Rare earth stocks are a class of cult investment. But what are Rare earths? These metals and minerals are a collection of seventeen chemical elements in the periodic table, namely scandium, yttrium and fifteen lanthanoids. And rare earth metals are very valuable to tech companies — thus very valuable to investors.
In modern technology, the use of rare earth metals has increased over the past few years. For example, the construction of hybrid cars — fast-charging batteries use rare earth minerals. Unfortunately, this new demand has strained supply, and there is growing concern that the world may soon face a shortage of the rare earths. This is where the investment opportunity unfolds.
The story of the rare earth metals is mostly one of China producing and exporting while Japan, America and everyone else is importing. Rare earth metals are vital to new technologies such as iPads and iPhones from Apple Inc. (NASDAQ: AAPL), as well as green energy technology such as wind and solar. Rare earth metals are critical to the future of hybrid and electric cars. But since China produces 95% rare earths, it is in charge of worldwide supply and high demand has caused skyrocketing prices.
Rare earth metals have held up well during the financial crisis, as they aren’t exchange traded commodities and subject to speculative trading like gold, silver and other metals. Also, with rare earths there is no more fretting over investment banks holding short positions that are greater than all of the gold or silver produced in a year– or the IMF attempting to suppress prices by leasing gold that they don’t own. The pricing is largely determined by supply/demand fundamentals in the free market and industry, which has resulted in strong demand and pricing for rare metals that’s expected to only get stronger.
A good play in this sector is Avalon Rare Metals (AMEX: AVL). Their project at the Thor Lake in Canada has global importance with its ability to offer NAFTA access to rare earth metals for decades to come. As western nations move to reduce dependence on foreign oil from unfriendly countries, I believe that there will be a significant increase in demand for the rare earth metals which should benefit Avalon. Its flagship project at Thor Lake was considered to be a “greener way of doing business”, according to APTN Economic Changes.
However, there is risk in Avalon Rare Metals. The stock is up +40% since joining the AMEX at the end of last year, and the financial statement shows the company is still not turning a profit. But in my opinion, there is still huge upside potential in this sector and in companies such as Avalon as rare earths remain in focus
There are other companies that an investor should also consider apart from Avalon and they are: Lynas Corporation (PINK: LYSDY), Rare Element Resources Ltd. (AMEX: REE) and Molycorp, Inc. (NYSE: MCP). But remember that each of these picks is a speculative play with high risk. Prices for these stocks may very well continue higher as rare earth metals become more rare, but some are already calling this sector the next big bubble.