The Rare-Earth Bubble Is Leaking Air

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Rare-earth minerals were hot this time a year ago. Investors couldn't wait to jump into Molycorp (NYS: MCP) and more speculative plays like Avalon Rare Metals (ASE: AVL) and Rare Element Resources (ASE: REE) -- all before any significant revenue started flowing or before we knew what China's strategy was going to be with rare-earth elements.

A year later, China has kept up its protective ways, driving the price of rare-earth elements higher, but that's also brought on new exploration in the industry. Molycorp and Lynas Corporation have been the only two with plants on the near horizon, but even these two mines have a big effect on the industry.

Lynas opened its plant, with expected annual capacity of 22,000 metric tons, earlier this year, and rare-earth prices have fallen for most of the elements it produces ever since. Molycorp is planning to open a 40,000-metric-ton facility, which should have an even more dramatic effect on prices.

It is no longer demand that has become the problem for the industry; it's supply that could send these stocks south. Molycorp estimates that outside of China, there will be a 29,500-metric-ton deficit of rare-earth elements in 2011. It also estimates that demand will decrease slightly from 2010. If both are true, wouldn't Molycorp's and Lynas' mines bring us into oversupply in the market?

And that doesn't include major potential players yet to enter the market.

Supplier
Estimated Resource
Rare Element Resources17.8 million metric tons
Avalon Rare Metals226.9 million metric tons
Mongolia31 million metric tons
KazakhstanN/A
Afghanistan1 million metric tons

Source: Company filings and rareearthinvestingnews.com. N/A = not available.

The data from Kazakhstan does not include an estimate, but it will produce 1,500 metric tons this year and neighbors China's rare-earth mines. Afghanistan has also barely scratched the surface of its possible reserves.

The bubble is popping
Early this year, I predicted that now would be the time Molycorp and others in the rare-earth space would begin to see their bubbles pop. They may already be running out of air after falling from yearly highs, but I still have my concerns about the industry. As you can see above, supply is only growing, and there are countries looking to get into this currently lucrative business.

To this Fool, that doesn't bode well for the future prospects for these stocks.

Interested in reading more about Molycorp?Click hereto add it toMy Watchlist, which will find all of our Foolish analysis on this stock.

At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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