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Rare Earth Elements: A Watch or a Watch Out?

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If you've heard about rare earth elements or rare earth oxides, there's a good chance you've learned about them recently, most likely in news reports about China reducing exports of the elements. Currently, China supplies 97% of the rare earth minerals used in applications as diverse as batteries for electric and hybrid cars to missiles and tanks, so a threat to supply gets noticed by government officials and by the share prices of the few Western companies supplying the magic ingredients.

Like the high ore concentrations required to make mining rare earths economically feasible, options for investing in the space are well ... rare.

Molycorp (NYSE: MCP  ) , is working to expand its rare earth mining operations in Mountain Pass, Calif., which once dominated world supply. The company, which was a part of Chevron (NYSE: CVX  ) as recently as 2008, went public in July following a short time in private hands. In the days following its IPO, Molycorp shares sank. CAPS members weren't fans either, bestowing a lowly one-star rating on the company. And who can blame the less than enthusiastic early response to a company that isn't operating at full capacity.

But that was before concerns about China's willingness to provide an unfettered supply of rare earths to the market emerged. Since then, Molycorp shares have more than doubled. Other Western rare earth shares have performed similarly. Canadian miner Rare Element Resources' (AMEX: REE  ) U.S.-listed shares have tripled since early August, while Australian miner Lynas Corp.'s (ASX: LYC.AX) shares have gained 64% over the same two month period.

But will these share prices make sense longer term? The current market cap of Molycorp alone exceeds last year's global sales of rare earth minerals. Sure, demand for rare earths is growing, and the prices for the elements have skyrocketed, but those prices could fall just as quickly as they rose. If supply from China proves reliable and current supply concerns fade, watch for these shares to fall like rocks. 

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Fool contributor April Taylor, does not own shares of the companies mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (5)

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  • Report this Comment On October 06, 2010, at 6:34 PM, nontechie wrote:

    It is hard for me to understand why, given the importance of these minerals to security and defense, western nations would buy them from China almost exclusively and allow domestic or at least western production to wither. We have seen China threaten Japan with cutting off supply and we can be certain they would do it to us in the event of conflict over, say, Taiwan. So why allow ourselves to become dependent (even if domestic sources are a bit more expensive to produce)?

  • Report this Comment On October 06, 2010, at 8:12 PM, jesterisdead wrote:

    ...because they are a "bit more expensive!" LOL!

    Supply and demand. As long as China can dish it out cheaper, you buy from China. Save our domestic supplies for when they start raising the price. Frankly, it would be stupid to spend more money (also a finite resource) to extract something that a business can get for less.

    It's a global economy people - isolationism doesn't work. We compete with everyone, whether we want to or not. This whining that China is stealing our jobs is absurd. If they can do it for less, we can take advantage of their cheap labor and use the money we save to produce other things that Americans can do even better. That's evolution.

  • Report this Comment On October 24, 2010, at 9:31 PM, mchlpollock wrote:
  • Report this Comment On October 26, 2010, at 2:05 PM, dnblack wrote:

    That John Kaiser article is the best I have read on the subject so far.

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