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Warning: rare earths are not rare - but they are difficult

Commentaries & Views

The US-China trade war seems to have reminded investors that China supplies 90% of the world’s rare earth elements (REEs). This vital supply has been restricted before, as the Chinese reminded us all a few months ago, prompting the US military to invest in building REE processing facilities in the US.

No surprise, then, that several readers wrote in to request coverage of REE plays—especially US REE plays—in My Take.

I’m sure you’ll understand if I reserve my company-specific analysis to those who’ve paid for it, but I will give you my take on the investment thesis.

As I said last May when the Chinese threatened to restrict supply of REEs to the US, I still think it’s too early. Here’s why:

  • Contrary to the name, REEs are not rare. They’re quite abundant in low concentrations, but there are also high-grade REE deposits in Canada, among other places.

  • China has been crushing the competition—on price, not availability. It’s true that China supplies 90% of the market, but that’s because they have a huge, low-cost (subsidized) mine complex in Inner Mongolia. The last time the Chinese intervened in the market, they didn’t cut off supply… they just raised export duties.

  • It’s not necessary to mine REEs in the US just to avoid China. The US can get REEs from its closest allies. If, for example, a US project is more economic than a similar Canadian one, fine. But if it’d cost more to produce in the US than in Canada, it’d be a mistake to assume that the company with the US project will deliver for shareholders.

  • Extracting the separate metals in these deposits is infamously difficult and expensive. There are 17 different REEs, each with unique chemical properties. You can get almost anything out with enough heat, pressure, and acid, but each of those things costs money. Many companies have thrown millions at figuring out how to extract REEs economically and have failed to come up with viable solutions.

  • Government involvement is far, far from a done deal. The US Army has requested proposals to build one or more REE-processing plants in the US. They may not approve any of these proposals. It may turn out that any given plant design only works for the ore from one mine, making the whole idea less practical than it may seem. Or even if the Army does approve a project, a change of US administrations could change its priorities.

  • The US has not yet announced any REE subsidies. Even if the Army goes ahead and subsidizes the construction of some REE plants, that’s not the same thing as guaranteeing higher prices for US-sourced REEs. Sure, the Army is saying it might provide up to two-thirds of the cost to build a plant, which would be a big help, but that doesn’t necessarily mean that mining and other operating costs will be low enough to make US REE projects viable.

Now, I have to say that none of this will stop REE stocks from rallying if investors get excited by this story, and these metals become the next flavor of the day.

But I remember one Canadian junior, Matamec, with a large deposit in Quebec that got a branch of Toyota to invest heavily in the project the last time REEs became the flavor of the day. After spending millions, Toyota walked away when it became clear that it would be cheaper to keep buying REEs in China.

I also remember Molycorp’s failure to make US REE production work back in 2015, resulting in that company’s bankruptcy.

I get that the new China story piques investor interest. But actual success in this space depends on government action not yet taken, metallurgy not yet proven, and more variables there’s just no way to assess at this stage.

Any REE stock we buy today may go higher, if the China threat and the America First stories remain strong. But any one of them is subject to suddenly stepping off a cliff on adverse news.

In my view, this all makes any investment in the REE sector extremely high risk—a gamble, more than a speculation.

I’m willing to miss out on whatever upside there may be in REE plays this year in order to keep that level of risk out of my portfolio.

That’s my take,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.