(Kitco News) - The rare earth metals market is poised for a significant upside, said Rick Rule at The Rule Symposium on Natural Resource Investing in Boca Raton, Florida. The veteran investor and CEO of Rule Investment Media pointed out a key factor poised to drive prices up significantly: China's new environmental regulations.
"The price of rare earths is going to increase not merely because of geopolitical competition, but rather because the Chinese are beginning to employ Western environmental standards in the extraction of rare earths. And that's the game changer that most people don't recognize," he stated in a recent interview with Jeremy Szafron, Anchor at Kitco News.
Impact of China's Environmental Policies on the Rare Earth Market
China, which dominates the global production of rare earth elements, has begun enforcing stringent environmental standards akin to those in the West. This shift, according to Rule, marks a significant departure from China's previous practices that often overlooked environmental consequences.
"The Chinese efficiency in rare earths has come with devastating environmental consequences in far western China. And the Chinese themselves are no longer willing to tolerate that," Rule explained. "So the price of rare earths is going to increase not merely because of geopolitical competition, but rather because the Chinese are beginning to employ western environmental standards in the extraction of rare earths."
This move is expected to create significant supply chain disruptions and increase the costs of rare earth elements, which are critical in various high-tech and green energy applications.
According to the US Geological Survey, China accounted for approximately 85% of the world's rare earth production in 2020. With these new regulations, the global market is likely to experience a tightening of supply and an upward pressure on prices, according to Rule. Watch the full video above for more on what to watch as an investor.
Strategic Investing and Contrarian Approach
Rick Rule also stressed the importance of strategic investing in commodities, especially during bear markets.
"I've learned in commodity-style investing, which is most of what I do, that you are either a contrarian or you're going to be a victim," he said. "If you're a contrarian, if you're in a market that's out of favor, say uranium in 2022, it's difficult to explain to people that they are better off buying something when it's out of favor and cheap than they are after the narrative has been proven by price."
Rule's approach to investing emphasizes the necessity of thorough due diligence and a long-term perspective. "My average 10 bagger or better has required five years to come to fruition and has exposed me to at least one, but often two, 50 percent declines in the share price," he noted. "If you have done sufficient work on the company, if you've kept up to speed with the company, these price declines become tolerable."
M&A Boom and the Outlook for Gold and Rare Earths
Rule also highlighted the mining sector's ongoing mergers and acquisitions (M&A) boom, pointing out that well-structured mergers can offer significant advantages.
"A properly structured merger is a wonderful thing. You reduce general and administrative expense relative to assets under management because you don't need duplicate management. Larger companies have greater trading liquidity, which means generally higher share prices, which means they have a lower cost of capital in a capital-intensive business."
A recent notable example of M&A activity in the sector is Newmont Corporation's acquisition of GT Gold Corp. for approximately $311 million. This acquisition is expected to strengthen Newmont's position in the highly prospective Golden Triangle area in British Columbia, Canada. Such strategic mergers are likely to continue as companies seek to optimize resources and enhance shareholder value.
Looking ahead, Rule remains optimistic about the prospects for gold and rare earths. "I have a belief that gold is going higher because I have a belief that in objective terms, the US dollar is going lower," he said. "If you believe like I do, that the real decline in purchasing power of the US dollar is more like seven and a half percent compounded than 2.6 percent compounded, you understand the strength in gold."
Rule underscored the strategic importance of rare earth metals in the evolving geopolitical and environmental landscape. "Rare earths seem to be beginning to be understood in a geopolitical context," he observed. "We haven't looked for rare earths because for 30 years, they're not rare. We haven't looked for them because the Chinese have produced them so efficiently and cheaply that nobody could compete with them. That's over."
For more insights and detailed analysis, watch Rick Rule's full interview at the Rule Symposium on Kitco News above.
Coverage of the Rule Symposium 2024 is sponsored by G Mining Ventures