REM`s Gaining Investment RecognitionInvestopedia Staff, On Thursday February 24, 2011, 6:11 pm EST
When it comes to commodity investing, most ofus are familiar with the different types of commodities that we caninvest in. Popular choices are energy commodities, such as oil andnatural gas, or the agricultural or “soft” commodities like corn, wheatand cotton. Metals are also popular investments, and many people usegold as a type of currency in times of economic uncertainty. Silver,copper and platinum have also gained popularity as investment optionsfor those searching for ways to diversify their holdings. Another groupof less recognizable metals has also joined the investment conversation –the rare earth metals (REM). This article will highlight the basics ofwhat these “rare” commodities are, their uses and what role they mayplay in the future.
Rare Earth Metals and Their Uses
Rare earthmetals, also commonly known as rare earth elements (REE), are a group ofperiodic elements made up of the 15 lanthanides along with yttrium andscandium. Although not lanthanides, yttrium and scandium are stillconsidered rare earths because they are often found in the same oredeposits as the lanthanides and exhibit similar properties. “Rare” is abit of a misnomer when describing these elements, as the rare earths areactually plentiful in the Earth’s crust. In fact, cerium, one of thelight rare earth elements (LREE), is found in at 68 parts per million(ppm), which is similar to copper. Below is a breakdown of each rareearth element and its common uses:
| Element | Common Uses |
| Non-Lanthanides | |
| Scandium | Aerospace components, mercury-vapor lamps |
| Yttrium | Lasers, microwave filters, high-temperature superconductors |
| Light Rare Earth Elements (LREE) |
|
| Lanthanum | Camera lenses, catalytic cracking catalyst for refining oil, high refractive index glass, battery electrodes |
| Cerium | Glass and ceramics, polishing powder, chemical oxidizing agent |
| Praseodymium | Rare earth magnets, lasers, carbon arc lighting |
| Neodymium | Rare earth magnets, lasers |
| Promethium | Nuclear batteries |
| Samarium | Rare earth magnets, lasers, masers |
| Heavy Rare Earth Elements (HREE) |
|
| Europium | Lasers, mercury vapor lamps |
| Gadolinium | Rare earth magnets, lasers, x-ray tubes, MRI, computer memory |
| Terbium | Lasers, fluorescent lamps |
| Dysprosium | Rare earth magnets, lasers |
| Holmium | Lasers |
| Erbium | Lasers, vanadium steel |
| Thulium | x-ray machines |
| Ytterbium | Lasers |
| Lutetium | PET scanners, high refractive glass |
As you can see, the rare earths have many uses, and keep in mind thatthese uses find their way into everyday technology, such as flat screenTVs, smartphones, tablet PCs and hybrid cars. Add to this their use inwind turbines and military equipment and it's plain to see that the rareearths are critical to the global economy. While we read and hear manyreports about the wide-ranging uses of oil in our everyday lives, therare earths are becoming nearly as important.
Sourcing and Mining of Rare Earth Metals
Asmentioned, most REMs are not rare in the Earth`s crust. The problem isfinding them and being able to extract and refine them at an economicalprice point. Rare earth deposits exist all over the world, and mostdeposits can be categorized as being either a light rare earth element(LREE) deposit or a heavy rare earth element (HREE) deposit, and mostdeposits will be found with uranium. In fact, in many uranium mines,rare metals are simply left in tailing, as refining the rare earths isnot economically viable for the majority of miners. In general, HREEdeposits are considered more valuable than LREE deposits, since theheavy rare earths are considered rarer. Additionally, the heavy raredeposits will also typically contain a large amount of LREEs, makingsuch discoveries much more lucrative.
There are numerous mines and projects around the world, but notabledeposits can be found in parts of Canada, Australia, Russia and Chinaamong other locations. While rare earth deposits may be plentiful, thecosts associated with mining and refining the minerals is a majorbarrier to entry. The typical rare earth project can cost anywhere from$500 million to well over $1 billion. This is the reason why investorsshould be careful when a miner claims to be involved in REM production.Since the cost and time to make such projects viable and economical arequite substantial (often over $500 million and many years beforeproduction becomes economically viable), many of these junior rare earthminers may simply have the mining rights to a rare earth deposit thatthey might have no real intention of producing. (For more insight, see A Beginner's Guide To Precious Metals.)
China's Rare Earth Stronghold
The incredible costof such rare earth mining projects is the primary reason why China hashistorically been world's largest producer of rare earth metals. Withless than 40% of the world’s proven rare earth reserves, it is China’smassive price undercutting (a luxury made possible by their low cost oflabor) that allows them to control the world’s rare earth supplies. Thatmakes many outside of China very nervous. For example, in late 2010,the Chinese government announced plans to limit rare earth exports toensure that local producers who use rare earth metals in the inputs willhave the ability to access the metals. With most other projects andmines abandoned around the world in the early 1990s due to China’saggressive pricing, China became the only viable player in the rareearth industry. However, increasing global demand for rare earths hasprompted many miners to reopen previously abandoned projects and seekout new deposits across the globe. However, as previously noted, thesenew projects will not come cheaply or quickly.
Rare Earth Investments
Investors looking for waysto play the industry do not have a multitude of options. The rareearths are not traded like gold, silver or copper, and few ETFs offerprospective investors exposure to the metals. Therefore, the easiest andperhaps most direct way to gain exposure to the rare earth industry isthrough the miners themselves. While there are a few large-caps outthere, there are many more juniors that may or may not have the means orpartnerships to actually produce their deposits. In addition, suchsmall firms often trade at much larger betas and less liquidity, soinvestors must do their homework when investing in rare earth miners.
The Bottom Line
The rare earths have burst backonto the economic landscape in recent years. Demand is expected tocontinue to grow in the coming years, one can expect rare earths toremain in the headlines. That said, with more projects starting up in aneffort to hedge against the possibility of China limiting exports, therare earth industry should see immense growth. However, keep in mindthat the costs associated with new projects are incredibly large, andcash flow will be of the utmost importance for these miners if they wantto ensure that their rare earth projects see the light of day.