Déjà Vu Muddies Rare Earth Rush

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"More REE suppliers are needed, no matter what policy China pursues."

Rows of moss-covered concrete bricks block the opening of the Monmouth rare earth mine in Canada, keeping curious hikers from entering the long-abandoned shaft.

The mine has been abandoned since the early 1980s, when an aggressive Chinese campaign to corner the rare earth market scared off the company before the mine came into production.

Two decades later, China accounts for 97% of the world's REE production. Until recently, the global dependency on China for rare earths was a well-kept secret. But word started to spread fast after Beijing cut export quotas by 70% for the second half of 2010, sending prices of some oxides—the purified form of rare earth elements—up as much as 850%. The need for alternative supplies from outside China suddenly became obvious. Dozens of companies are now aiming to fill the void in supplies.

Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), which owns a promising rare earth deposit in the U.S. state of Wyoming, is a good example. Its shares have risen almost 400% in less than 90 days, and over 2,000% since April 2009. In that time, the 495,000 shares belonging to one director have jumped in value to more than C$5.4M.

The most successful companies are likely to be those with the right mix of specific rare earths in their deposits, the downstream processing know-how and the contacts to make it in a demanding industry.

The challenge for investors is separating the real players from the pretenders playing the rare earth buzz to make a quick profit on the stock market. In response to this challenge, Van Eck Global recently launched an ETF focused on rare earths and minor metals.

Regardless of the red flags, analysts and industry observers agree that more suppliers are needed, no matter what policy China pursues.

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