A Deep Dive into Rare Earth Metals Investing

Rare earth minerals may not be at the top of Wall Street's agenda, but they're beginning to make waves. Essential to cutting-edge technologies, mining and production present unique challenges.

Australia's Lynas Corp and privately-held MP Materials are working on expanding end-to-end processing, creating what could become the closest thing to an alternative domestic source for these essential metals.

What Are Rare Earth Metals?

Rare earth metals are 17 metallic elements situated near the middle of the periodic table (atomic numbers 21, 39, 57 and 71). Although their names might seem obscure, rare earths play an essential role in today's emerging technologies: miniaturizing electronic devices; green and medical technologies; defense telecommunication systems and transportation networks. Rare earths also help reduce greenhouse-gas emissions sufficiently so as to avert climate collapse.

Rare earths include materials like lanthanum for correcting distortion in camera lenses and neodymium magnets for improving sound from smartphones' tiny speakers, and yttrium and erbium phosphors which create bright colors on energy efficient screens. Rare earth technologies have become integral components in smartphones, tablets, HDTVs, solar panels, hybrid vehicles and wind turbines alike.

Every battery that powers an electric or hybrid vehicle contains several pounds of rare earth compounds, and as concerns for energy independence and environmental sustainability grow, their demand will likely increase accordingly.

Rare earths can also serve as catalysts, phosphors, and polishing agents, making them great tools in air pollution control, illuminated screens for electronics and products, compact fluorescent lighting with light-emitting diodes (LEDs) as well as polishing of optical-quality glass surfaces. Furthermore, rare earths may also be found in some specialty alloys used in nuclear medicine applications and nuclear medical imaging - all uses which make use of rare earth elements.

Rare earths play an indispensable role in military electronics such as night-vision goggles, precision-guided weapons and defense electronics. Additionally, rare earths provide vital hard alloys used to construct armored vehicles and projectiles - something rare earths cannot provide without.

Rare earth elements (REEs) have caused international disputes over supply. China's restriction of exports has led to other sources being sought as alternative producers; yet mining and refining these elements is highly impactful on the environment, producing 75 cubic meters of acidic wastewater as well as radioactive waste with each ton of REEs mined or refined.

Rare earths may not be found naturally, but their concentration leads to large reserves around the world; about 120 million metric tons. China currently holds 37% of these resources while Vietnam (18%), Brazil (16%) and Russia (15%) also hold substantial reserves of rare earth elements. If demand remains at 2017 levels for rare earth metals then world supplies could run out as early as 2040.

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Why Are They Important?

Rare Earth Elements (REEs), also known as Lanthanides, play an indispensable role in modern life. REEs are used in cell phone speaker magnets and hard drive hard disk magnets; optical displays use REE phosphors; some catalytic converters contain REE phosphors for optical displays; rechargeable batteries use them too! And REEs form the building blocks of green technologies such as hybrid cars and wind turbines.

Rare earth metals quickly gained scientific and geopolitical importance upon discovery. Governments became concerned about potential military uses for them; investors looked for ways to make money quickly - some devising ambitious mining schemes for Amazon rainforest or Greenland or seafloor sites.

Rare earths experienced an explosive boom for several years until 2012, when an international Trade Organization grievance forced China to relax export quotas and flood global markets with REEs at 2009 prices, rendering many bold plans uneconomic. Molycorp closed its Mountain Pass mine and now sends all rare earth raw materials back to China for processing.

REEs are exceedingly rare, yet their demand continues to skyrocket as more consumers pursue energy independence while simultaneously decreasing greenhouse gas emissions that contribute to climate change. Each electric vehicle requires several pounds of REE compounds for battery production; with hybrid and all-electric vehicles becoming ever more prevalent as consumers look for ways to mitigate climate change through alternative forms of transportation.

Rare earths are required in other high-tech applications that rely on fast and stable magnetic fields, including medical scanners, high performance high temperature superconductors, and MRI contrast agents. Furthermore, rare earths play an essential role in efforts to recycle waste materials as well as promote recycling of other precious metals.

