-phosphate technology at a company called A123Systems Inc. -- a supplier of high-powered lithium-ion batteries -- does not use rare earth metals, said Squiller.

"To the extent that A123's technology affects the market for NiMH by displacing NiMH batteries in HEVs and/or growing the EV market at the expense of HEVs, it could affect demand for rare earths," he said.


Investing with caution
So investors really have quite a bit to think about, and the best advice for them is geared toward simple caution and patience.

"You'll need to be patient as the rare-earths story unfolds over the next couple of years," said Byron King, editor of Energy & Scarcity Investor, published by Agora Financial LLC of Baltimore.

He points out that Lynas Corp. /quotes/comstock/22x!e:lyc (AU:LYC 0.56, -0.01, -1.75%) controls one of the world's richest, high-grade ore deposits of rare earths at Mount Weld, Australia.

"The world will need these materials in the coming years, and Lynas will become one of the world's most important suppliers," he said.

a recent report, Sean Brodrick, a natural-resources analyst at UncommonWisdomDaily.com, also mentioned Avalon Rare Metals /quotes/comstock/11t!avl (CA:AVL 3.20, +0.09, +2.89%) , which owns a rare-earth property at Thor Lake in Canada's Northwest Territories.

But he noted that Avalon's share price has sky-rocketed over just the past four months.

"This one has already left the launch pad," Brodrick said. "However, there will be pullbacks, and they may be buying opportunities."