Is It Safe to Mine in Rare Earth Stocks?

by Jeff Reeves | January 18, 2012 7:45 am

Rare earth investments have a certain sex appeal to them. The name “rare” implies that these commodities are inherently precious. And the ties to 21st century electronics — such as lasers and fast-charging batteries — make folks think there is nothing but growing demand for these rare earth commodities.

But how do you invest in rare earth stocks? And more importantly, should you bother?

First, let’s look at the biggest players in rare earth elements:

Molycorp (NYSE:MCP[1]) is one of the largest, with a $2.5 billion market cap and almost 4 million shares traded daily. Molycorp operates rare earth mines primarily in California.
Avalon Rare Metals (AMEX:AVL[2]) is less established, with a $3 share price and a tiny $320 million market cap. Avalon mines Thor Lake in Canada for rare earth metals.
Rare Element Resources (AMEX:REE[3]) is a $6 stock but also has a tiny market cap at $250 million. Rare Element operates in both Canada and the U.S.
Last but not least is OTC-traded Lynas (PINK:LYSDY[4]), but despite its $1.7 billion market cap, investors should be wary of this pink sheet’s ultra-low volume — often just 150,000 shares traded daily. Lynas is headquartered in Australia and has operations in Malaysia.

So what’s the story behind these stocks? Well, past performance is not so hot. After a peak in April of 2011, all of these stocks are off roughly 60%.

Why? Well, for starters, last April was a period of stability right before the Arab spring, the U.S. credit downgrade[5], the eurozone debt crisis escalation and a host of other issues.

It also was just a few months before Japan announced a massive rare earth find[6] on the ocean floor in July, prompting thoughts that supply wouldn’t be dwarfed by demand for some time.

And of course, there are continued fears that consumer spending will remain weak and that baseline demand for gadgets and smartphones won’t exactly deliver some of the red-hot growth some tech stocks were hoping for.

The icing on the cake is a fascinating recent report[7] in Fast Company that indicates governments and private enterprise are committed to weaning the markets off rare earths by reformulating more common elements or flat-out fabricating necessary materials from scratch.

Makes the capital-intensive enterprise of mining for these things a bit suspect if that comes to pass.

There’s no way of knowing whether rare earth elements have crashed for good or are simply down until demand comes back or China puts a damper on global supplies. But investors bottom-fishing in the sector right now should take care. The companies listed here are mostly small-time, thinly traded enterprises, and that comes with big risks. Throw in the added risk of investing in an emerging business segment like rare earth mining, and it’s almost impossible to know how things will shake out.

As a result, it’s probably best to simply sit out the rare earth investing game for now.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

Endnotes:

MCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCP
AVL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AVL
REE: http://studio-5.financialcontent.com/investplace/quote?Symbol=REE
LYSDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LYSDY
U.S. credit downgrade: https://investorplace.com/2011/08/s-and-p-us-credit-downgrade-standard-poors/
Japan announced a massive rare earth find: http://gizmodo.com/5818514/hip-hip-hurray-japan-discovers-rare-earth-metals-needed-for-gadgets-and-electric-cars
fascinating recent report: http://www.fastcoexist.com/1679036/breaking-chinas-monopoly-by-engineering-new-rare-minerals?partner=homepage_newsletter

Source URL: https://investorplace.com/2012/01/rare-earth-stocks-molycorp-mcp-lynas-avl-ree-lysdy/