“The US government is using the same strategy which has once already failed with oil:
begging foreign countries not to take advantage of their monopolies.”
JimRogers, December30th, 2010
“The trend is for acontinued increase in the use of rare earths in many applications, especially automotive catalyticconverters, permanent magnets, and rechargeable batteries.”
©2012QWealth Limited,PortVila, Vanuatu
This publication is prepared exclusively and under the editorial control of Q Wealth Limited. This version is distributed by Swissmetal Inc. with the permission of Q Wealth Limited. Q Wealth has not received a fee for this.
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Setting the scene: More than $4.6 trillion in commerce (5% of the global economy!) depends on a critical group of natural resources. China has a near monopoly hold on the supply, with unstable countries like Bolivia dominating other important parts of it. As Jim Rogers says, it’s oil all over again…
Why You Should Read This Report Today!
Back in January 2011, after reading the words of Jim Rogers, we wrote in The Q Wealth Report about the investment potential we saw in rare earth and rare strategic metals. Since then we’ve done a lot of research and due diligence, in order to present readers with our vision and recommendations for investing in these metals.
Demand for rare metals has exploded in recent years. These metals are required in all kinds of high-tech products from Ipads and hybrid cars, to jet engines to nuclear power stations. Yet all too few mines are coming on stream in this sector, for reasons we will outline.
You’ll be pleased to hear that we have discovered a solution for holding these rare strategic metals in physical form for investment purposes in tax-free, secure and insured vaults in Switzerland and/or Panama. In this form they are definitely not subject to government reporting requirements. They are also completely independent of manipulated commodity markets, stock markets, fiat money and the global financial system generally.
The battle to secure these vital resources will undoubtedly make some people very rich. Will you be among them? Read this report and then decide for yourself. We will explain to you not just the potential upside, but also the potential downside and how to minimize it.
Why We Are Excited About This Investment
Regular readers will know that here at Q Wealth, we are self-declared ‘gold bugs.’ Owning gold as a hedge against inflation has got a lot of publicity recently. We’ve consistently recommended holding real physical gold in offshore vaults, as opposed to ETFs or other investments that are dependent on fiat money, the financial system, derivatives, and complicated custody and leasing agreements. If you haven’t read our Gold Report, it’s available free at our website http://www.qwealthreport.com/gold-report.php
While gold has certainly provided us with a healthy return in dollar or pound terms over the past few years, the main reason we recommend gold is not as a speculation, but as a store of value. By basing your holdings in gold, you will protect yourself against the decline of fiat money such as the dollar and the euro, something that we see as inevitable.
We’ve also recommended physical silver, but we’ve always made clear that silver is a rougher ride. We still expect to see lots more upside in silver, but there could be corrections along the way that will knock a lot of players out of the market – especially those who are highly geared. Silver is a more speculative play for the more adventurous trader, who hopes not just to preserve his or her assets but to grow them.
But besides silver and gold, we often get requests from readers who are prepared to speculate more with a small part of their portfolios over the medium term, looking for greater returns. We are by design not a stock-tipping newsletter, and readers come to us because of our healthy disrespect for the products of Wall Street or the City.
We like this investment (rare metals) because it is all about investing in something physical that you can touch and feel, and take possession of if you want, rather than numbers on a screen. In the event of a financial crisis, banking collapse or market closure, physical investments will be the only ones worth having!
This report is about investing in physical rare metals. This is undoubtedly a more speculative venture than investing in gold or silver, since those bullion markets are entirely liquid. The markets for these rare metals, as you will read, are much less liquid, simply because there quantities being traded are so small. There are certainly factors that could reduce demand for certain investments, leading to a fall in price. There are segments of this market that are already bloated, looking like a bubble ready to burst (we cover this on page 13).
Therefore, Rare Metals should only represent a small part of your portfolio. This is an investment that is very safe and secure from the point of view that it’s a physical, touchable product that can’t disappear in a meltdown of the financial system. It has zero counterparty risk. On the other hand, you could be in for an exciting ride in terms of the increases or decreases in value.
Even so, there are ways to hedge the downside by diversification, and the upside is potentially huge – as this report will explain in detail. The price of the basket of metals we will recommend has increased significantly since 2009, with some of these metals showing triple digit gains. Yet, we believe there is room for continued sustainable growth over the next five years or so.
