x Abu Dhabi, UAESunday 21 January 2018

Rare investment opportunities

As demand for rare-earth minerals grows, is now the time for savvy investors to dig in and diversify their portfolios?

The low cost of labour and lax safety protocols at rare-earth metal smelting workshops in China help it to produce the minerals cheaply, leading to a global monopoly over production.
The low cost of labour and lax safety protocols at rare-earth metal smelting workshops in China help it to produce the minerals cheaply, leading to a global monopoly over production.

As little-known minerals increasingly find their way into everyday items, rising demand and declining supplies of such commodities should keep their prices buoyant. Investors in such times may do well to seek out shares of rare-earth metal stocks or ETFs. Harvey Jones reports

If the stock market inferno has burned your portfolio to a crisp, you might be tempted by something on the rare side instead.

So how about a serving of rare-earth minerals? They're tasty, financially nutritious and the world can't get enough of them these days. These little-known metals and alloys are so rare that you probably can't name any, but they are vital components in dozens of everyday items.

Erbium, thulium, ytterbium, lutetium, holmium, dysprosium and praseodymium may sound obscure, but they play a starring role in your car, mobile phone, laptop, plasma screen TV, iPad or sunglasses.

They are also rising stars in new green technology, such as wind turbines and hybrid-car batteries. Is there a part for them in your portfolio?

There are 17 rare-earth metals, all with different skills. Promethium is widely used in nuclear batteries, scandium in aerospace components, yttrium in microwave filters, samarium in lasers and gadolinium in camera lenses, and that is only the start of their talents.

The two most commonly occurring rare earths, lanthanum and cerium, help to convert heavy crude oil into petrol and other refined products.

Neodymium is a key component in hybrid-car batteries, while europium and terbium are used in LCD, LED and plasma displays, says Marc Sontrop, a portfolio manager at the Toronto, Canada-based investment firm Interward Asset Management. "Rare-earth magnets are much more powerful than ferrite magnets, which allows companies to manufacture smaller, lighter and more energy-efficient motors."

Rare-earth metals aren't as rare as their name suggests - all are more common than gold and platinum. They are scattered all over the world, but are mostly found in small concentrations, which makes mining them difficult and expensive.

China has been able to mine them more cheaply than anybody else because of its lower labour costs and cavalier attitude towards worker safety and the environment. Rival countries are unable to compete on price.

The result? China now produces 97 per cent of the world's rare earths, while the US supplies none. China is also the only significant source of scarce heavy rare-earth elements such as dysprosium. It holds a virtual monopoly and has been flexing its muscles, Mr Sontrop says.

"In 2004, China introduced export quotas on rare-earth metals, claiming it was protecting a dwindling resource. Exports have halved from 67,521 metric tonnes in 2005, to just 30,259 tonnes last year."

It has even abused its monopoly as a political weapon. Last November, China suspended all rare-earth exports to Japan for two months, after the Japanese navy seized the captain of a Chinese fishing boat near the disputed East China Sea Islands.

It has also been clamping down on illegal mining, which is responsible for an estimated 25 per cent of total rare-earth production and up to 50 per cent of heavy rare earths. This has further squeezed supply.

China has continued to slash its export quotas, sending shock waves through the market and leading to a dramatic rise in rare-earth prices. In June, earth metals doubled in price in just over three weeks. Neodymium hit a high of US$129 (Dh473) a kilogram, up from $19 a year earlier.

Investors took notice. The Australian miner Lynas Corporation, which owns the richest-known rare-earth deposits outside of China, saw its share price shoot up, as did its rival Arafura Resources.

Nobody is going to shake China's dominance just yet. The minerals are out there, but mining them isn't easy, Mr Sontrop says. "Developing a rare-earth mine and plant is capital intensive and can take 10 or 15 years. Financing is difficult to obtain. Outside of China, technical expertise is limited."

Electronics producer Japan, which consumes roughly half the world's supply of rare earths, has been in talks with Australia, Mongolia and Vietnam in a bid to find a diversified supply of rare earths and shake its China dependency. However, a recent discovery by Japanese geologists of rare-earth metals in the Pacific Ocean could challenge China's dominance.

