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Profit from the Rare Earth Shortage

Three ways to play it

Written by Brian Hicks
Posted May 5, 2010

China outguessed the world...

And now we'll all pay for that dearly.

You see, years ago China recognized the extreme value in rare earth metals. So the Middle Kingdom invested heavily in finding what they could and taking control of what would eventually become limited supply.

They were smart about it.

And now China's in a position to halt all rare earth exports — reserving them for its own economic expansion — and leaving the rest of the world scrambling to meet future rare earth needs.

But we need those rare earths now. We don't have time to scramble. Rare earth resource demand must be met.

Without rare earths, technological advancements are history; the world in which we have become accustomed to living in and the way in which we work, communicate, and progress will change.

Drastically.

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And China is very well aware of that.

The Chinese currently control 97% of the rare earth market. They know they're the monopoly... and they're about to take full advantage by sending prices skyrocketing.

Beijing is already drawing up plans to stop or restrict the exports of rare earth metals that are produced in China.

The Ministry of Industry and Information Technology is also calling for the total ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium.

And other metals — neodymium, europium, cerium, and lanthanum — will be restricted to a combined export quota of 35,000 tons a year, far below global needs.

Yet, most U.S. citizens and businesses have no idea that this is even happening, nor do they grasp how this restriction could affect us.

R.I.P. iPod, Smart Phone, MacBook?

When you think of where your iPods, cell phones, computers, and electronic motors come from, consider this: China holds 97% of the materials that allow these products to function.

All China has to do is follow through and halt the export of such materials... and the whole picture suddenly changes.

Electronics would disappear from the shelves and products that depend on these materials would see prices skyrocket, possibly bankrupting the very companies that depend on these sales.

Heck, the impact alone on electric batteries and motors — and on green technologies — would be crippling.

Toyota's Prius alone depends on 2.2 lbs. of neodymium in the hybrid's electric motor and 22-33 lbs. of lanthanum in the car's battery pack. And there are still plans to double production of the Prius from one million to two million units.

But they can't build these cars if they don't have access to rare earth metals. Thus, all of that product is in jeopardy.

Why We're Trying to Become Rare Earth Independent

Congress wants to stockpile rare earth supplies. This could do to rare earth what it did to oil back in 2007, which resulted in a 10% spike in oil prices.

Members of Congress introduced a bill that could bolster the U.S. rare earth supply-chain and create a stockpile for military and tech industry uses — as its best-case scenario. This led Colorado Congressman Mike Coffman to introduce The Rare Earth Supply-China Technology and Resource Transformation Act of 2010. 

Coffman's no dummy. He knows that "over 95 percent of worldwide rare earth mining today is located in China. There is no rare earth element mining taking place in North America and with worldwide demand growing exponentially the situation is only going to get worse."

The bill calls for the creation of a rare earths stockpile for national defense and encourages federal loan guarantees for companies involved in restarting rare earth supply chains.

But it's a wait-and-see situation. We all know how quick Congress is to act...

So How do You Profit from the Shortfall News?

To profit from the rare earth shortage — and Congress' stockpiling announcement — buy the companies with access to supply. They'll jump on any news of discovery.

First Gold Exploration Inc. (TSX-V: EFG), for one, skyrocketed as much as 180% after the company announced a new high-grade discovery of rare earth elements and lithium at its Éléonore Property in Northern Québec.

Hudson Resources (HUD.V or HUDRF.PK) jumped more than 140% after Denmark relinquished its sovereign hold over Greenland's mineral rights, making the country's $273 billion rare earth resource private property.

Avalon Rare Metals' (AVARF.PK) project at Canada's Thor Lake has access to rare earth metals. The stock could easily move higher this year.

Lynas Corporation (LYSCF.PK) owns a rich deposit of rare earth at Mt. Weld in Western Australia. This stock could also move higher.

Rare Element Resources (RES.V) recently completed financing and reportedly has capital of more than $12 million. And Quest Rare Minerals (QRM.V) reportedly has a big resource at Strange Lake in Quebec.

Any positive news amid China fears could send any of these stocks higher.

Double-Bag Your Investment

But while these are all good buys here (especially Hudson Resources), patient investors might also consider buying into a new rare earth IPO and an ETF.

Molycorp, owner of a California rare earth mine, just filed for an IPO with hopes of raising $350 million to restart rare earth operations. While we'll look to buy at IPO, Molycorp won't be able to meet all the needs of the United States...

And it's for this reason that you should also buy one of the other stocks mentioned above as well.

The other plays are coming ETFs.

Dacha Capital reportedly has plans to start a rare earth element ETF, where they warehouse the metals and compounds and buy/sell them.

An REE Fund which received approval from the Swiss Financial Market Authority will open on May 31, 2010. It will only trade in Switzerland, though; it will invest in companies involved with rare earth metal mining, refining, and manufacturing, according to the company's site.

While stocks like Hudson Resources remain a buy, we'll look to pick up these ETFs and Molycorp IPO in coming months.

Stay tuned for news on rare earths and profit opportunities in Pure Asset Trader.

Stay Ahead of the Curve,

Ian L. Cooper
Energy and Capital

P.S. Rare earth metals are about to experience hyper-growth. But this sector isn't the only one about to experience a major ramp-up... Energy and Capital's own Keith Kohl is putting the finishing touches on his latest research report on an "old" oil formation with a brand-new life. Chances are, you haven't heard of this emerging North American oil play before... And you won't want to be the last to get the full story. We'll have a full report to you Thursday.

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