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The market has been crazy over rare earth elements for the past few months. Now that the news cycle has run its course, it's time for long-term investors to see if these rocket stocks have any staying power to them.
When China implemented a pseudo-embargo, there was a realization around the world that we probably shouldn't be relying on China for 97% of the production of crucial rare earth elements. And for the health of the U.S., domestic manufacturers shouldn't be put in a position where operations need to be relocated to China to secure a supply of rare earths they may not get elsewhere. Suddenly these obscure metals most people have never heard of are a point of national economic security. But before we panic, everyone needs to recognize one important detail.
Rare earth elements aren't that rare
In the U.S., Molycorp (NYSE: MCP ) is rushing to reopen its Mountain Pass mine in California, but that appears to be at least two years from full production. And when production does begin, Molycorp believes it will provide more than enough rare earth metals for all U.S. production needs -- off to a good start, two years from rare earth independence.
So if Molycorp can supply the U.S., where does that leave Rare Element Resources (AMEX: REE ) , which has a mine in Wyoming? The mine is in early stages and will be far behind Molycorp in terms of production timeline. If Molycorp can supply all U.S. demand, or even close to that, there isn't much pie left for Rare Element Resources and other potential miners.
To further potential oversupply, John Kaiser, an expert in the area, says Avalon Rare Metals and Quest Rare Minerals, two small developers who trade on the Pink Sheets, have enormous resources that could meet demand for 100 years.
If rare earth elements demand is going to pick up, there doesn't seem to be a shortage of companies willing to meet that demand.
And it isn't like Molycorp's mine was a shining star when it was open. Even though it provided around 40% of the world's supply, the mine was shut down in 2002 because China's production costs were lower and environmental concerns kept popping up. China gained dominance in the industry through low costs of production, not because of a monopoly on rare earth deposits.
Complicating matters last week, a new exchange-traded fund called Market Vectors Rare Earth/Strategic Metals (NYSE: REMX ) started trading and brought miners like Thompson Creek Metals (NYSE: TC ) , RTI International Metals (NYSE: RTI ) and Titanium Metals (NYSE: TIE ) into the mix. High demand for this ETF could put unjust pressure on individual companies' shares, continuing their fast and furious run in the near term.
The bottom line: Even if prices of rare earth elements remain elevated, there doesn't seem to be a shortage of mines willing to pick up the slack. Molycorp in particular has essentially no revenue and no income, and only hopes to produce something in 2012. That's a speculative stock if I've ever seen one.
For even the best mines to become wildly profitable, a lot of dominos will have to fall just right for fundamentals to catch up. And even then the party may not last long as mines all over the world start to ramp up. We aren't the only country paying attention to rare earth elements.
Foolish bottom line
If you want some skin in the rare earth or strategic metals game, this Fool would stay away from speculative stocks and go with established companies like Thompson Creek or Titanium Metals. Molycorp looks good now, but with a market cap of $3 billion, I'm confident enough this stock has been overhyped to garner it an underperform rating on my Motley Fool CAPS page. I might take a short-term hit if momentum continues, but I'm confident this bubble will burst soon enough.