Here's a risky but potentially rewarding play.
Rare earth metals are set to become big news as demand for these elements, essential in a range of new techologies, seems likely to outstrip supply in the short term.
Moreover, currently China has a strategic stranglehold on these resources, which is driving up the price of those miners located outside China.
What are they?
A group of 17 metals, with glorious names such as Praseodymium and Ytterbium, are often referred to as 'rare earth elements'. It's a bit of a misnomer as they are not all rare. However, their unusual properties make them valuable and they are also difficult to mine and process.
Their great magnetic capacity and resistance to high temperatures make these elements essential components in a variety of low carbon technologies, including hybrid cars, wind energy turbines, catalytic converters and nuclear power rods. All of these markets are set to expand greatly over the coming decades.
They are used in a host of other high tech devices, such as iPhones, fibre-optic cables and missile guidance systems.
China, which produces about 97% of world's rare-earth metals, curbs exports through quotas and additional duties. In addition, some of these rare-earth metals like neodymium, terbium, dysprosium and yttrium are difficult to mine and process. So there is definitely a stranglehold on supplies.
The play
Such is the growing demand for these rare earth metals that it is clear that alternatives sources are going to have to be developed.
There are a number of mining and resource companies operating outside China that are worth looking at, most of which areCanadian. However, their shares have shot up recently and you'd be advised to do plenty of research before taking the plunge:
- Great Western MineralsGroup (GWG)
- Rare Element Resources(RES)
- Rare Earth Metals(RA)
- Avalon Rare Metals(AVL)
- Neo Material Technologies(NEM)
Arafura Resources(ARU) is another possible punt, anAustralianrare earth miner, 25% owned by a Chinese company. Another Australian company, isLynasCorporation(LYC) which apparently owns the richest deposit of rare earths in the world at Mt Weld, 35km south of Laverton in Western Australia. There is alsoGreenland Minerals and Energy Limited(GGG).
Molycorp Mineralsis one of the few US miners in this sphere, and it owns one of the world's largest and richest rare earth deposits at its facility in Mountain Pass, California. However, it is privately owned.
A possible bubble?
The price of many of these shares has already risen substantially in the past couple of years. There is also a debate whether, as production from alternative sources comes to market, there could eventually be a glut of such metals on the market.
My best guess is that demand will remain high and any subsequent production is probably going to be readily absorbed by market demand. In which case, the price of such miners could continue to rise, even over the long term.
Of course investing in any of the above-mentioned companies carries varying degrees of risk. The economics of mining and processing these metals, and the time it takes to deliver them to market, also makes choosing the winners and losers very difficult for those who cannot devote lots of time to learning about this industry.
To reduce your exposure to any single company it may be worth looking at a fund that invests in a number of miners in this space. Names that I've come across includeCity Natural Resources High Yield Trust(LSE: CYN), which holds 1.7% in Neo Material Technologies. The Fool'smining sector boardalso occasionally discuss these companies.