How and Why to Invest in Rare Earth Metals

FARMINGTON HILLS, Michigan () -- In 2002, the United States imported 54% of its needs of rare earth metals. In 2003, that figure rose to 100% and has remained there since. What happened?

The two U.S. producers of rare earth metal concentrates were shut down after a private group, which had gotten in 2001-2002 a donation of more than $5 million from a Chinese "supporter," raised environmental concerns. Within two years, the Chinese were producing nearly 100% of the world's supply of cerium and lanthanum, rare earth metals (rems).

Of the 100,000 million tonnes of rare earth metals (rems) mined and refined each year, 46% (mainly cerium and lanthanum) are used to produce automotive emissions controls, mostly catalytic converters. The bulk of the rest of the rems produced are used to make permanent magnets mostly used in high efficiency and miniaturized electric motors. Rems have more than 40 applications in a typical automobile and in the manufacture of specialty high current density long life rechargeable batteries - such as nickel metal hydride types the major use of which is in hybrid vehicles.

As of now, in 2005, no American manufacturer can produce a catalytic converter, a miniature electric motor, a high-density magnet, a nickel metal hydride battery or a hybrid vehicle without materials supplied by the Peoples' Republic of China (PRC). To be more specific, none of these products can be produced without the agreement of Bao Steel to sell the American, manufacturer of the rare earth metals necessary. In the PRC it is Bao Steel that has cornered the mining, refining and manufacturing of the rare earth metals.

How does one invest in Bao Steel? Baosteel has been an on-again, off-again listing for the Shanghai, Hong Kong and even the NYSE for the last several years. Currently, it is unlisted, but in order for the company to grow and prosper it needs the kind of low cost capital that an IPO can bring, so stay tuned. Another way is to buy General Motors [NYSE:GM; TSX:GM] shares.

GM has an arrangement to build hybrid vehicles in China, so that it will have access to Bao Steel as a supplier, for the moment, just of rare earth metals - GM does not today buy steel from Bao. These GM hybrid vehicles are for not only the export but also the domestic market. Bao or a partner of Bao will undoubtedly also acquire the technology from GM to produce hybrid vehicles on their own.

Investors could also choose any of the other car companies going forward with hybrid vehicle programs, but none of them except perhaps Toyota [NYSE:TM] has a deep connection to Bao Steel. Without that connection their efforts will fail. Ford [NYSE:F], in particular, is completely out of its supply chain depth and will fail in its hybrid program for that reason and for its noncompetence in hybrid engineering as well.

Finally, you can buy shares of Energy Conversion Devices [Nadaq:ENER] the Michigan based high technology company founded and continuing to be inspired by Stanford R. Ovshinsky. ENER has a nickel metal hydride operation in China in partnership with Bao Steel. This insures ENER access to the necessary rare earth metals it needs to make nickel metal hydride batteries. Bao Steel of course will also get ENER battery manufacturing technology.

Bao Steel obtains iron ore from an (Inner, i.e., Chinese) Mongolian JV. The Mongolian ore body is high in rare earth metals that are produced as a byproduct of the operation with the cost of recovering the rare earth metals offset in great part by the value of the iron produced. This allows Bao to cost the rems without being accused of dumping. Its costs are simply much lower than those of other producers such as the two former American producers that have such high environmental compliance costs that they simply cannot economically produce in the U.S.

The American ore bodies are also rich in thorium a natural radioactive metal the concentration of which is fought by environmentalist - funded by the Chinese - as a health hazard. The former producing mines in the U.S. are in eastern California and Alabama.

For the immediate future, the only investment play for rare earth metals is Bao Steel and its partners, GM and ENER. If you truly believe that the future holds large numbers of hybrid cars and that catalytic converters will continue to be used to clean the exhaust of the world's internal combustion engines then Bao Steel is the place to be driving on the greenest acres.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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