Due to this increased demand, world reserves of rare earths may become depleted within several decades if production rates remain at current levels without recycling efforts being instituted. There is great fear that such vital materials could become scarce and expensive as time goes on, hindering renewable energy and green technology innovation essential for combatting climate change.

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How Can I Invest in Rare Earth Metals?

Rare earth metals differ significantly from more commonly-found metals such as copper (Cu), nickel (Ni), aluminum (Al), zinc (Zn), lead (Pb), iron (Fe) and steel in that they do not easily oxidize or corrode, making mining, transporting and processing these rare earths much harder and consequently costlier; additionally processing often poses ecological risks that investors must be wary of.

Investing in rare earth metals may seem challenging, but there are opportunities available that fit with your investment strategy. Mining companies that extract rare earth elements might provide exposure or you could explore exchange-traded funds that provide exposure.

One option is VanEck Vectors Rare Earth/Strategic Metals ETF (REMX), which contains an index of rare earth metal production and mining companies. Or consider investing through a robo-advisor that offers environmental, social and governance (ESG) portfolios - such portfolios typically feature stocks with lower carbon footprints that support sustainable development initiatives.

One way to gain exposure to rare earths is through purchasing shares in companies that recycle them, which can reduce reliance on rare earth elements while providing protection from future supply disruptions. Examples include Metal Tech Recycling Corp (NASDAQ: MTRX), American Resources Corporation (NASDAQ: AREC) and Geomega Resources Corporation (NASDAQ: GGORF).

As much as their name may imply, rare earth elements aren't rare at all; they're widespread throughout the planet and many forms, like terbium and dysprosium are in high demand due to their use in green technologies such as electric vehicles and wind turbines.

Examples include iPhones and AirPods equipped with rare earth magnets manufactured primarily in China. Should the Chinese government decide to restrict these sales, this could have a substantial effect on Apple sales and profitability - making it important to assess your risk tolerance before investing in rare earth elements as there's always the possibility that your entire investment could be lost.

How Can I Get Started Investing in Rare Earth Metals?

Investment in rare earth metals requires an extra level of due diligence than investing in other commodities. Rare earths can be very costly to mine and extract, with mining processes potentially contributing to environmental degradation and water contamination - this means you'll likely want to put your efforts toward investing in mining companies with a strong focus on sustainability.

Rare earths can be hard to come by and mine, requiring special equipment in small concentrations for extraction. As such, rare earths present an additional challenge to diversification than stocks and bonds do - though their prices tend to increase alongside demand - giving them long-term return potential.

As a general guideline, investors should seek major mining corporations with proven exploration and mining techniques, a solid rare earth market share, consistent output levels and steady cash flows - this will allow you to minimize risk while still enjoying exposure to an economically lucrative sector.

As with any commodity investment, rare earths pose some geopolitical risk. China currently monopolizes this industry and distributes four times as many rare earth products than their closest competitor (the U.S.), creating significant political risk for investors.

Rare earths present another risk in that their production may not keep pace with current demand, creating supply gaps which could increase prices over time.

One important note: contrary to popular perception, rare earth elements aren't particularly "rare". There are tons of them scattered throughout the ground - what makes them unique is their low ore grades which make collection challenging.

As such, most investors in rare earths invest by purchasing shares of mining companies that specialize in exploring, mining and refining the elements. You can do this directly or via exchange-traded funds (ETFs); one ETF that has existed since 2010 and was joined in 2022 by another one called Optica Capital Rare Earth Elements & Critical Metals ETF (CRIT) is VanEck Rare Earth/Strategic Metals ETF (REMX). Other Australian stock market companies, such as MP Materials Corp (NYSE: MPM), Lynas Rare Earths (ASX: LYC), and Arafura Resources (ASX: ARU), also specialize in rare earth production.

A Deep Dive into Rare Earth Metals Investing