Mongolia recently discovered that it is sitting on plentiful rare-earth deposits, says Steve Gregory, the managing partner at international financial services company Holborn Assets in Dubai. "It has seen the fastest-growing stock market in the world as a result, growing 184 per cent over 12 months."

So are we seeing a rare-earth bubble? Mr Gregory thinks not because demand is likely to remain high. "The mobile communications revolution depends on rare-earth elements. There are more than five billion mobile phones worldwide, and the numbers will continue to rise. The future market for mobile telecommunications devices is an astonishing 50 billion. There are some substitutes for rare-earth metals, but they are less effective and more expensive."

Soaring demand and shrinking supply should keep prices buoyant. "The sector offers superb growth prospects if you can stand the risk. The problem is, it is difficult for many investors to access. One option is to buy shares in mining companies such as Avalon Rare Metals, Great Western Minerals, Lynas Corporation, Molycorp and Quest Rare Minerals," Mr Gregory says.

Buying individual mining stocks isn't for the faint-hearted, but you can reduce your risk by spreading your money between several different companies. "Alternatively, you can buy more than 40 exchange-traded funds [ETFs] investing in commodities, many of which include a sprinkling of rare-earth metals. Unfortunately, the larger investment houses currently don't offer specialist rare-earth mutual funds."

Almost every new electronic gadget uses rare-earth metals, says Dan Dowding, the chief executive at IFAs Killik & Co in Dubai. "Hybrid cars and wind turbines cannot function without them. These two sectors alone are likely to support a long-term bull market."

Rare-earth metals are a relatively small cost of the final product, which explains why the recent surge in prices hasn't sparked a dramatic increase in the price of electronics. "Yet the industry has had a wake-up call and is trying to rectify matters. Japan and South Korea are both stockpiling," Mr Dowding says. "Companies such as Toyota, Mitsubishi and Sumitomo are buying directly into mining companies. Germany is trying to strike a rare-earths deal with Kazakhstan and the European Commission plans to assist African countries to mine rare earths."

China isn't being difficult for the sake of it. "It has stated that its rare-earth metals will run out in 15 years and it is likely to become a net importer within just five years."

It isn't the only country trying to protect its domestic resources. "The Chinese made a recent bid to corner the market for foreign rare earths by trying to buy a 51.5 per cent interest in Lynas Corp, but it was rebuffed by the Australian regulator," Mr Dowding says, adding that the recent surge in prices is encouraging investors to seek out new sources of supply.

"High prices have made old, abandoned rare-earth mines viable again and the race is on to get production on stream as quickly as possible. Lynas Corp and Molycorp will be the earliest to bring on supply in 2011/12, followed by Arafura in 2013/14, Alkane Resources in 2013/14 and Avalon Rare Metals in 2016. Supply will increase, but steadily rising demand means the market is unlikely to be flooded, so prices should remain firm."

Should you consider scooping up a handful of rare-earth metals stocks? Yes, Mr Dowding says, but only if you're an experienced investor with a well-balanced portfolio. "You should focus on the heavy rare earths, as opposed to light rare earths. They are rarer, especially outside China, harder to extract and command significantly higher prices. Deposits held by the two rare-earth mining giants, Lynas Corp and Molycorp, are 99 per cent light and just 1 per cent heavy."

Heavy rare-earth prices are set to remain high as China's supplies dwindle. "Investors should seek out companies with a large percentage of heavy rare earths. Alkane Resources is a good example, with 25 per cent heavy rare-earth deposits."

Mining company stocks haven't been immune to recent stock market troubles. "Lynas Corp, Molycorp, Arafura, Alkane, Avalon, Rare Element Resources, Great Western Minerals, Greenland Mineral and Quest Rare Minerals have seen share-price declines of up to 60 per cent since August. This sector is clearly at the upper end of the risk spectrum."

Brave investors may see this as a good opportunity to go digging. "With some of the speculative froth blown off the sector, prices are starting to look interesting again."

Mr Dowding says you can spread your risk by investing in a basket of rare-earth miners through the Market Vectors Rare Earth/Strategic Metals ETF, which is listed in the US and invests in 27 companies.

The fund's recent performance shows how risky the sector is, having plunged 40 per cent over the past six months. You may see this as a good opportunity to tuck into a serving of rare-earth metals at reduced prices - or you may suddenly have lost your appetite. Not everybody likes their investments quite so rare.