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Challenges Undermine Rare Earth Elements

For the past few months, we've heard about the incredible demand for rare earth elements outstripping constrained supply, after China cut back on exports. But there are a few elephants in the room keeping some investors skeptical of the space, including myself. One of those elephants reared its ugly head last week, when Toyota Motor (NYSE: TM  ) announced that it would look for ways to build hybrids and electric vehicles without rare earth elements.

Rare elements have been riding a couple of myths to higher stock prices over the past six months. One is the thought that demand will only increase and that substitutes are unavailable. Another is that the supply/demand curve doesn't have a breaking point. But when prices get high enough, manufacturers will look for alternatives.

Rare earth stocks feeling the pain
Sky-high rare earth prices have pushed Molycorp (NYSE: MCP  ) , Avalon Rare Metals (AMEX: AVL  ) , and Rare Element Resources (AMEX: REE  ) on a ride higher, but their charts have begun to look like the apex of a roller-coaster in recent weeks. Over the past week alone, Rare Element Resources is down 19.1%, and Molycorp has taken a 17.8% haircut on worries that prices won't rise forever.

Molycorp in particular is starting to feel the pressure to keep other suppliers at bay. The company is trying to get federal loan guarantees to support its expansion, and it's lobbying against competitors' attempts to fast-track environmental assessments. It may be in our national interests to expand rare earth mining, but Molycorp isn't keen on the idea.

If Molycorp really thought prices would stay high and demand would continue to rise faster than supply, why would it go to such lengths to stifle its competition?

As I warned earlier this month, rare earth stocks face many headwinds as supply increases outside of China. Now that one big buyer of rare earths is bringing demand assumptions into question, investors have a little more to think about.

Interested in reading more about Molycorp? Click here to add it to My Watchlist, which will aggregate all our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (13) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On January 18, 2011, at 2:52 PM, prginww wrote:

    Travis your not doing your hoework on REE's...

    I hope you noticed that while the REE stocks have slowed the actual price of the REE"s themselves are continuing up. That story on Toyota makes me laugh, do you really think toyota has any chance in hell of brinign a new engine to market in the next 10 years that would be REE free?

    Jeff Makarewicz, Toyota's VP for Materials Engineering, said that creating substitutes or doing re-designs are "very huge challenges for us, because right now there are no readily-available alternatives".

    This quote was on CNBC just last week...

    Hello wake up and smell the REE's..

    Check here for pricing...

    I am very long GWG.v/GWMGF love their heavy REE deposits!

  • Report this Comment On January 18, 2011, at 4:37 PM, prginww wrote:

    It is a challenge right now. As a result, prices will rise in the short term. That will be the case for at least the next six months. The question is what happens after that? Lynas is come online, soon after so will Molycorp and a slew of smaller miners.

    Even at elevated prices MCP is trading at many multiples of possible sales.

    Travis Hoium

  • Report this Comment On January 18, 2011, at 4:37 PM, prginww wrote:

    typo, "will come online"

  • Report this Comment On January 18, 2011, at 7:05 PM, prginww wrote:

    I work in the oil industry and heard the rare earth story fairly early on. Still I didn't get in until a few months ago. Quickly doubled my money (bought

    AVL as I couldn't get a good feel for Molycorp with no history) and then got out a couple weeks ago.

    If the stocks run up at this point its smoke and mirrors. REE prices are up incredibly from a couple of years ago and to expect these prices to continue past 2 years is a pipe dream as alternate production comes online.

    There was a good analysis of all the REE companies that suggests given their production targets they are overpriced already. It was a nice run but the stocks are priced for all the good things that can happen.

  • Report this Comment On January 19, 2011, at 6:32 AM, prginww wrote:

    "China cut its 2010 rare earth export quota 39 percent year on year while rare earth development and production capacities were reduced by 25 percent and 23 percent, respectively, he said.

    In addition, China has added a 15- to 25-percent export duty on rare earth exports while banning the export of 41 rare earth-related processed products."

    See link:

    Curiosity which "41 rare earth-related processed products" are banned for Chinese export?

    Any vital to USA military?

    Why doesn't USA secure their own Rare Earth supply including manufactured rare earth products?

    Might come in handy in "war time"?

  • Report this Comment On January 19, 2011, at 11:43 AM, prginww wrote:

    I hate to make my ignorance known, but I have no idea where to turn. I invested heavily in AVL and in REE just after the major upturn. I held on after the turn down began, thinking within time it would turn up once again. At this point I will lose considerably if I sell, but realize I could lose it all if I don't. I'm beginning to doubt the intelligence of my 'hanging tough'. Can anyone give me some guidance?

  • Report this Comment On January 19, 2011, at 2:00 PM, prginww wrote:

    Hanging Tough is not an investment thesis. Sometimes you need to cut your losses. Diversity helps ride out sector challenges. Market corrections sometimes last 2-10 days and sometimes they help establish resistance levels and things move upward again. Rare Earths, (or any equity that has moved as fast) will have a much lower floor as investors who got in early will jump out to protect profits.