Rare Metals are an indirect play on the Chinese economy
The other reason we like this opportunity is as a China play. Many of these metals are principally priced already in Yuan Renminbi, meaning that it’s also an indirect play on the Chinese currency. So whilst you can buy by paying into a bank account in the US, Switzerland or Panama, when you choose to liquidate, you can be paid out in Yuan or any other currency you wish, to any bank account worldwide. You would also have the opportunity to switch your portfolio to physical gold or silver, or other metals, if you prefer.
Last but certainly not least, this is also an investment for people who value their privacy. Unlike gold held by a custodian, and unlike shares in a foreign company, you don’t have to report this investment to the government. Why? Because this is a physical item you are buying that is titled in your name, just like buying a car or a computer for example. It is not considered a financial investment. Indeed, if you want to buy completely anonymously, you can (we tell you how at the end of this report). Nobody but you and anyone you choose to tell needs to know about this investment and it’s completely legal to keep it that way.
Introducing Rare Metals
Before we go any further, what exactly are ‘Rare Metals’?
Well, we’ll take it you are pretty clear on what are precious metals: Gold, Silver, Platinum and Palladium. And we are all aware that there’s another set of more common metals, used mainly in industry: examples are iron, copper, tin, nickel, zinc and lead.
But this report is about a third, relatively obscure, group of metals knows as ‘rare strategic metals’ or ‘technology metals’ – or, historically, as ‘minor metals’.
If you’ve got a kid in high school who has studied the periodic table, he or she may well be more familiar with these elements than you are. Whereas more than 21,000 tonnes of silver are produced each year, and more than 2,000 tonnes of gold, here we are talking about metals like Gallium and Hafnium – of which 78 and 25 tonnes respectively were produced worldwide in 2009 – with production rates decreasing and demand increasing. These metals are vital components in various industrial processes and products such as:
- The mass production of miniaturized electronics and associated devices, like cellphones, Ipads, and TVs.
- Advanced weapons systems and platforms for national defense
- The generation of electricity using ‘alternative’ sources such as solar panels and wind turbines
- The storage and generation of electricity using cells and batteries, including solar power.
- Green technology
- Water purification technology
In fact, about 80% of all industry uses these metals. As long as the world goes on consuming electronics, and continues to look for alternative sources of energy, demand for these rare metals will continue to increase.
If you re-read that list above (that is by no means a full list) and stop to think about each one, you’ll realize the significance of this. While major economies like the US, Europe and Japan may be slowing down, upcoming countries like Brazil, India, Russia, China and Mexico keep on developing apace. With this development comes demand for all these applications, whether it be electronics, medicines or water purification. As these technologies become more ubiquitous they fall in cost and the demand increases in a virtuous circle.
By way of example, the Indian government has recently passed a law requiring the use of solar panels on all government buildings.
Until recently, in fact, most people didn’t know that these rare metals had much in the way of commercial applications. Until, that is, minor metals jumped to worldwide prominence in 2010, when China stopped shipments of many rare ‘earths’ to the rest of the world.
Buyers Have Not Been Price Sensitive – Until Now
The funny thing is, although the prices have increased a lot in recent years, industrial buyers haven’t cared too much. The reason for this is that the quantities they need are miniscule – perhaps a few milligrams to make a flat screen.
Take for instance indium. It’s critical to flat televisions, smart phones and solar cells. In 2003, the metal’s price was $60 per kilo. At the time of writing, in a world with an average annual output over 1.2 billion smart phones and 200 million flat screens, Indium hovers around $700 per kilo – yet the public hasn’t felt a significant blow. In fact, many of these gadgets are getting cheaper. Why?
In the big picture of the cost of making a television, one rare metal doesn’t make much difference, even if a kilo of it now costs well over ten times what it cost a few years ago. For this reason consumers haven’t yet felt the pinch. In fact, technological advances and economies of scale have so far more than compensated for the increase in rare metals prices.
It’s like this: a doubling of the price of wheat isn’t going to have a big impact on the price you pay for your Domino’s pizza – even though the wheat is an essential ingredient.
But this is about to change.
Up until now, industrial buyers have been pretty complacent. For example, they haven’t bothered to adopt hedging and forward pricing strategies that would be normal for industrial users of things like silver or oil.
