Rare-Earth Minerals 101
A lot of ink has been spilled lately over rare-earth minerals. But my guess is, for the average investor, there's a lot of confusion as to what rare-earth minerals are, why they're important, and who the major players in the industry are.
My main goal here is to give readers a very basic primer of the rare-earth industry.
First, a definition
I know when I hear about "rare-earth" minerals being in high demand, it makes me worry that industry is becoming increasingly reliant upon a resource that is -- by its very definition -- scarce.
Not so, says Richard Martin, editorial director for Pike Research and contributor to Fortune magazine: "Ironically, rare-earth minerals aren't really rare; they get their name because they are spread widely throughout the earth's crust in small concentrations that in most cases can't be mined economically."
Next, the uses
Phew! Dodged a bullet there. But what are these minerals, and why are they so important? Well, here's a list of six of the most sought-after minerals, what they're used for, and how much will be needed -- in tons -- by 2015.
Estimated Demand in 2015 (tons)
|Cerium||Fiber optics, flat-screen displays|
|Lanthanum||Batteries for electric vehicles, oil refining|
|Neodymium||Wind turbines, hybrid and electric vehicles|
|Yttrium||Flat-screen displays, smartphones|
|Terbium||Flat-screen displays, smartphones, hybrid and electric vehicles|
Source: Pike Research, IMOC, Fortune.
As you might gather from this list, just about every use for these minerals is part of a burgeoning movement in the worldwide economy. Everything from smartphones and flat-screen displays, to alternative energy solutions like electric cars and wind turbines relies on these minerals to function. One can only imagine what demand might look like after 2015!
The players, and a little history
The story of the Mountain Pass Mine in California serves as an excellent proxy for the last two decades of rare-earth minerals. Once a powerhouse on the international stage, this mine was forced to shut its doors in 2002.
The reason was quite simple: China had been ramping up production for the past two decades. The country was able to flood the global market with minerals at a lower cost, making just about any other producer irrelevant.
Here's a quick visual of just how fast things changed:
Source: U.S. Geological Survey.
As of now, China controls an astounding 97% of the market.
But this past year, things started to get pretty interesting. China announced it would drastically be cutting exports of rare earths to other countries. As Martin points out, the Chinese government "views rare earths as a key element in its move from a low-cost producer of cheap manufactured goods to a high-tech powerhouse."
The obvious result was ballooning prices for rare-earth minerals worldwide (with, of course, the exception of China). Key industry players -- and publicly traded companies -- like Molycorp (NYS: MCP) , Rare Element Resources (ASE: REE) , and Avalon Rare Metals (ASE: AVL) all saw shares surge between 100% and 475% between September 2010 and April 2011.
A reversal of fortune?
But then, two things happened. First, investors and manufacturers alike realized that there would be a number of new mines coming online in the near future. The new mines would help ease the supply constraints and bring down prices for rare-earth minerals.
And second, China decided to ease its stance in July, doubling its export quotas for the second half of 2011. With that, prices began falling, as well as shares of the three aforementioned companies. Since their height in April 2011, all three are down about 60%.
I'll be getting more into what the future might look like for these companies on a very basic level later this week with my Rare-Earth Minerals 201 installment. In the meantime, if you're ready for advanced courses, Fool Travis Hoium is our resident expert. You can check out his articles here.
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At the time this article was published Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. 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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