Categories: Energy Stocks / Stock Market
Topics: Investing in Energy / Mining Stocks

Profiting on rare earth stocks in 2024 as China tightens grip

Editor’s Note: China is tightening its grip on rare earth metals. And that has the US defense department scrambling. The Chinese are doing the exact same thing with graphite, which has EV battery makers equally concerned. Xi’s saber-rattling is causing America to redouble its efforts on the direct production of metals deemed critical to our national defense and key to the multi-$trillion clean energy transition. As a contrarian investor, you need to know precisely what’s going on with these metals in ‘24. And that’s why I’m urging all of you to watch my friend and business partner Nick Hodge’s brand-new video presentation on Clean Energy Investing in 2024. It’s a deep dive into critical metals and how to position today, ahead of the herd, for escalating gains.

—Gerardo

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In 2010, a Chinese fishing trawler rammed a Japanese Coast Guard ship in a territorial dispute. The Japanese seized the boat's captain and, two weeks later, China stopped shipping rare earths to Japan. 

Prices soared when the world realized that approximately 90% of the mining, refining, and processing of rare earth minerals was controlled by China. Fast-forward more than a decade and not much has changed. 

What are Rare Earth Metals?

Rare earth elements (REEs) and other specialty metals are critically needed by many major industries, especially in the US defense sector. Although used in small amounts, they give irreplaceable function to many weapons and defense systems used by our armed forces. REE supply has never been more firmly in the hands of China than it is today with all legal Chinese production controlled by state owned enterprises.

Neodymium, dysprosium, praseodymium, and terbium within high-strength permanent magnets are ubiquitously deployed in all vehicle and airborne platforms — improving efficiency and lowering operational weight and size.

The guidance systems employed by missiles and smart bombs rely on the fluorescent properties imparted by terbium, europium, and yttrium oxides. Display systems, optical systems, and night vision all rely on glass containing or prepared with REEs such as cerium and lanthanum. High-tensile strength ceramics and next-generation armor-plating apply to the properties of the REEs yttrium, ytterbium, and scandium. 

America is overly dependent on China for even America’s most advanced weaponry and defense systems. One example is the F-35 fighter jet, the most technologically advanced weapons system in history. 

Each F-35 contains nearly half a ton of rare earths. Rare earths are also found in smart bombs, the guidance systems on weapons systems, and tomahawk cruise missiles and lasers. 

China has executed its strategy of controlling the rare earth markets — and the associated IP that flows with controlling the supply-chain — brilliantly, although with an environmental cost. In 1992, Chinese President Deng Xiaoping was famously quoted as saying that “The Middle East has oil. China has rare earths.”

Supply-chain oversight is one of the many flaws that has allowed China to amass its dominant position on rare earths. In 1995, China bought the biggest American rare earth magnet company, Magnequench, which was based in Indiana. 

That allowed China to become a global player in the value chain for rare earth metals, alloys, and magnets. Through Magnequench, China gained access to the most important portfolio of rare earth patents in the world, given that the company was the key supplier of rare earth magnets for cruise missiles and other advanced military hardware. 

Many would argue that the endgame for China is to gather as much of the global rare earth related intellectual property as possible… a feat that has been made possible by the continued failure of the United States to establish its own industry — whether it’s profitable or not misses the point. 

Rare earths support tens of billions of dollars in revenue from intermediate products such as catalysts, polishing powders, and glass additives. Those industries employ over a hundred thousand Americans and generate billions of dollars in payroll. 

End-market products and technologies — including oil refining processes and wind power — use rare earths to generate hundreds of billions of dollars in revenue. These industries support over half a billion jobs and over US$30 billion in payroll. 

Despite the relatively small dollar amount of rare earth imports, the rare-earths that are imported go into hundreds of billions of dollars worth of end-products and, as mentioned before, many of those products have national security implications. 

A subgroup of elements referred to as critical rare earth elements (CREEs) have been found to be both high in importance to society but also prone to supply disruptions. Of the CREEs, dysprosium is the single highest critical element.

Dysprosium is an important additive for increasing the performance of permanent magnets that have crucial functions in next-generation wind turbines and military systems. Historically, dysprosium has only been mined in China, which has allocated its limited reserves for domestic consumption. 

