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Sep 21 2010 | 10:43am ET
Everyone talks about the next big short, but what about the next big long? According to some savvy Wall Street vets, sophisticated investors and hedge fund managers are starting to take a close look at rare earths. But before one delves into their investing potential, it is important to understand just what the term means.
Rare earths are the 17 elements in the periodic table from number 57 to number 71—specifically, scandium, yttrium and the 15 lanthanides. Many, it must be noted, are not rare, and although they are commonly divided into ‘light’ and ‘heavy’ rare earths, Jack Lifton of Technology Metals Research told FINalternatives this is also misleading:
“That’s a misnomer. That numbering has nothing to do with the weight of the material,” laughs Lifton, “The seriously unlearned seem to think that a higher atomic number means a heavier material and so it’s just that the first few rare earths—57 to maybe 61 or 62—are referred to as the ‘light’ rare earths. They really mean ‘the low-atomic-number’ but that’s too much of a mouthful so it’s become ‘light.’”
Rare earth elements are used in a variety of products, including wind turbines, mobile telephones, hybrid vehicles, computers, television sets, energy-efficient lights, PET scans, super conductors and various military applications. What Robert Akeson, a partner at du Pasquier & Co, calls “the space age products—the products of tomorrow.”
But while the investment class is garnering attention from sophisticated investors, there is one glitch...China has a virtual monopoly on rare earths, producing 97% of the world’s supply, according to Charles Kaplan, an institutional broker and adviser on economic trends and market conditions at du Pasquier. China produces 120,000 tons of rare earths annually while its nearest competitor, India, produces 2,700 tons. Low Chinese prices have driven most other companies out of the market (rare earths production is a very pricey undertaking) and since 2006, China has been limiting its rare earth exports.
Kaplan, and he’s not alone, looks at this situation and sees a threat to U.S. supplies—in fact, he sees it as a threat to U.S. security, given the military applications of rare earths. He says the answer is for the U.S. government to subsidize domestic rare earths production to ensure an independent supply.
Lifton, on the other hand, is less alarmed.
A physical chemist by training, he is now a trader specializing in technology metals and rare metals. He says Chinese limits on rare exports are not a “Fu Manchu plot” against America but a plan to add value and create jobs by ensuring China exports finished goods, not raw materials. As for the U.S. military, he says it doesn’t require rare earths in quantities large enough to cause panic.
In fact, Lifton says there are only two rare earths that really matter—the heavy rare earths neodymium and dysprosium, both of which are used in the production of rare earth permanent magnets (which in turn are used in many of the products mentioned earlier) and both of which are indeed, rare. (Dysprosium comes from the Greek ‘dysprositos’ which means hard to get).
“The problem with dysprosium is that it has only ever been produced in China and [China’s] production is about 1,000 tons a year and that is rapidly becoming not enough. The Chinese are worried that they’re running out—remember, they’re the only producing source we have in the world and they think they’re running out.”
Lifton thinks there is no need for the non-Chinese world to produce all the rare earths—instead, he says, countries like the U.S. should emphasize the heavy rare earths “because that is what everyone is looking for.”
That said, he also points out that you can’t produce individual rare earth elements—you have to mine them all. But he thinks the United States could achieve self-sufficiency in rare earths through just two mines—Mountain Pass California (owned by Molycorp Minerals) and the Bokan Mountain project in Alaska (owned by Ucore Rare Metals).
Lifton says if the U.S. produced light rare earths in California and heavy rare earths in Alaska, “it would solve our strategic security supply issues.” In fact, it would solve it and then some—the U.S. would not just be independent of China, he says, but would be in surplus. “We’d be exporting…We’d be suppliers suddenly.”
As for the wider world, Lifton says there are deposits containing sufficient heavy rare earths to meet global demand in China, Canada and South Africa. According to Gerry McConnell of Nova Scotia-based Namibia Rare Earths, after Mountain Pass, the site most likely to come online next is in Australia—owned by a company called Lynas. “They’re under construction now,” he says.
Whether they can produce heavy rare earths economically is another matter. McConnell says starting a rare earths mining operation takes “years and billions of dollars” and in the meantime, “demand is going through the roof.”
Akeson says the subject of rare earths is “exciting,” and one that will undoubtedly be of interest to investors:
“What’s going on in commodities has, one way or another, been impacted by the travails of the world’s fiat currencies and I think one of the things that you’re going to see more of in the coming years is people not only buying precious metals, such as gold and silver, but…looking for value in stocks, they’ll be looking for real estate—undervalued real estate—and I think [they’ll be looking for] plays like rare earths, which have extraordinary run potential because of the application they have to new technologies.”
Find out more: du Pasquier & Co. is co-sponsoring the A Fund Fall Investment Conference, which will focus on emerging growth companies and rare earths. The event takes place this Thursday, Sept. 23 at the Princeton Club in New York.