Over the past week shares in two of the largest rare earth metals producers, Lynas (LYC) and Molycorp (MCP), have rallied on a combination of stock-specific and industry news. The strong performance from these two sector heavy weights has pushed up rare earth ETFs, including the Market Vectors Rare Earth/Strategic Metals ETF (REMX) and the UBS-ETF STOXX Global Rare Earth (UIMV), which are showing signs of rebounding from recent lows.
Molycorp's Mountain Pass rare earth facility in California. (Photo copyright Molycorp)
Shares in Lynas, Australia’s largest rare earths producer, have rallied 16% since Friday’s close after the company’s refinery in Malaysia finally got the go ahead from authorities. The Malaysian authorities rejected efforts to block Lynas’ plant and a parliamentary panel recommended that the company get a provisional license to commence operations.
California-based Molycorp, owner of the Mountain Pass rare earth mine has put in an equally impressive performance. Since it announced on 11 June that it had completed its CAD$1.2 billion takeover of Canada-based Neo Material Technologies, shares in the company are up 15%.
Commenting on the acquisition, Mark A. Smith, Molycorp’s President and CEO, said “Our expanded product line in rare earths, particularly in the ‘heavies’ category, and rare metals, along with our patented technology platform, and our ability to consistently meet demanding customer specifications, will make us a formidable player in these global markets for years to come.”
| FEATURED PRODUCT
Market Vectors Rare Earth/Strategic Metals ETF (REMX) – Tracks the performance of the Market Vectors – Provides exposure to companies globally primarily – Physically replicated. Major holdings include Iluka – NYSE listed, UK Reporting Status, eligible for SIPPs, |
In terms of industry developments, the main story set to drive rare earths stocks over the short to medium term is the news that the Chinese government is warning of depleting supplies and has vowed to defend its exports curb.
According to a cabinet report published by the official Xinhua news agency, “The decline of rare earth resources in major mining areas is accelerating, as most of the original resources are depleted. In Baotou [the largest rare earth industrial base in China] only one-third of the original volume of rare earth resources is available in the main mining areas”
It seems therefore that, after more than 50 years of excessive mining, China’s rare earth reserves have begun to materially decline and the years of guaranteed rare earth supply are drawing to a close.
However, some analysts are suggesting that this is just a ploy by the Chinese to defend its curb on exports. Either way, this could have a major impact on supply and demand dynamics when demand is set to increase to 200,000 tonnes by 2015 from 105,000 metric tonnes last year, according to data from the US Geological Survey and Dudley Kingsnorth of Industrial Minerals Co of Australia (IMCOA).
As an aside, what are rare earths? Essentially, rare earths are a group of 17 relatively abundant chemical elements. They are Lanthanum (La), Cerium (Ce), Praseodymium (Pr), Neodymium (Nd), Promethium (Pm), Samarium (Sm), Europium (Eu), Gadolinium (Gd), Terbium (Tb), Dysprosium (Dy), Holmium (Ho), Erbium (Er), Thulium (Tm), Ytterbium (Yb) and Lutecium (Lu), and their congeners Scandium (Sc) and Yttrium (Y). However, despite their abundance, they rarely exist in economically viable concentrations. In addition, the mining and refining process can be hazardous, difficult and costly.
But because of their unique properties, rare earths are considered indispensable in modern industry. They are used extensively in areas such as new energy, new materials, energy conservation and environmental protection, aeronautics, electronics and information technology, to name but a few. Catalytic converters, hybrid cars, magnets, wind turbines, flat screen televisions and smartphones, for example, all contain vital quantities of rare earths. Other significant applications for the elements are in metal alloys, polishing, glass, ceramics, medical imaging and defence.
For investors wishing to access rare earth metals, there are a couple of ETFs offering highly targeted exposure:
Market Vectors Rare Earth/Strategic Metals ETF (REMX)
The Market Vectors Rare Earth/Strategic Metals ETF (REMX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Rare Earth/Strategic Metals Index (MVREMXTR).
The Market Vectors Rare Earth/Strategic Metals Index is a rules-based, modified capitalization-weighted, float-adjusted index intended to give investors a means of tracking the overall performance of publicly traded companies primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. Major holdings include Iluka Resource, Molycorp, Kenmare Resources, Lynas and Eramet. In total there are 29 holdings.
NYSE listed. TER 0.57%.
Note to UK investors: The Market Vectors Rare Earth/Strategic Metals ETF has been registered with HM Revenue & Customs’ UK Fund Reporting regime, meaning it is treated on a similar tax basis to UK funds, as opposed to a punitive tax treatment which can apply to offshore funds outside the regime.
UBS-ETF STOXX Global Rare Earth (UIMV)
The UBS-ETF STOXX Global Rare Earth (UIMV) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the STOXX Global Rare Earth Index (STGREP).
The STOXX Global Rare Earth index tracks the performance of companies that generate at least 30 percent of their revenues in the rare earth sector. The rare earth sector is defined as all companies whose operations include the exploration, extraction, transport, processing or any other business involving any of the 17 rare earth elements. Major holdings include Molycorp, Lynas, China Rare Earth, Alkane Resources and Rare Element Resources. In total there are 13 holdings.
Xetra listed, UCITS compliant, registered for public distribution in the UK, Austria, Germany, France, Italy Luxembourg and Sweden. TER 0.62%.
China has the right to reduce rare earth export to its advantage, just like OPEC controlling oil. China has been giving a free ride to the world at the expense of its environment.
China uses it as a weapon against the dispute with Japan and/or other countries. Despite the mutually beneficial trade, Japan has been brutal to China in the last 250 years. The role in Opium Wars and the criminal acts in WW2 are just some examples.
With the restriction of importing weapons from US, should China do the same in restricting the rare earth that helps US weapons?
Rare earth is available in many parts of the world. They are not mined due to the cost and the environment damages. It is about time China cares about its own environment and charges its minerals as much as the market can bear – it is a free market after all.
All the companies in mining these minerals will enjoy appreciation in the short term. However, it is the riskiest investment by now as we do not know what is the next move by China.
Chinese want to use this strategy to improve foreign investment and advantage in its industries that use these rare earth like hydrib cars and turbines. WTO cannot accuse China in limiting export of these rare earths as there is no such precedent.
China will and should charge these rare earths at 10% below the closest competitors. If they are more than 10% less, the local governments will step in to protect their industries and/or take actions.
China has at least 3 years before these foreign mines are ready. By then, China will decide the prices again based on whether they want to capture the rare earth market and/or their products that use these rare earth elements.