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Unearthing The Rare Earths Investment Opportunity

Summary

  • Given recent developments in geopolitical interests and environmental applications of strategic metals, we believe now is an exciting time to explore investment opportunities in rare earths space.
  • The term “rare earths”, or REEs, refers to 17 metallic elements (15 lanthanides plus scandium and yttrium) located in the middle of the periodic table.
  • The U.S. domination of the global rare earth market began to decline in the 1980s-90s as American firms relocated their factories to countries with fewer regulations and lower wages.
  • The urgency to establish domestic sources of rare earths has been accelerating as the world becomes increasingly aware of the threat of climate change and the unsustainable cost of fossil fuels.
  • VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) provides a unique opportunity to gain exposure to these companies across the globe and invest in the future of technological and environmental innovation.

Rare earth elements and other strategic metals have held a niche but important role in our everyday lives for many years. From the development of rechargeable batteries in the 1970s to the debut of the first iPhone in 2008, rare earths have been key contributors to technological advancements, and the industry has only continued to expand. Given recent developments in geopolitical interests and environmental applications of strategic metals, we believe now is an exciting time to explore investment opportunities in this space.

Understanding the Rare Earth Industry

The term “rare earths”, or REEs, refers to 17 metallic elements (15 lanthanides plus scandium and yttrium)1 located in the middle of the periodic table. These elements are a subset of “strategic metals”, which are various metalloids spread across different periodic groups. Geologically speaking, REEs are not especially rare as deposits are found across the world, but their “rarity” comes from the fact that they are never found in high concentrations and are generally mixed together with one another or with radioactive elements. Current production methods generate a great deal of harmful waste to extract just a small amount of rare earths, and the chemical properties of the metals make them difficult to purify. These qualities have made rare earth mining a tough industry to break into, and only a small number of companies have established themselves in the field in recent years.

Some Major Players in Rare Earth and Strategic Metals

Company Country Metal Involvement*
Zhejiang Huayou Cobalt Co Ltd China Cobalt
Shenghe Resources Holding Co Ltd China Titanium, Zircon
China Molybdenum Co Ltd China Cobalt, Molybdenum, Tungsten
China Northern Rare Earth Group China Rare Earths
Ganfeng Lithium Co Ltd China Lithium
Lynas Rare Earths Ltd Australia Cerium, Lanthanum, Neodymium, Praseodymium
Lithium Americas Corp Canada Lithium
Xiamen Tungsten Co Ltd China Molybdenum, Tungsten
Pilbara Minerals Ltd Australia Lithium, Tantalum
Galaxy Resources Ltd Australia Lithium

Source: VanEck; company reports. Metals involvement indicates the rare earth and/or strategic metals a company was involved in at the time of this report. It may not be comprehensive and may not be inclusive of non-rare earth/strategic metals. Involvement is based on publicly available information provided by each company and is not meant to indicate revenue or assets attributed to metals. For a complete list of holdings in the ETF as of the most recent month end, please click visit: https://www.vaneck.com/etf/equity/remx/holdings/.

Shifting Dynamics in the Global Rare Earth Market

The first discovery of a rare earth element dates back to Sweden in 1788, but the first commercial use came from Germany in 1880 when chemist Carl Auer von Welsbach2 separated an alloy (didymium) into the elements neodymium and praseodymium. Welsbach used these metals to develop an incandescent gas lamp and subsequently found a way to mix the production waste with iron to create ferrocerium, a material that came to be widely used in lighters and ignition devices. The supply for these new inventions came largely from Brazil, India and North Carolina, marking the start of the international rare earth trade.

The discovery of nuclear fission of uranium in 1939 elevated rare earths to a new status in the scientific community as they were used to solve key problems in the development of the atomic bomb. The quest to find sources of uranium in the U.S. led to development of the Mountain Pass Mine in California’s Mojave Desert-owned by the Molybdenum Corporation of America (Molycorp), this mine dominated global rare earth production in the second half of the 20th century. The arms race between the U.S. and the Soviet Union during the Cold War (1945-1991) led to increased government funding for research and development of rare earth mining, outputting improvements to radar instruments (using samarium, a strategic metal), stronger aluminum in fighter planes (using scandium), and laser targeting for guided weapons (using yttrium).