And they have always relied on the market being able to supply the product on a ‘just in time’ basis – something that is only now being called into question. All metals were viewed as commodity metals, subject to and reacting in the same way to market forces.
You can see however that for a speculator who is hoarding a few kilos of that metal that’s needed for making the TVs, that ten-fold price increase would make quite a difference! Yet up until now, there has been very little speculation in these metals. Again, this is changing.
Speculators just haven’t been attracted to this market because the entry barriers have been high. The metals are generally handled by a few major wholesalers, rather than in a commodities exchange-style market that could attract speculators via hedging contracts like futures or options – or even ETFs.
The entry barriers are coming down as new financial products like ETFs are targeting the Rare Metals markets. Last year alone saw several new funds launching in this sector, which we will examine later.
Meanwhile, industrial buyers are getting smarter and are looking for more control of the supply chain, and access to stockpiles. Major industrial buyers are now paying close attention to these developments. For example:
- Aluminum Corp of China (CHINALCO) recently invested $1.5 billion in several rare earth metal companies.
- The Korea T imes also recently reported that their Ministry of Knowledge and Finance is slated to add Indium to its critical substances list in June 2011, since the nation’s heavy hitters, like Samsung and LG, are dangerously dependent on the element.
The United States, meanwhile, was asleep at the wheel. Later in this report we will examine the belated US efforts to intervene in this market, partly to support the US military machine.
How Rare are these Rare Metals really?
Rare Earth Metals are not actually as ‘Rare’ as some of the hype would have you believe. What we are talking about is metals that are produced in small quantities, but that doesn’t necessarily mean they are rare. In fact, they are more abundant than precious metals – about as common as lead or nickel.
The main point is that rare metals are rarely found in quantities that are economic to mine. A mining conglomerate cannot just open a huge open cast or strip mine and extract rare earths, as they can with Nickel. Extracting rare earths is a completely different process, much more labor intensive. Many of these metals are extracted (illegally) by artisan miners – individuals working on their own. This is why they are often described as ‘earths.’
The definition of a rare metal is somewhat fluid (see sidebar); and some of today’s rare metals may not always be so. Maybe someday all rare metals will become available in commercial quantities, perhaps due to improvements in our ability to process low grade (low concentration) ores. There are precedents for this happening – if the demand increases enough, technology and the markets will react.
Lithium, for example, is on the point of being struck off the list of rare metals, because of its use in electrical storage. The lead time on such processes, however, is years or even decades – and there are often additional complications. Most of the world’s lithium comes from South America, where it is recovered from pools of brine. Chile is the biggest producer, and has about a quarter of the world’s known reserves. But just next door, Bolivia – which currently has almost no production facilities – has about half. Yes, half of the world’s reserves of an increasingly important strategic metal lie in Bolivia.
There are probably also large bodies of high grade ores of many metals undiscovered as of yet. However, since the accessible face and reasonable depths of the earth’s surface have been explored in most temperate climates, these deposits will be in places inaccessible due to depth, height, lack of roads and other necessary infrastructure – for example beneath the oceans or the polar icecaps. Greenland, it is said, has a vast wealth of these minerals.
According to the International Union of Pure and Applied Chemistry (IUPAC), rare earth elements or rare earth metals are a set of seventeen chemical elements in the periodic table, specifically the fifteen lanthanides plus scandium and yttrium. Scandium and yttrium are considered rare earth elements since they tend to occur in the same ore deposits as the lanthanides and exhibit similar chemical properties.
Minor metals is a widely-used term in the metal industry that generally refers to primary metals not traded on the London Metal Exchange (LME). Historically, these minor metals were called byproduct metals. The Minor Metals Trade Association (MMTA) was founded in 1973 in a period when so-called „byproduct? metals were just starting to be used in growing mass applications. According to them, their members alone today account for over US$10 billion in the annual trade of minor metal products. From just seven elements covered at the outset in 1973 – Antimony, Magnesium, Nickel (not then traded on the LME and still regarded a minor metal!), cadmium, bismuth, selenium and mercury, the scope of minor metals trade activity today has increased dramatically.
Another expert, Jack Lifton of Tech Metals Research uses a definition we like. He says, “My definition of a rare metal in 2010 is one that was produced at a rate of less than 32,000 tonnes per year in 2009.” This definition would include precious metals like silver (21,400 tonnes produced in 2009) and gold (2,350 tonnes), Bismuth (7,300 tonnes) right down to specialist metals like Gallium (78 tonnes) and Hafnium (25 tonnes). (Global production in metric tonnes per year for 2009. Source: techmetalsresearch.com)
Anyway, to get to the point:
Economics – not rarity – is why China has been ab e to dominate the wo rld’s rare metals supply.
Rare metals are associated in the west with ‘green’ technology like hybrid cars or solar cells. Mark A. Smith, CEO of Molycorp, an American producer of rare earth minerals, goes as far as to call them ‘green elements.’
It’s ironic, therefore, that the mining of these metals requires two things in order to be profitable: low-cost labor and lax environmental regulations. The Western world has neither, whereas China has both.
Just like all forms of mining (gold mining, for example, is certainly no better), rare earth mining can be disastrous for the environment. This is something China has never cared much about in its pursuit of economic growth. Ever heard of the Chinese city of Linfen? It has been mentioned by Blacksmith Institute as one of the most polluted cities in the world, and the world’s dirtiest city by The Mother Nature Network. It was also chosen as one of the world’s ten dirtiest cities by the Popular Science website.
But as investors, neither side of this equation really affects us. We are certainly not investing because of green credentials or the lack of them, but because we think it is good business. The point we should get out of this, is that prices of the elements will have to be a lot higher to make it economically worthwhile to extract them in places like California. We are getting there, but bringing new mines on stream – or even reopening old mines – is not a quick or cheap process.
The China Factor
Some say it all started when Japan confronted China over fishing rights in a group of islands that have long been the subject of dispute. The Japanese arrested a Chinese fishing boat captain. The Chinese soon imposed an embargo on “rare earths” exports to Japan, crippling Japanese production of electronics and forcing them to import stocks from elsewhere. This was in 2010. As of the time of updating this report (October 2012), this conflict seems to be flaring up again.
Suddenly, rare earths became the stuff of international attention and intrigue. It became common knowledge overnight that China controls about 97% of the world’s rare earths output. People seemed so accustomed to a Chinese near monopoly in manufactured goods, that they didn’t really notice China’s near monopoly of rare minerals. The story of rare earth metals is mostly one of China producing and exporting while Japan, America, Korea and everyone else is importing. With the Chinese export embargo, suddenly the dire industrial and political implications of that national monopoly became apparent.
Having studied the topic in depth, I can say that it goes back much further than last year. China grasped the importance of many of these metals back in the nineties. At that time, with its low cost and lax environmental regulations, it out-priced global competition, causing massive mining / refining closures in Western nations – including, for example, Molycorp’s Mountain Pass mine in California, which was once the world’s largest supplier of these minerals and is now belatedly being re-opened.
The prices of rare minerals are likely to increase in the short-term because world demand is higher than China’s export quotas. The rapid increase in the market price is due simply to economics of supply and demand – in other words, to the Chinese government’s success in restricting and reducing the volume of exports.
The reason they are restricting exports is simple: they need their entire domestic production capacity – and more besides – for Chinese industry by next year.
According to Liu Junhua, the deputy secretary for China’s Baotou Rare Earth High-Tech Industrial Development Zone Committee, “China may eventually need to import [rare earth] materials.” Mr. Liu, speaking at a recent conference, says there’s a “strong possibility of [China] importing heavy rare earths” over the next three to four years.
So, they are going to have to buy in rare metals on the international markets anyway, just to keep the Chinese manufacturing juggernaut going. They figured it wouldn’t make sense to sell at lower prices now, only to have to buy in at a much higher price a year or two down the road.
Bottom line, the fishing rights of Japan might have been a convenient excuse, but frankly this has been going on much longer, and it doesn’t make economic sense for China to sell what they have. The rest of the world will just have to deal with the consequences. And the consequences are simply much higher prices on these metals.
Industrial producers outside China are right to be concerned. As of June 2011, the value of rare earths has soared almost nine fold in less than a year. A tonne (i.e., a metric ton) of Chinese rare earths — a weighted composite of 17 different materials — currently fetches just over $109,000 in June 2011. Back in July 2010, each tonne averaged buyers a mere $14,405.
Will China’s current monopoly of rare metals production last? We think not. At today’s prices, and with a view to further increases expected, other countries – including the U.S. – are already working to mine their reserves.
