Resurgent Rare Earths?

MCPNew York, March 14th ( – Plenty of investment themes these days have deep ties to China. Arguably one of the most controversial, if not misunderstood among those themes is the rare earths investment space. There are a few rare earths stocks listed in the U.S., but most fall into the small- or mid-cap universes and the lack of investor familiarity with individual rare earths names has helped the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) to some modicum of success since its debut in late 2010.


Success in terms of the fact that REMX has almost $226 million in assets under management, a robust haul for an ETF that is less than two years old. Performance is another story as REMX is down almost 10% since its debut.


Some would argue the rare earths story is misunderstood. It’s also not hard to comprehend. Rare earths, 17 elements found on the periodic table we learned about in high school, really aren’t all that rare. The problem stems from the fact that China controls 95% of the global rare earths export market, mainly because developed nations with bountiful rare earths resources such as Australia, Canada and the U.S. have shied away from rare earths mining due to negative environmental consequences.


That’s left China as practically the world’s sole rare earths supplier. However since demand for rare earths is expected to remain high over the next several year, it's a cause for concern. What fuels that demand? Well, rare earths are found in scores of everyday products. OK, so night vision goggles and missiles used by the military (probably the largest buyer of rare earths in the world) aren’t "everyday" products, but smart phones, tablets and hybrid cars are and they all require some rare earths to be produced.


That would seem to make for a strong fundamental argument for owning REMX, but it all comes back around to China as far as REMX is concerned. China wields so much power in the rare earths universe that if it says it will export more of the minerals, then prices fall and REMX and its constituents get hammered. Conversely, if China is believed to be holding back on rare earths supplies, shares of rare earths producers might be viewed as good buys.


REMX is home to 29 stocks, including Molycorp (NYSE: MCP), the owner of the largest rare earth reserves in North America. It has an expense ratio of 0.59% and is a global story, as well. The ETF offers exposure to 11 countries with Australia, Canada and the U.S. accounting for about 57% of that weight. Yes, there is a legitimate, fundamental story, but with China looming so large with rare earths, caution must be applied with REMX. The ETF is up over 18% year-to-date, and its chart indicates it might be best to wait for the ETF to surpass the $19.30 area before initiating new positions.

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