Investing in REEs: Restraint is Essential

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"Investors can make a healthy profit by looking for returns in the long run."

Investing in the rare earth market poses challenges that are not common in other commodities markets. First, there are 17 elements in the rare earth bundle that are valued individually. Secondly, the drama of reducing export quotas from China, which accounts for over 95% of world supply, has increased investment in mining companies but also created what some fear is an unsustainable bubble in the market.

Companies like Molycorp and Rare Element Resources (TSX.V:RES; NYSE.A:REE) have seen share prices jump with the increased interest in this market even though many of the exploration/mining companies have yet to produce or sell any product. Investors can make a healthy profit in this market, as demand for the material will only increase in the future.

The export quotas have created an interesting dynamic in the Chinese supply of the elements. The dynamic stems from the details of the export policy.

"With the current quota system, China does not distinguish between the individual REE oxides but limits the total tonnage of exports across the board. That has led to Chinese companies exporting as much as possible of the high-value heavy rare earths like dysprosium, instead of low-value light rare earths (LREEs) like cerium, reported Reuters' Julie Gordon.

While the prices for all 17 elements have gone up because of the policy, some of the prices for lesser-used elements like cerium have gone up at a faster rate than the widely used elements like neodymium.

The quota system has not affected all REEs equally because no one is exporting lesser-used elements the supply/demand fundamentals have disproportionately affected the market.

The urge for short-term gains is powerful given recent share price increases for many REE miners; however, many have no product to sell in the near future. Investors should be looking for returns in the long run.

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