3 Challenges for Rare Earth Mineral Stocks

Challenges keep popping up for rare earth mineral stocks, but the market is seeing nothing but a rosy future for miners in the space. Last year's IPO darling Molycorp (NYSE: MCP  ) still trades with a lofty $4.0 billion market cap. Rare Element Resources (AMEX: REE  ) and Avalon Rare Metals (AMEX: AVL  ) , which are years from any real revenue source, have market caps of $533 million and $684 million, respectively. An awful lot of optimism is baked into these companies.

But there are challenges in the rare earth mineral industry, and eventually the industry will have to face them head-on. Here are three I am worried about:

  • Recently, the World Trade Organization ruled that China is breaking trade rules by restricting the export of rare earth minerals. China is challenging the ruling, and we don't know if it would follow the rules anyway, but this is a blow to the investment thesis behind the rare earth explosion late last year.
  • Customers of miners are looking for product anywhere they can find it. Last year Molycorp agreed to sell "substantial quantities" of production to Sumitomo as well as accept a $130 million investment in the company. It looked as if customers were beginning to panic and miners had the upper hand. But now Sumitomo is partnering with Mitsui & Co. to seek rare earth mineral developments in Russia. Russia has about 19% of the known commercially viable rare earth deposits, and with other sources of supply coming on to the market in the next few years prices could fall quickly.
  • Manufacturers that use rare earth minerals are looking for alternatives as prices for their inputs rise. Toyota (NYSE: TM  ) and Tesla Motors (Nasdaq: TSLA  ) are looking to use electric motors that don't rely on rare earth minerals in the future. Hybrid and electric vehicles are pointed to as major demand sources, so this could be a blow to demand for miners.

The WTO ruling may have the most impact if it affects export quotas in China. China is challenging the ruling, but this could be a contentious issue if rare earth mineral prices remain high.

What do you think about rare earth mineral mining stocks right now? Leave your thoughts in the comments section below.

Interested in reading more about Molycorp? Click here to add it to My Watchlist to find all of 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 (8) | Recommend This Article (4)

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  • Report this Comment On February 28, 2011, at 3:07 PM, David7turner wrote:

    The Tesla motors do not use rare earth technology. They are induction motors. Induction motors are one of the invention claims of Nicola Tesla. (actually they were invented and used commercially in Europe first).

    Almost all industrial motors are induction motors.

    Permanent magnet motors (that use rare earth have advantage in the smaller sizes. Somewhere between about 50 and 100 kw induction motors are better and are alwasy much cheaper.

    I am a motor designer

  • Report this Comment On February 28, 2011, at 3:31 PM, garceman wrote:

    i have felt exactly the same way ever since

    MCP blasted off ...

    i would add 1 more "fear factor" ....

    o "phantom " inventory .... i will never forget

    the Sumitomo copper debacle .... copper was

    rising very quickly and everyone was convinced

    that it was better than gold , then all of a sudden ,

    somebody discovered that Sumitomo had

    hundreds of tons tucked away and not accounted

    for ..

    my guess is that there are some caches of

    at least some of the Re's out there , that

    could get dumped on the market

    the whole run of the miners has been folly and

    a lot of folks are going to get burned ..

    garce

  • Report this Comment On February 28, 2011, at 5:03 PM, Mark4124 wrote:

    With all due respect, a stock being significantly ahead of its IPO price or having a market cap of $4 billion does not make its valuation lofty. Morgan Stanley believes that MCP is worth $63, and possibly as high as $140 if rare earth prices remain elevated. JPM believes MCP is worth $65.

    I have the reports on my blog if you want to see their valuation analysis.

    MS: http://www.marksmarketanalysis.com/2011/02/ms-molycorp-repor...

    JPM: http://www.marksmarketanalysis.com/2011/02/jpm-molycorp-repo...

  • Report this Comment On February 28, 2011, at 5:09 PM, Gommca wrote:

    Please reread the WTO artical in the rulling you will note the RARE EARTHS ARE EXCLUDED here is the quote "The raw-materials case, which follows a complaint filed in 2009 by Mexico, the United States and the European Union, does not concern China's politically sensitive export restrictions on rare earths, some of which are essential to the production of smartphones and other high-tech appliances, the paper reported on Friday."unquote! Note alsothis rulling took over two years to make and as of today no formal WTO rulling has been requested. Also the induction motors are very old Technology and I would doubt they would be using them. So lets all read past the Headlines which are misleading. The REE'S will be great investments for all who can sift through the BS....JMHO....Gommca

  • Report this Comment On February 28, 2011, at 5:32 PM, Gommca wrote:

    A new artical "Japan Aims to Cut Rare Earth Use by 10,000 Tonnes" again we need to read beond the headline. The body of the artical says from China not world wide here it is "Reuters reports that as Tokyo seeks to reduce reliance on receiving rare metals from China, the Japanese government aims to cut rare earth usage by 10,000 tonnes per year within a few years, a trade ministry official said on Friday," See how they twist words arround and will not say world wide. Those 10,000 tonnes and much much more will be replaced with REE'S from stocks that you and I own.....Gommca

  • Report this Comment On February 28, 2011, at 7:06 PM, David7turner wrote:

    Gommca

    Inductiion motors maybe old technology but 95 % of the worlds electrical power uses them! They will not be replaced with rare earth PM motors. In fact there is a lrage scale move from PM (Rare earth back to induction based on cost. Above 100 kw rare earth has no advantage, and never did have, and costs much more.

    Rare earth will be always be used in special applications such as Hybrids ( niche market) and industrial servo motors. The later is the main market and cost is not critical there.

  • Report this Comment On February 28, 2011, at 10:42 PM, Gommca wrote:

    Hi David

    Then why are Wind turbines switching over to REE'S ( they reduce the genset size by half, require less maint. are more efficient, require no power to magnitize poles and more than make up in cost for the tonne of REE'S in each one) If Toyota goes back to old tech. it falls in line with there track record lately. So you can see10,000 tonnesis nothing. All the latest news articals are trying to shake up the market just ask yourself why are the governments so concerned over REE's its because they need them for Hi Tec weapons and amunition for a start.All I'm saying is don't miss out on a great investment because of a missleading headline.

    Good Luck...Gommca

  • Report this Comment On March 14, 2011, at 6:20 AM, ChairmanMAObama wrote:

    "Then why are Wind turbines switching over to REE'S ( they reduce the genset size by half, require less maint"

    The majik of big-gubment subsidies maybe. You can afford to pay more if your using OPM!

    More people have been killed by windmills in the US in the last ten years than by nuclear power in the last 40! Just a usless fact i found intersting.

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