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:

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 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.

  1. MCP:
  2. AVL:
  3. REE:
  4. LYSDY:
  5. U.S. credit downgrade:
  6. Japan announced a massive rare earth find:
  7. fascinating recent report:

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