4 Hidden Risks in Rare Earth Investing

Posted by admin at 2:07 PM on Aug 10, 2009


By Clint Cox

How well do we truly understand risk in the rare earth market? Most people who invest in the mining sector understand that there are risks inherent with mining operations. These risks include (but are not limited to):

  • country—will that dictator really allow you to take all those diamonds out of his country?
  • pricing—will rhodium be $10,000 or $500 when that mine gets to production
  • environmental—will the mess the last company left be the new company’s responsibility?
  • management—is the management really hoping to find gold bricks while sitting on the beach in Tahiti?

Mining is extremely risky, and for junior exploration companies to find “the next big one” is like looking for a sweetpea painted silver in a ball bearing shop. As risky as mining is, in general, I would like to argue that the Rare Earth sector has its own special set of risks.

The risks are not confined to this list, but these provide a starting point:

1. Competition. The Chinese are blessed with great resources and focus. The market tends to look at the junior exploration companies listed in Australia and Canada as the great hope for REEs outside of China. But don’t forget the big players that aren’t junior exploration companies. There are private companies and interested parties from the top to the bottom of the supply chain. For example, recent press releases have shown that the Japanese (such as Toyota, Mitsubishi, JOGMEC and others) are looking for resources. These are players that intimately understand the market and its future requirements.

2. The Numbers. Rare earths are quantified in a variety of ways: %REO, ppm, element distribution, % Heavies versus Lights, % recoveries, $ of rock in the ground, etc. Some of these numbers are important, and some mislead. Some of the most important numbers are rarely available to investors! It is difficult to understand the absolute truth about what the numbers tell us. Just when I think I comprehend an answer – another snafu appears. Don’t be complacent with the numbers. Know that you know that you know.

3. Experts. There are a lot of new “experts” emerging in the rare earth industry! The number of qualified experts in this field is small. There are some great geologists out there – but just a very small handful that have the expertise to claim that they specialize in this. Be sure that the expert whom you are banking on has the proper credentials and context necessary to speak the truth about rare earths. Remember – assay results alone don’t make experts!

4. Whiplash. The day the NdFeB magnet was revealed, the market was rocked dramatically. The South China ion adsorption clays stunned the geos who thought you had to have significant %REO. The United States used to dominate this market. Buckle your 5-point harness and put on your helmet! This market can be reshaped so fast that the cutting edge becomes dull and obsolete almost overnight. (If I’m mixing my metaphors, it’s only because this market is so perplexing!) What we think about the realities of this complex market today will undoubtedly be transformed by tomorrow.

The picture of the week: Rare earth metals oxidizing for your viewing pleasure: