Transcription
Rare Earth Stocks are the topic of today's presentation. And if you are somebody that's thinking about investing in the producers of rare earths, then there are a lot of compelling reasons to do so now.
One of the nice things about this YouTube channel is that we have the flexibility to be able to cover topics outside of just the typical disruptive tech themes that we cover on Nanalyze. So, one of our paying subscribers, people that we listen to very closely, suggested we take a look at a rare earth stock.
A response is that, well, we've written a few pieces on Lithium, Uranium, and Cobalt for obvious reasons, right? They're enjoying a surge in demand because of disruptive technology such as electric vehicles or wind and solar power. But our response is that we don't invest in commodities. And we've said that on a number of occasions before.
When people want us to dive further into these topics, well, that's not entirely true, as this gentleman pointed out. Because we do have commodities exposure, some of which includes gold. Now, we're looking for something more interesting. That's part of our alternative asset allocation strategy. And there could be something that's more relevant, such as investing in a pool of startups.
Then, in our DGI strategy, that stands for dividend growth investing, we have exposure to Chevron and Exxon. Both of which rely heavily on oil. Though Exxon is an interesting situation because they sit on both sides of the supply chain. So they produce the oil, then they sell it to their own refineries who produce products. So when the price of oil goes down, the people that are pulling it out of the ground get less money. But the people who are producing products see a much wider margin because that's a key component of what they're producing. So, very interesting business model.
Then you have Archer Daniels. They're a food processor of sorts that could be considered to have heavy exposure to commodities. And then there's three bits here that we've highlighted: wine, art, and Bitcoin. Is wine a commodity? Well, yes. But what about art? Well, I suppose it is. And maybe the difference between a commodity and wine and art would be liquidity. And then you have Bitcoin, which is an entirely different conversation.
But if we exclude these alternative assets in blue, then we have 8% of commodities exposure. So, what's our stance on commodities? Well, aside from this incidental exposure, we're not actively seeking more.
Now, the reason why you might be interested in commodities is that they provide some great diversification effects. Here's a really cool chart that shows how commodities are correlated to one another. In other words, how they move together. If you look at gold and silver, those are highly correlated. Well, you'd expect that, right? The sorts of people that invest in those metals typically move, the herd moves in a single direction. But look at some of the negative correlations here that are quite interesting. Zinc and gold, for example. Look at how that's quite negatively correlated.
So, the point of this chart is to show that you can enjoy diversification effects by investing in commodities. But they're not so accessible to retail investors unless you go after the producers. Which the idea there would be to get some leverage. But that leverage often comes with risk.
Now, if you want to learn about Rare Earths, this gentleman here, Nicholas Lepan, the mining editor for Visual Capitalist, put out this article. So, it's called "Where in the World Are All the Rare Earths?" And it's simply phenomenal. Unless, of course, the facts presented are wrong, then we'll throw them under the bus. But this is an excellent article that we pulled some information from for this presentation.
So, Rare Earth Elements, or REEs, are a group of 17 elements critically important for certain technology-related applications like magnets, screens, batteries, steel alloys. They're actually quite abundant in the Earth's crust, but minable concentrations are less common. So, reserves are both valuable and strategic. These will be used in electric vehicle engines, in wind turbines, hard disks, cell phones, etc. One megawatt of wind energy requires 379 pounds or 171 kilograms of rare earth.
Now, what's interesting is that at Tesla's investor day in March 2023, they announced that their next generation of electric motors would contain no rare earth material. So, they see this as a risk, a dependency risk on China. So, China dominates rare earth production. Here you can see mine production for 2020. And it actually goes beyond just the production of the raw material. The processing is where China really comes into play. But they award production quotas to six state-run companies that you can see here.
So, if you're looking for some of the major players in the mining of rare earths, then you'd have to dabble in Chinese stocks. And this is nothing we'd ever want a part of. We've written a piece, I'll put a link to it in the description of this presentation, on why investing in China is so risky.
Now, when you take a look at the global picture, this is very interesting. So, you have the reserves here in the right column. So, you can see the percent of total reserves. China has about 38%. And this is ranked by total reserves. But then on the left, you see mine production 2020. So, just because you have a lot of reserves doesn't mean that you're mining them.
And three countries of interest here would be Vietnam, Brazil, and Russia, which collectively have over 40% of the world's rare earths. But they're not hardly mining them. So, that's likely to change. You can see China's mining the most there, and they also happen to have the most reserves. But look, the U.S. has just 1.3% of total reserves, and they're producing. They're the second biggest producer, followed by Burma. And perhaps the reason that Burma is a player here is because of this mining process can be very dirty. And in certain places, some of these regulations might be swept under the carpet. Makes it a lot easier to make money off this stuff.
So, we want to focus on the U.S. and Australia. So, if we go back and look at the chart for production, we see the names China, Myanmar (which is another name for Burma), Madagascar. So, Myanmar and Madagascar are not in contention here because these aren't even, um, these aren't emerging markets. They're not even frontier markets. They're just not accessible. So, any companies that are working on this in these countries would be off limits for retail investors. That leaves us with China, U.S., and Australia. As we said, China is seen as an extremely risky place to dabble, and especially Chinese mining firms, which are reliant on probably lots of government subsidies and regulation. So, that leaves us with U.S. and Australia. Since we always invest in leaders, China's dominance here makes laggard countries much less appealing.