In 2010, the Chinese government drastically reduced export quotas and hiked up export tariffs that have limited rare earths availability in the global market. China then abolished its quotas after the United States successfully pressed the World Trade Organization (WTO) to declare them illegal.

China is also the source of the majority of the world’s so-called “heavy” rare earths (HREEs) — which are scarcer and more valuable than “light” rare earths (LREEs) and more difficult to process. 

The heavy and light categories refer to the elements’ atomic numbers, though they also distinguish the minerals by abundance. Known HREE reserves in the United States are very small; yet, demand for heavy rare earths is on the rise. According to the United Nations, China’s HREE supply could be depleted within a decade.

Many analysts and politicians in the US have argued that the potential supply shortages that alarmed everyone in 2010 have been resolved because prices have come down and the free market has worked efficiently. However, the free market they speak of is an illusion. China controls the supply and has shown a willingness to add to or reduce that supply as it suits their interests at any given time. 

Over 70% of current supply still comes from China and, in the meantime, the US has done very little to address the potential supply disruptions that could affect sectors ranging from consumer electronics, green-energy initiatives, and, most importantly, weapons systems and products with national security implications.

In a scenario where the United States and China were to find themselves at odds militarily, and China decided to flex its economic (China being our largest debt holder) and military muscle, it is possible that China could restrict or completely cut-off a metal like dysprosium, which is critical for our weapons systems.

Top Rare Earth Stocks to Watch

So how do you gain exposure to this exciting but opaque space? My favorite way is through the rare earth equities.

Like the gold space, there are a number of ways you can allocate capital in the rare earths space.

The most frequent, if you’re not familiar with individual stocks, is through an ETF like VanEck Rare Earth/Strategic Metals ETF (NYSE: REMX).

The ETF seeks to replicate, as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Rare Earth/Strategic Metals Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund's benchmark index. 

The index includes companies primarily engaged in a variety of activities that are related to the producing, refining, and recycling of rare earth and strategic metals and minerals. 

Investing in Rare Earth Stocks

If you are willing to take on more risk, you can look at producers in safe mining jurisdictions such as MP Materials (NYSE: MP).

MP Materials — which is covered in detail in our brand-new, eye-opening video presentation on Clean Energy Investing in 2024 — owns and operates Mountain Pass, the only integrated rare earth mining and processing site in North America. 

The company recently reported revenue of US$52.5 million and, although not cash flow positive yet, it is still ramping up production and targeting a 50% increase in REO (rare earth oxide) production within four years. 

The riskiest and my personal favorite way to gain exposure to the rare earth space is by speculating on an explorer or developer; i.e., companies that have rare earth production capacity but also a mix of other critical metals. A prime example of this hybrid approach is Energy Fuels (NYSE: UUUU)(TSX: EFR).

Energy Fuels provides both rare earth and uranium production exposure and has assets here in the United States. 

The company recently reported a robust balance sheet with US$162.5 million of working capital and over US$54 million in cash and cash equivalents. It is also debt-free with US$70 million in marketable securities.

As of Q3 2023, it held 586,000 pounds of U3O8, 906,000 pounds of finished vanadium pentoxide (V2O5), and 11 MT of finished high-purity, partially separated mixed REE carbonate (RE Carbonate) in inventory.

The rare earth space is an exciting one with national security implications at a time when there’s a growing concern about the vulnerability that Western nations have in regard to these important metals/elements.

And it’s not just rare earths that are set to drive escalating gains for well-positioned investors in 2024. 

I mentioned our new video on Clean Energy Investing in 2024. It’s the work of our own Nick Hodge of Foundational Profits. 

Inside, Nick goes well beyond solar and wind to cover a number of often overlooked subsectors of the clean energy space including uranium, lithium, and, as noted, rare earths. 

As a steadfast contrarian, you need to know precisely what’s going on with these key metals in ‘24… and no one knows it or explains it better than Mr. Hodge. 

Plus, as an added bonus, Nick is including his Top-4 Picks for 2024 Gains from the clean energy space. I already mentioned one of them!

In other words… if you’re serious about securing outsized returns in the multi-$trillion clean energy space this year… then you owe it to yourself to check out Nick's new video.

Let’s get it!

Gerardo Del Real
Editor, Daily Profit Cycle