The general public benefitted from mining as well-europium from the Mountain Pass Mine was used to develop color television technology, and lanthanum and neodymium were used to create rechargeable batteries, which became popular for use in portable electronics in the 1990s and hybrid cars in the 2000s. Erbium was a key metal used to boost signal in fiber-optic cables, which reduced the price of long-distance phone calls and now carry internet data around the world. The 2008 debut of the first iPhone was a pinnacle for the industry as it showed how far applications of rare earths had advanced-smartphones use metals such as lanthanum, neodymium, yttrium and erbium for everything from colors on the screen to speaker volume.

The U.S. domination of the global rare earth market began to decline in the 1980s-90s as American firms relocated their factories to countries with fewer regulations and lower wages. At the same time, the Chinese government was developing its own domestic manufacturing and trade capabilities, and a surge in production of rare earth elements in the 1990s saw a shift in supply and prices. As China increased its own exports and acquired offshore companies, it grew to control 80% of global supply by 2019.

Country Dominance in Rare Earth Production

Country Dominance in Rare Earth Production

Graph showing world mine production of rare earth oxides, by country and year, from 1960 to 2012. The layers of the graph are placed one above the other, forming a cumulative total. Data are from U.S. Bureau of Mines (1961-1996) and U.S. Geological Survey (1997-2012).

Over the past decade, the importance of rare earths has permeated geopolitical relationships as China sought to increase leverage by restricting its exports. The fear of losing materials needed for weapons and technology has led to proposals of mining the Amazon rainforest and even raking metals off the moon. Despite global efforts to open new mines and equalize the playing field, most projects have not proved lucrative. Even Molycorp filed for bankruptcy in 2015 before being bought and restructured-its Mountain Pass Mine now sends its ore to China for processing.

The urgency to establish domestic sources of rare earths has been accelerating as the world becomes increasingly aware of the threat of climate change and the unsustainable cost of fossil fuels. Governments and corporations alike have acknowledged that new sources of energy are necessary to power the economy and support the population, and rare earths are essential to this effort. Elements such as neodymium and praseodymium (exposure in Lynas Rare Earths Ltd), first used in gas lamps, are now used to produce some of the world’s most powerful magnets, which are key components in electric vehicles and wind turbines. Lithium, another strategic metal, has become increasingly important (large exposure across various companies) due to its varied applications in infrastructure and technology, one of the most important uses being in batteries for laptops, phones and electric vehicles.

Common Uses for Rare Earths and Strategic Metals

Rare Earths Various parts of electric and hybrid vehicles; air conditioners; wind power generators; fluorescent lights; plasma screens; portable computers; handheld electronic devices
Lithium Electric and hybrid vehicle batteries
Molybdenum Missile and aircraft parts; petroleum refining ; filament material; ultra-high strength steels
Titanium Aerospace jet engines, missiles, and space crafts; chemical industrial process; medical prosthetics; dental instruments and implants; mobile phones
Cobalt Surgical instruments; cutting tools and drills used in metal-working and mining; medical prosthetics; batteries
Tungsten Lightbulb filaments; television tubes; X-ray tubes; super alloys; cutting tools and drills
Manganese Disposable dry cells and batteries; stainless steels; aluminum alloys
Gallium Semiconductors
Chromium Jet engines and gas turbines; cookware and cutlery; magnetic tape used in audio recording; blast furnaces and cement kilns
Tantalum Electronic components; metalworking equipment; jet engine components; chemical process equipment, nuclear reactors; missile parts
Germanium Semiconductor material; fiber optic systems and infrared optics; solar electric applications
Indium LCD television displays; LED lights; solar cells

Investing in Rare Earth and Strategic Metals

Unlike many commodities, rare earths do not have traded futures, so the investment opportunity lies primarily in the companies extracting and refining the materials. VanEck Vectors Rare Earth/Strategic Metals ETF (NYSEARCA:REMX) provides a unique opportunity to gain exposure to these companies across the globe and invest in the future of technological and environmental innovation.

DISCLOSURES

1 Source: https://geology.com/articles/rare-earth-elements/rare-earth-elements-periodic-table.gif

2 Source: https://www.britannica.com/biography/Carl-Auer-Freiherr-von-Welsbach

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