Investing in Rare Earths: The Risks and Rewards

Rare earth elements are highly useful, yet also extremely scarce and expensive - both characteristics that create significant returns for investors.

Before adding rare earth mining companies or ETFs that provide exposure to this sector to your portfolio, carefully assess their advantages and disadvantages.

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Supply and Demand

Rare earths' unique properties make them invaluable assets in many applications. Magnet production for electric vehicle motors relies heavily on these materials. Fiber-optic cables also rely heavily on rare earths for improved signal strength, helping reduce costs associated with long-distance phone calls while simultaneously transmitting data globally.

Investment in rare earths requires significant capital commitment for mining and processing capabilities development, with projects often costing billions and taking years to produce their first batch of rare earths. That is why many investors opt for ETFs as a quick way to gain exposure to multiple rare earth companies without purchasing them separately.

Mkango Resources (MKA), one of several London-listed competitors attempting to break China's grip on rare earths by building domestic supply chains. MKA takes an innovative approach by investing in HyProMag, an affiliate of University of Birmingham using hydrogen to extract, reprocess and reassemble rare earth magnets before reassembling them into working magnets.

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Environmental Impacts

REEs (rare earth elements) are a group of 17 metallic elements (the 15 lanthanides plus scandium and yttrium), found near the center of the periodic table. Although often perceived as rare, REEs are actually found abundantly throughout our planet's crust in lower concentrations that make mining and processing challenging due to radioactive contamination from other minerals and materials, as well as producing hazardous waste products from mining operations.

China controlled 97% of the global rare earths market before 2010, when exports were reduced due to diplomatic tension with Japan and prices spiked dramatically. Following China's actions, prices skyrocketed and since then the U.S. has attempted to regain its dominant position by investing in new mines and technologies development - most projects failed however.

MP Materials' Mountain Pass mine in California stands out as an exception, receiving government funds to create a separation facility for rare earth minerals, and having secured contracts from companies manufacturing renewable energy systems and electric vehicles. Although rare earth investments pose potential risks, their involvement could support transitioning towards low carbon economies.

Taxes

As with any investment, investing in rare earths is subject to price fluctuations and market instability; however, as demand continues to increase for these minerals, investors' chances for making significant profits increase accordingly.

China remains dominant within the rare earth industry, but their ability to unilaterally disrupt supply chains will likely decline over time as shifting market dynamics enable new players to compete more successfully. Both Australia and the US have initiated initiatives designed to reduce their reliance on Chinese producers for processing, while Japan is working closely with them and Australian firms like Lynas Corporation (ASX: LLY) in developing its own production capability.

Investors can gain exposure to the rare earths market by purchasing stocks of companies that recycle these metals, providing a hedge against any supply disruptions while supporting sustainability of emerging technologies such as electric vehicles and wind turbines. Neodymium and praseodymium first used for gas lamps have now found new uses such as producing powerful magnets for electric vehicles and wind turbines; this trend should continue as more countries adopt environmentally-friendly energy alternatives.

Regulations

As is true of mining investments in general, regulatory issues play a crucial role in rare earths companies' success. Therefore, investors should conduct thorough research prior to investing in rare earths shares; this should include understanding environmental and regulatory risks which could impede production or distribution.

Investment in rare earths involves purchasing shares in mining companies that explore, mine and produce these metals. The best ASX rare earths stocks tend to be major mining firms with proven track records and market shares, along with strong profitability track records; examples of such stocks would include MP Materials (MP), Molycorp and Lynas Rare Earths (LRE). You could also invest via an exchange-traded fund; an example being VanEck Rare Earth/Strategic Metals ETF (REMX), launched in 2010 and boasting market capitalisation approaching $1 billion as of early 2022.

As more businesses switch to environmentally-friendly technologies, rare earth elements are expected to experience rising demand, leading to increasing prices and profits from companies that provide them. Unfortunately, commodities like rare earths can be unpredictable in terms of supply disruptions.

Valuation

With more countries seeking to diversify their rare earth sources away from China, mining companies in this sector are seeing ample opportunities. One popular choice is investing in stocks with long histories in rare earth metals mining - which have proven track records.

These companies should possess an effective exploration strategy, stable operations and production capacities, a healthy market share and be capable of developing alternative processing technologies with strong growth prospects.

As the world moves away from fossil fuels and towards hybrid and electric vehicles, renewable energy technology, and green energy, rare earths will continue to be in high demand. They are essential minerals needed for these industries' success; investors can take advantage of a reliable long-term supply by investing in appropriate mining companies.

When researching ASX rare earth stocks, look for those which explore or produce elements such as neodymium and praseodymium - both essential elements that generate powerful magnets for electric vehicle motors, cell phones, headphones, and other electronic devices.

Investing in Rare Earths: The Risks and Rewards