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.

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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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