Rare Earth Stocks — An Uncommonly Good Buy?

China's meddling makes rare earths a risky play

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Rare Earth Stocks — An Uncommonly Good Buy?

The China Factor

Of course, a seismic shift in the rare earths sector could significantly alter the outlook for these stocks. Western nations talk about reducing dependence on foreign oil from unfriendly countries, and could very well start feeling the same way about importing rare earths from China — the industry’s main supplier — in the years ahead. China produces nearly 95% of the world’s rare earth materials.

It’s also worth noting that extracting rare earths can sometimes be a very messy business with huge environmental impacts, and backlash or new regulations could grind production to a halt and crimp supply from U.S. and Canadian mines. Even China is focusing on improving pollution controls in its notoriously toxic mining and processing industry. China recently reported it largely shut down its rare earth industry for three months to address pollution problems, which resulted in the huge spike in rare earth element prices this summer.

Perhaps most disturbing is that China has been imposing tariffs and quotas on its rare earth exports for some time. The shock to global supplies has seen spikes in the 17 rare earth elements as much as 40 times above levels just a few years ago.

Demand is only part of the equation. If China continues to monkey with the supply chain, rare earth prices could soar, and all these stocks might firm up.

But investors should take a large dose of caution in the short term. Rare earth miners are risky plays, as the sector’s recent sharp selloff proves. Molycorp might have a price target almost 50% above current valuations, but the fact that MCP stock has languished at these “oversold” levels for more than a month proves investors aren’t as optimistic about the sector as they once were.

A rare earth stock could be the bargain buy of the century right now if the chips fall right. Then again, it could be a gamble that loses you a big chunk of change.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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Article printed from InvestorPlace Media, http://investorplace.com/2011/10/rare-earth-stocks-an-uncommonly-good-buy-mcp-avl-ree-lysdy/.

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