    In particular, I think you backed the wrong Rare Earth plays to ride things out. AVL and REE are too far from production and too many things can happen in the long run.

    It's your money and your risk tolerance, but based on your question, I think you'd do better scaling back. Good luck.

  • Report this Comment On January 19, 2011, at 2:09 PM, prginww wrote:

    PS. I'm not a bashed of RE. I'm pro-Lynas and I think that MCP could have some value after the expiration plays through if an appropriate correction comes. The key is as this article and others on Fool and other places point out. While demand will grow, (and I agree the Toyota article is speaking of solutions in YEARS), it will not grow enough to absorb the supply. The first few non-China company's hitting production will help keep prices stable. China could even flood the market once they can't protect their monopoly anymore to push new company's down.

  • Report this Comment On January 28, 2011, at 3:06 AM, prginww wrote:

    Toyota Executives: How do you spell DESPERATE in Japanese?

  • Report this Comment On January 28, 2011, at 3:07 AM, prginww wrote:

    According to the USA Department of Energy in any case scenario there shall be critical Rare Earth shortages for the next 15 years. Particularly critical for Dy Tb Y Nd Eu.

    Page 72 identifies only 7 Non Chinese companies in Rare Earth Production by 2015: Alkane Lynas and Arafura in Australia, Great Western and Avalon in Canada, Molycorp in the USA and Dong Pao in Vietnam.

    See USA Department of Energy summary and full reports, and Center for Strategic and International Studies (CSIS) video presentation links:

    Zhang Anwen a leading Chinese government advisor and Deputy Secretary General of Inner Mongolia Rare Earth Guild who in Beijing conference Spring 2010 said:

    “Foreign countries should calmly and logically think about this and develop their own mines for their own needs. Our (China) resources are diminishing and we (China) need these minerals for our own use.”

    (Minutes 2:46 to 3:20 in the 6:19 minute video)

  • Report this Comment On February 03, 2011, at 8:03 AM, prginww wrote:

    Stick to the 6 Non Chinese Miners in production by 2015: Alkane, Arafura, Avalon, Great Western, Molycorp and Lynas.

    American Security Project 1 February 2011 links:

    A prestigious U.S. defense think tank says the country’s current dependence on Chinese rare earth metals will harm future U.S. military and economic needs.

  • Report this Comment On February 03, 2011, at 8:08 AM, prginww wrote:

    Stick to the 6 Non Chinese Miners in production by 2015: Alkane, Arafura, Avalon, Great Western, Molycorp and Lynas.

    American Security Project 1 February 2011 links:

    A prestigious U.S. defense think tank says the country’s current dependence on Chinese rare earth metals will harm future U.S. military and economic needs.

  • Report this Comment On February 11, 2011, at 4:08 AM, prginww wrote:

    Greater transparency? Less secrecy? Less international intrigue? Less confrontation? Is that too much to ask from the USA and Chinese governments?

    Why couldn’t USA and China have revealed their real motivations adversely effecting the REE mining and manufacturing industry in 2007? 2008?

    Why not let us know before 2 February 2011 UK Telegraph? (See links).

    Why did USA DOD wait to release information 4 February 2011? (See link).

    Multiple press releases about “satellite and cyberwarfare” in multiple countries now, shortly after the UK Telegraph article “USA and China shoot down satellites”. (See link).

    The severe impending worldwide REE shortages could have been avoided. (See links for US DOE Critical Materials Strategy and IBTimes: American Security).

    The Non Chinese REE mining and manufacturing industry could be 4 years further along.

    Will the same western governments blame the Non Chinese REE industry when the impending severe REE shortages hit?

    REE shortages hitting governmental and high tech business supply needs hard!

    With honest, timely and transparent government communication, the Non Chinese REE mining and manufacturing industry could have risen to the challenge of potentially providing all of the Non Chinese REE supply needs.

    Sudden. Permanent. Game-Changing. Earth-Shaking.

    Permanent decisions about Chinese REE exports have happened.

    The Non Chinese world needs to come to grip with the New Reality:

    How to find and fund Non Chinese REE mining and manufacturing sources for all Non Chinese demand?

    Let me explain the change that has happened:

    "China and US shoot satellites in standoff" Telegraph Group Ltd. UK (See Links)

    Dates: January 2007, February 2008, January 2010, February 2010.

    Did these international incidents cause the Chinese to change Chinese REE export policy?

    Did the Chinese determine that sharing REE with potential military adversaries is not in Chinese Strategic Interest?

    If these statements are true, how permanent is the Chinese REE export ban? Particularly of the scarce and strategically important HREE?

    How permanent is the Chinese ban of Dy Tb Y ?

    Permanent decisions about Chinese REE exports have been made as a result of this incident?

