From stocks and bonds to property and precious metals?
According to Natural Resources Canada, Rare Earth Metals (REM) or as also referred to as Rare Earth Elements (REE), is a group of 17 elements which are used towards everyday products, such as computer memory, DVDs, batteries, cell phones and much more. Although REM is referred to as 'rare', they aren't in fact especially rare at all. They are just rarely found in pure form. The use of REMs is also interestingly vital in National Defence, as the military uses tools such as night-vision goggles, precision-guided weapons and other various communications equipment. Before we answer are earth metals a good investment, we need to break down the two kinds of rare earth metals.
The two kinds of REMs are "light" and "heavy".
Generally not... They are produced in global abundance and are in surplus supply. "Heavy" REMs, on the other hand, are in much higher demand compared to supply. The heavy Rare Earth Metals family includes dysprosium, erbium, holmium, lutetium, terbium, thulium, ytterbium and yttrium. These are mined almost exclusively in China and are therefore further limited supply. A recurring challenge with these elements being mined almost exclusively in China is the conditions of their production often involving child labour and other human rights violations. We will leave that for another piece.
% of Rare Earth Metals by Country
% of Rare Earth Metals by End Use (2016 USA)
In 2016, international demand for REMs was some 130 thousand tonnes. Over 24% of that, however, went towards the manufacture of what are known as "permanent magnets." These are integral to the manufacture of so many technologies - traditional and green - that it is hard to count.
Below are some examples:
- Neodymium makes powerful magnets used in everything from hard-drives to hybrid cars.
- Lanthanum is essential to make modern photographic equipment, specifically, lenses. Moreover, you encounter the practical benefits whenever you watch a movie (projectors).
- Cerium is used alongside platinum in automotive catalytic converters, and when combined with lanthanum is a part of catalyzing the crude oil refining process.
- Praseodymium strengthens metals for safe use in high-temperature aircraft engines, as well as protective glass.
- Gadolinium helps keep us healthy by enabling effective X-ray and MRI technologies.
- Other heavy REMs are used everywhere from TV screens to nuclear reactors.
China currently controls 86% of the production of REMs, which can definitely worry where future supply will come from. In addition to potential future provisions, there is some confusion and unclarity as to the pricing of the REMs. However, it is generally not a bona fide investment opportunity, unless one is potentially looking for possible portfolio diversification. Although these metals are indeed used in the industry, there is no spot market. The major companies working with such metals will buy them directly from the producers most likely on long contract terms.
The other issue is the volume necessary to resell. For example, 10 kg of neodymium is worth next to nothing. Storing such a high quantity will cost that much more. To sum up, Rare Earth Metals are not liquid markets. It is easy to acquire, yet beyond difficult to sell and store.
So in terms of practicality, are rare earth metals a good investment? Although purchasing REMs directly, i.e. in bullion, isn't the most practical option, buying stock in a company that deals with REMs might make more sense. The other argument of course is then why invest in a company that deals with REMs and not any other institution on the stock market.
According to Palisade Research, demand for Rare Earth Metals was set "to sky-rocket by 2,600% over the next eight years." Following this 2017 statement on MIT research, the firm highlighted growing demand and monopolized Chinese supply. Moreover, the time in brining a REM mine online is significant. They cite expert investors and point to investments in companies Appia Energy who control high assay (purity of ore) properties.
Appia Energy, for instance, controls 49% surface-assay deposits in a world where 5% throughout is considered world-class. While this may sound like the plot to the movie Gold, we will hopefully learn more about this company's properties soon. Medallion Resources, likewise, focuses on extracting REMs from heavy-mineral sand discarded as a by-product of other mining activities.
Despite being a phenomenal proposition, we need to take a step (or several) backs. Ask yourself, is investing in mining companies in any way different from investing in REMs? Of course, it is. Much the same as precious metals investing, the further removed you are from the metal itself, the more work you need to do to consider the business case for the company itself. Do you know the management? Do you know the value of their different assets? What about industry competition?
Whether you’re a bond, equity, property, or precious metals investor at heart, it’s worth exploring more conventional alternatives. We talked about a few things: China’s monopolized supply, Rare Earth’s Metals Wide but highly Technical Applications, and the trouble in liquidating them at market values, not the mention storing them along the way.” I also explained that while investing in companies involved with REMs can mirror returns, this also exposes you to those companies behaviours. At that point, again, you need to look more broadly to capture the most alpha you can.
I fall into the category of precious metals enthusiast, to say the least.
A similar sort-of investment one might look into purchasing are precious metals, such as silver, gold and platinum. Precious metals, unlike REMs, are quite rare. There is a limited amount of these metals produced each year, lowering supply, and generally increasing value. The surest way to invest in these metals is to buy the metal itself, in either bar or coin form. Both gold and silver have both generally increased in value over the last 20 years.
These metals are quite easy to buy and just as easy to sell. Unlike stocks and bonds, or even investments in REMs, buying silver for instance, does not require investors to overlook company logistics, rather keep an eye on the market pricing of gold or silver per say.
It seems to me overly more effective to purchase precious metals as opposed to investing into REMs or companies that trade REMs.