Decoding the Value of Rare Earth Elements for Investors

Rare earth elements (REMs) were once disregarded by investors. However, COVID-19 and strain in US-China trade negotiations has reignited investor enthusiasm for investing in rare earth elements (REMs).

Rare earths refers to 17 metallic elements found in small quantities that are used extensively across both high-tech applications and consumer goods.

Mining Companies

With tech industries relying on rare earth elements for products like hybrid and electric cars, green energy technologies, and more utilizing rare earth elements, the case for investing in mining companies becomes stronger every day. Before investing, however, it is wise to carefully weigh both pros and cons before making this type of commitment: mining operations tend to be dirty and labor-intensive processes and their prices often skyrocket due to demand/supply imbalance.

Mining companies may provide stable long-term returns, yet are exposed to political risk given China's dominance in rare earth elements production and processing capacity. Furthermore, moving production off-shore would likely prove both challenging and costly given it takes on average 16.5 years for mining projects to move from discovery to first production.

Up until recently, most rare earth minerals produced worldwide were produced by Chinese private companies. But intense competition and low prices drove profits down further, prompting Beijing to implement export quotas to stabilize the market and protect profits. After they were eventually overturned by WTO rulings in 2014, government efforts focused on consolidating industry by merging many privately held firms into larger ones.

China has created six big state-owned enterprises that control most of the global rare earth production. Their dominance in this market has raised concerns over national security since rare earth elements are widely used for military systems like radar and sonar; furthermore, China's dominance could limit technological advancement in commercial applications like batteries and wind turbines.

Diversifying exposure to rare earths might require diversifying beyond China, however. Investors looking for rare earth investment opportunities outside China could explore companies in other nations who are trying to increase production. But it should be remembered that such projects often take 18+ years for development and could be susceptible to supply chain disruptions.

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Smaller Companies

Rare earth elements play an essential role in modern electrical appliances such as smartphones, flat-screen display panels and televisions, as well as many military applications such as radar and sonar systems. Though typically found in smaller quantities than other metals, rare earth elements can make an enormous difference to product functionality - for instance neodymium is essential in producing permanent magnets used by spinning drives on computer hard drives and voice coils in laptop speakers.

China holds nearly an 80% monopoly in rare earths production, which poses problems for countries like the U.S. that depend on China for their supply. An international incident between Japan and China regarding fishing boats detention resulted in an embargo affecting several companies with rare earths products.

As part of its efforts to decrease dependence on China, the United States is looking to increase its own rare earth mining operations - with Mountain Pass Mine in California accounting for 15% of Western Hemisphere rare earth production. Not only can this move increase self-reliance; its strategic significance also lies within military use of rare earth materials in new weapons development programs.

United States are investing in new technologies that may enable it to compete against China's dominance in this field. For instance, Defense Advanced Research Projects Agency awarded grants to two American firms operating in this industry - MP Materials Corp and Lynas Rare Earths - so as to reduce our nation's dependence on rare earth elements from China.

This study utilizes a Markov switching vector autoregressive model to examine return and volatility spillovers between a rare earth index (REM), five key financial markets such as WILDERHILL Clean Energy Index (ECO), MSCI World Equity Index (WWX), S&P/TSX Global Base Metals Index (SPGBM), gold, and crude oil. Under normal market conditions, the REM index displays strong independence from these other markets; however, under COVID-19 stress conditions it becomes one of the primary receiver of return/volatility dynamics from these other markets.

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Companies That Recycle

Recycling rare earths is another alternative approach being investigated by companies as an attempt to ensure an ongoing supply of these elements and reduce dependence on foreign countries for material sourcing.

USA Rare Earth is working towards making this more feasible through their facility in Round Top, Texas. Their plant would recover rare earth metals from electronic waste (e-waste). To do this, acid-free processes that are less damaging to the environment will be utilized while simultaneously employing an innovative process for feeding bacteria to produce acid that reduces production costs and energy requirements significantly.

These savings will enable the plant to offset other significant operating expenses, such as electricity production. That could lower overall project costs by millions; moreover, reduced pricing should increase demand.

Recycling rare earths is becoming more essential as more steps are taken towards creating a greener planet. Technologies that convert solar, wind, and tidal power into electric vehicles or other forms of green energy require rare earths for proper operation; same with medical equipment like neodymium magnets used in MRI scanners as well as stealth technology and night-vision goggles used by military forces.

Recycling rare earths may seem like an obvious decision, but there can be challenges associated with doing so. Most rare earth elements are present in various products and need to be separated out carefully in order to be recycled effectively. Unfortunately, this process requires heat energy as well as chemical power in large doses; something which can prove both expensive and hazardous when applied at such concentrations.

China holds control of much of the global rare earth production and exports are strictly regulated to keep prices affordable for domestic buyers. This presents foreign companies an opportunity to set up processing plants abroad; investors looking for this investment opportunity could consider Metal Tech Recycling Corp (NASDAQ: MTRX), American Resources Corp (NASDAQ: AREC), Geomega Resources (GOMRF).

Investing in Rare Earth Elements

Rare Earth Elements (REEs) are essential components of numerous high-tech consumer products and devices, including cell phones, computer hard drives, flat-screen monitors and electric vehicles. REEs also play an integral part in defense applications like missile guidance systems, radar and sonar technology - though only making up a fraction of total device weight in each instance; as such, rare earth elements have become a crucial resource globally [1].

China's dominance in this space has caused many to speculate that it could use its mining and processing capacities as political leverage in future trade disputes with the United States, yet experts note that global rare earth markets would likely continue to flourish even if China stopped exporting rare earths altogether.

Companies reliant on these minerals already have inventory stockpiles that can help address short supply shortages. Longer-term, the rise of green technology may increase demand for light rare earth metals such as neodymium and praseodymium while ongoing efforts to lower greenhouse-gas emissions should increase demand for heavier rare earths such as europium, terbium and dysprosium used in magnets and electric vehicle batteries.

Though concentration of rare earths varies across deposits, most are typically dominated by either light or heavy rare earth elements. Lighter metals like cerium and lanthanum used in alloys and industrial catalysts tend to be oversupplied while heavier elements like neodymium and praseodymium tend to be in higher demand.

Current methods of extracting rare earths involve solvent extraction, which is both energy-intensive and expensive. But researchers are developing alternatives to this process; University of Pennsylvania chemistry professor Eric Schelter developed a ligand-based technique using common lab equipment that effectively separates neodymium and dysprosium at room temperature using common lab equipment; Ames Laboratory developed an acid-free technique for dissolving and recovering rare earths from hard drives.