Now, that's particularly true when you consider these REEs are hard to extract due to their ores oxidizing rapidly and extremely polluting, causing extensive water and soil pollution. That's very costly to manage. Which means that emerging markets or frontier markets where this sort of stuff is just ignored, that provides a cost advantage for the producers in these other places. So, government subsidized using rare earths as a strategic asset is the other option here, which is what's happening in the U.S. That's a regulatory risk. So, the entire thesis is quite risky.
This article is excellent. It's by China Power, and this is a think tank out of DC. And the title of this is "Does China Pose a Threat to Global Rare Earth Supply Chains?" And it's an excellent read. The table here pretty much describes the problem. So, look at the imports for the European Union, U.S., South Korea, and Japan. The percent of imports from China is above 90% for South Korea. U.S. and EU, they need to reduce those dependencies. Japan actively worked to do that, and they're able to bring their dependency on China, Chinese imports of rare earths, below 50%. Which is still high.
And this chart on the right shows rare earth mining production. And what you'll see is that whilst a lot of rare earths are being mined in other places, they're then shipped off to China so that they can be processed. So, there's still heavy supply chain risk surrounding China.
So, the rare earth thesis goes something like this: Western governments are pushing to reduce their dependency on China for rare earths. That makes sense. Subsidies will be required to propel Western firms in Australia and the United States so that they can compete with the Chinese.
Now, what's the total opportunity? Well, it's not that large, to be honest. It's expected to reach $15 billion by 2030. It's not blue ocean, right? There's a $7 billion market in 2021. So, let's say that's $8 or $9 billion this year, and then you have that gap there, which is the, uh, new market opportunity to be captured.
The consumption of rare earths, you see this when you're researching this, comes up quite often. It's vital to war machines like submarines and aircraft. So, it's likely going to remain a strategic priority for Western and, uh, developed market or emerging markets.
Now, what's keeping other emerging markets from copying Myanmar's success? Now, what you'll note here is that most, remember, Myanmar is one of the top five producers. Most of their rare earth minerals are being exported to China. So, Myanmar is right behind the United States in terms of their production. United States, the second, and Myanmar is shipping it all off to China. So, as China's domestic consumption of rare earth grows, the country is going to be increasingly reliant on imports to feed its own appetite for the materials. And that may come at the expense of other countries, which is why governments around the world see this as a strategic priority.
Now, investors are wondering, Rare Earth stocks, what are names to invest in? Well, if we stick to the U.S. and Australia, which is what we're going to have to do, there are a few pure-play names we came across with a market cap greater than a billion dollars. So, you have MP Materials. This is a $4.4 billion firm that operates Mountain Pass, which is the only rare earth mining and processing site in North America. Then you have Lynas. Second largest producer of separated rare earth elements in the world outside of China. They're in Australia. They operate the globe's largest single rare earth elements processing plant situated in Malaysia.
Are there others? Probably. But in our world, we want to look at firms that are pure-play or at least 25% of their revenues and growing strong related to rare earths. And they have to be large. You have to have a market cap greater than a billion dollars. So, there are plenty of names out there to choose from. You'll see lots of these risky junior mining outfits trying to attract investors' attention. They'll spell out the thesis as we did today, and then they'll shove some crummy, pre-revenue "opportunity" in your face. And you really want to avoid this. Um, avoid choice overload. So, the more that you spread your net, the smaller firms that you allow to come under your radar, the more difficult it's going to be to do research and make a decision, especially as a retail investor. Go right to the leaders. So, proven production leaders are going to receive the most favorable government support.
The other problem you have here is that these commodity prices are not transparent. And you'll need to track the progress that they're making towards reducing the reliance on China. That's, which is another risk because they rely on China. On the right here, you can see the revenue growth for MP Materials and their earnings. That's quite attractive, but expect lots of volatility.
Just to conclude, Rare Earths are seeing demand increase from green technologies. Geopolitical factors will boost Western miners, especially the processors of rare earths outside of China. Larger companies, the leaders, they're always the best way to play any space. Expect lots of junior miner noise and avoid that stuff. So much rubbish, so many traps out there. It's one of the reasons why we don't like to get involved in the whole mining thesis to begin with. It's just a giant rabbit hole.
So, can companies build products that don't require rare earths? It certainly seems like Tesla is taking that direction. So, that's going to reduce demand and dependencies, which makes you question the demand side of the business going forward. As you can see, it's an extremely complicated thesis with lots of external risks and unknowns.
So, next up, we may look at some rare earth companies that everyone seems to like, but that depends on interest. So, if this is a topic of interest, then a lot of people share this video, like it, and subscribe to our channel because of this piece, then we'll do a follow-on. But speaking of which, please do me a favor. Click the Nanalyze logo here on the right, subscribe to our channel, support our work. And then I've put up another video here on the left that may be of interest. Thanks for taking the time to watch this today.