(Article by Becca Lipman. List compiled by Eben Esterhuizen, CFA. Data sourced from Finviz.)
China is single handedly responsible for 97% of rare earth productionand exports, which are used to in material goods from plasma TV screens to batteries and light bulbs. The country’s majority market share means China’s political and mining activity are lead drivers in pricing rare metals, and through it, a number of consumer goods.
Almost inevitably, China’s monopoly over rare earth minerals has led the country to approve high taxes, tariffs and value added taxes. As a result, it has become increasingly expensive for foreign manufactures to build products outside of China, for whom in-nation factories are immune to most increases.
The New York Times reports, “For the last two years, China has imposed quotas to limit exports of rare earths to about 30,000 tons a year. Before that, factories outside the country consumed nearly 60,000 tons a year. China has also raised export taxes on rare earths to as much as 25 per cent, on top of value-added taxes of 17 per cent.”
Rare earths are not necessarily exclusive to China, they are also found in many other countries, including Australia and the USA, and are not as rare as their name implies. However the country’s extremely lax environmental and safety standards make them one of very few nations who are both willing and unrestricted from cheaply accessing and refining them.
This hasn’t stopped China from using claims of environmental conservation to justify the increased taxes and tariffs. Nor has China has made no moves nor announced intentions to reduce the amount of rare earths mined or manufactured nationally. This has caused a panel of the World Trade organisation to say the restrictions are potentially in violation of global trade laws. At present, no formal case has been made.
The solution is clear for international businesses that require rare earth materials: move their factories to China. Doing so gives manufactures a limitless supply of rare earth materials at low tax rates and little to no value added taxes. The savings are substantial.
“Cerium oxide, a rare earth compound used in catalysts and glass manufacturing, now costs $110,000 a metric ton outside China. That is more than four times the price in China, and up from $3,100 two years ago, according to Asian Metal, an industry data company based in Pittsburgh.” (via NY Times)
China currently accounts for 60% of the world’s rare earth consumption. Given the influx of foreign factories that number is expected to rise to 70% by early next year.
To help you follow the rare earth trend, here is a list of five rare earth stocks. How do you think these companies will react to China’s rising rare earth mineral costs and the shift in foreign factory locations?
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1. Molycorp, Inc. (MCP): Industrial Metals & Minerals Industry. Market cap of $4.25B. Current price at $50.67. It is headquartered in Colorado. It mines rare earth minerals, which it then turns into oxides, alloys, metals, and magnets. It is one of the few vertically integrated rare earth metal producers. The stock has performed poorly over the last month, losing 16.08%.
2. Avalon Rare Metals Inc. (AVL): Industrial Metals & Minerals Industry. Market cap of $409.44M. Current price at $4.02. It is a Canadian mineral exploration and development company with a primary focus on the rare metals and minerals, headquartered in Toronto. Avalon’s primary asset is the 100% owned, advanced development stage project, Nechalacho Rare Earth Element Deposit located in the Northwest Territories, Canada. This is a risky stock that is significantly more volatile than the overall market (beta = 2.41). The stock is currently stuck in a downtrend, trading -12.15% below its SMA20, -29.55% below its SMA50, and -37.03% below its SMA200. The stock has performed poorly over the last month, losing 34.1%.
3. Rare Element Resources Ltd. (REE): Industrial Metals & Minerals Industry. Market cap of $357.98M. Current price at $8.16. It owns and operates the Bear Lodge mining facility in Wyoming, which contains one of the largest disseminated rare-earth deposits in North America as well as extensive gold occurrences. The stock is a short squeeze candidate, with a short float at 20.61% (equivalent to 5.96 days of average volume). The stock is currently stuck in a downtrend, trading -10.73% below its SMA20, -17.57% below its SMA50, and -30.61% below its SMA200. The stock has performed poorly over the last month, losing 23.6%.
4. Quest Rare Minerals Ltd Common (QRM): Industrial Metals & Minerals Industry. Market cap of $246.30M. Current price at $4.08. It is a Canadian-based, exploration company focused on the identification and discovery of new world-class Rare Earth deposit opportunities. Most of their projects are located in the Newfoundland and Labrador regions of Canada. The stock is currently stuck in a downtrend, trading -11.2% below its SMA20, -24.36% below its SMA50, and -31.36% below its SMA200. It’s been a rough couple of days for the stock, losing 5.34% over the last week.
5. Polymet Mining Corp. (PLM): Industrial Metals & Minerals Industry. Market cap of $218.62M. Current price at $1.41. It is a Canadian mining company that owns and operates mines in the Duluth Complex in Minnesota. Its deposit, the second-largest deposit within the large Duluth Complex, represents nearly 25% of the known mineral resources in the area. This is a risky stock that is significantly more volatile than the overall market (beta = 2.08). The stock has performed poorly over the last month, losing 14.55%.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.