Do you know rare earth elements?

The first part of this post is a short science lesson to frame the subject. Rare earth elements (REE) are a collection of 17 chemical elements in the periodic table. These elements are the 15 lanthanides along with scandium and yttrium. Why are these elements important? A recent article from the Financial Times puts it rather succinctly by saying:

“…rare earth elements are the most important substances you have never heard of, vital for applications from hybrid cars to guided missiles. Arguably as important as oil to a modern economy or military force, their supply is far more concentrated. While the Organization of the Petroleum Exporting Countries can make the world shudder with its 40 per cent of crude supply, China has 98 per cent of REE production, leading the late Deng Xiaoping to remark that “he Middle East has oil, but China has rare earths.”

Televisions, cell phones, computers, guided missiles, hybrid cars, satellites, wind turbines, batteries and more are non functional without these elements. China’s dominance in REE was not always so. Until the 1990s a single mine in the U.S. (Mountain Pass Mine) was the world’s source for REE. Low prices and environmental concerns saw the Mountain Pass mine close in the mid 90s. Today the Mountain Pass Mine is owned by Moly Corp. which was sold by Chevron in the last few years to a group of investors of which Goldman Sachs is one of those investors.

In the years since the closing of the Mountain Pass mine China has built up their own mines as well as acquiring interests in REE mines around the world. China even tried to buy the Mountain Pass mine.

The bad news

China which now controls 98% of the world’s REEs recently announced that it was going to impose restrictions on exports of REE. The Chinese government is going to cut its REE export quota by 72% for the 2nd half of 2010. This is exactly why the Pentagon and the European Union have held hearings and conferences on how to handle the looming problem of REE availability.

The good news

There are ways to invest in REEs. Currently, there are no REE ETFs. That is coming though. Market Vectors has filed with the SEC to start a Minor Metals ETF. In the meantime there are two Canadian companies that one can consider. We want to look to Canada because the companies that stand to benefit most from China’s restrictions are non-Chinese and non-Chinese owned REE companies. The two most prominent are Avalon Rare Metals (ticker AVARF) and Great Western Minerals (ticker GWMGF). Yes, I do not typically point to individual stocks but while waiting for an ETF in this space it may be worth looking at small positions in one of these stocks. The primary concern with investing in these stocks is that they are penny stocks but if you are looking for a flyer to add a small position to your portfolio look at one of these stocks.

Tagged as: Rare Earth Elements