    Obviously there are other considerations, e.g, relative scarcity of materials, self interest in developing their own REE manufacturing sector. As the Chinese move up the technological REE manufacturing chain, they shall consume most if not all of Chinese produced REEs.

    Further, China claims that China is now “environmentally” concerned?

    These “official” explanations seemed insufficient to explain the drastic change in REE exports and total ban on Dy Tb Y.

    Suddenly the earth-shaking game-changing REE world events of the last year make sense.

    Sudden severe Chinese REE export restrictions and the Chinese ban of Dy Tb Y make perfect sense.

    Suddenly why are we surprised that our tiny fledging REE miners have doubled, tripled, quadrupled, or more within one year?

    “There are two ways to live: you can live as if nothing is a miracle; you can live as if everything is a miracle.” -- Albert Einstein.

    Seemed like a “miracle” didn’t it? Guess what? That’s how things appear until more facts are revealed?

    Finally the China and USA “star wars race” conflict was revealed 2 February 2011 by UK Telegraph. (See links).

    This conflict extends to the rest of the Western world. For example, China’s fear of Strategic Missle Defense Shield in Japan by the USA.

    A major change in policy is often due to a significant incident. Why are we surprised?

    Please do not take my opinion as fact for yourself. Please review the maze of documents just released by UK Telgraph. Come up with your own judgements. (Links attached).

    Please spend 10 minutes or 10 hours doing your own analysis of the just revealed UK Telegraph documents, and decide in your own mind the permanent consequences to REE Mining/Manufacturing.

    The Chinese shall ban most rare earths and certainly any HREE that have military applications. The West shall never again trust the Chinese for vital REE resources.

    Yes the REE world is forever changed. Irreversibly. Permanently.

    The Non Chinese REE mining and manufacturing world is suddenly called upon to deliver 50 percent of the world’s REE supply.

    Impossible REE demands shall be placed on the Non Chinese REE Miners/Manufacturers. Can we deliver? I doubt we can.

    Severe pressure shall be placed upon each and every Non Chinese Miner to produce. Currently, only 7 Non Chinese REE miners are expected in production by 2015 (Alkane, Arafura, Avalon, Great Western, Molycorp, Lynas, and Dong Pao of Vietnam).

    Personally I doubt that these 7 select companies can replace 50 percent of the world’s rare earth needs, even at current levels.

    Perhaps with more warning, more awareness of the 2 February 2011 revelations, our Non Chinese miners could have geared up faster, expanded more rapidly, more money could have been raised, more workers trained, etc.?

    We have been living in a world based on old assumptions. China: The Rare Earth Monopolist would be our REE “Mama”. China would provide any shortfall that the Non Chinese miners could not provide in the next few years?

    New Reality: Virtually all of the Non Chinese demand needs to be supplied by Non Chinese Mining and Manufacturing companies, i.e., 50 percent of the world’s total use of REEs. Virtually all of the already Chinese banned REE: Dy Tb Y. China has already banned 41 REE manufactured products. How soon!

    The progression to a total Chinese REE ban is inevitable and may happen at any time.

    Is the Non Chinese world prepared for severe shortages? Shortages that the US Department of Energy said in December 2010 shall last at least 15 years? (See attached link).

    The world’s most successful businesses: Siemens, General Electric, Toyota, Honda, Apple, etc. and governmental needs: Japan, USA, EU, South Korea, India are all threatened.

    China: No safety valve for the world. See Zhang Anwen statement: Video attached.

    Solutions happen when actions are taken.

    May I ask a question? How can we come to our own personal interpretations, and merge our collective interpretation of the New Reality? What actions can we take? How can we “spread the word” of real shortages, real need to increase Non Chinese REE supply capability?

    What obligations do governments have to mitigate potential damage to their National Defense, and potential crippling of businesses?

    Is there a true REE crisis? A true emergency?

    If there is an impending disaster of supply shortfall, what can we do to make a difference? Individually? Collectively? Individual REE companies? REE companies collectively? REE industry collectively?

    The future is in our hands. Our collective hands. We will be judged as an industry by our actions.

    Yes these are great opportunities for the Non Chinese REE mining/manufacturing industry, but at the same time severely difficult times ahead even working together.

    Can we accomplish a nearly impossible task: fulfilling our call to provide the modern world with a sufficient supply of REE?

    How will history judge us?

    Attached links:

    2 February 2011 UK Telegraph Ltd:


    USA Department of Energy Report: Critical Materials Strategy December 2010:

    Zhang Anwen a leading Chinese government advisor and Deputy Secretary General of Inner Mongolia Rare Earth Guild who in Beijing conference Spring 2010 said:

    “Foreign countries should calmly and logically think about this and develop their own mines for their own needs. Our (China) resources are diminishing and we (China) need these minerals for our own use.”

    (Minutes 2:46 to 3:20 in the 6:19 minute video)

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