The Military Angle
Military demands have historically often been responsible for metals transitioning from ‘rare metals’ to mass production.
Prior to the Great War, Nickel, for example, was a ‘rare metal’. Then, based on military research, came the commercial development of stainless steel in 1919, when economical methods of producing stainless steel were undertaken for the first time. Nickel after that rapidly became a high volume production metal.
Today, we have become totally dependent on rare metals for the mass production of necessary consumer goods like miniaturized electronics, large television and cinema displays, electronic data processing, and personal communications – our total way of life in fact.
The military, however, is critically dependent on technology metals for secure communications, weapons guidance, surveillance, drones and other battlefield technology. The military, instead of catalyzing the supply and taking a priority position, is now simply another customer waiting in line.
Although some rare metals are classified as critical minerals in the U.S. National Academies’ “criticality matrix,” the U.S. National Defense Stockpile at present contains precisely: zero. The US has now, belatedly, caught on to the need to keep a stock of these minerals. Unfortunately for them, the Chinese figured it out first. Losing access to these materials is a real kick in the pants for the Pentagon, though they are only just beginning to wake up and notice it has happened.
In the US, politicians have been getting involved in pointing out how critical rare metals are to National Security. Congressman Mike Coffman (R-CO) is proposing the RESTART Act of 2011 which essentially admits the US fell asleep at the wheel while depending on China to supply these vital resources. The act proposes to jumpstart a rare metal supply chain in the US over the course of the next five years.
Coffman, who sits on the House Armed Services Committee, became alarmed in early 2009 when he learned that many U.S. defense contractors rely heavily on Chinese exports of rare earth metals to make everything from night vision goggles, tanks, and fighter aircraft, to precision guided munitions.
According to Coffman’s press release, his “comprehensive, bipartisan legislation will put in place mechanisms to assist U.S. companies with meeting their needs for rare earth metals and ensures our national security needs are met in the near term.”
Key provisions of the legislation include setting up a Defense Logistics Agency (DLA) rare earth inventory — where DLA enters into long-term supply contracts and then makes the supplies available for purchase to federal government contractors — to generate a domestic market and facilitate the domestic sourcing of rare earth alloys.
What this means is that it will take at least five years for new domestic production to come on-stream. In the meantime, the US military and their colleagues around the world – both friends and foe – are likely to be trying to stockpile rare metals.
Technology Metals Prices Disconnect from Base Metals
Another important change has occurred in the world of metals that is only now being perceived by institutional investors. The financial crisis caused the commodity metals like iron ore to drop precipitously in both demand and price after nearly a decade of record increases. Rare metals prices mimicked structural metals prices during most of the recession, but now the rare metals are described as “leading the recovery.” Is this true?
The fact is that the demand curve is just very different for rare strategic metals versus commodity metals. It doesn’t make sense for them to be grouped together. Rare strategic metals also depend on the refining process for base metals, so there are finite amounts produced every year.
Iron ore, for example, is used in the manufacture of steel, which in turn is used in construction of buildings. Therefore, the construction boom in the past decade led to record process for iron, as well as record production as new mines around the world suddenly became economical.
Rare metals are quite different. They are the “technology metals,” and the market for them is now standing on its own. The world may not be buying so many new homes, but we are certainly buying IPads and TVs.
The Market for Rare Metals
Based on what we have covered so far, it seems reasonable to assume that there will be an increasing demand for rare metals, as the world continues to demand more high-tech products. There are still billions of people in the world who do not own a cellphone – yet even in the poorest countries, infrastructure and access to technology is developing fast.
As Western nations move to reduce dependence on foreign oil from unfriendly countries, we also believe there will be a significant increase in demand for the rare earth metals used in electric cars, wind turbines and thin film solar cells.
So how is the market looking right now? In short, rare strategic metals supply is becoming economically disruptive. The market is in a state of flux, where buyers are becoming much more price sensitive and sophisticated, but are ultimately more worried about their inventories that are running dangerously low.
If you want to buy rare strategic metals, you generally need to be a professional. Metals are only available via specialist trading companies. These traders typically import directly from China, store the metals in their own warehouses, and sell to industrial buyers. They normally deal in substantial amounts, and are not accustomed to dealing with private investors or retail sales.
It’s important to point out again that Rare Strategic Metals are not exchange traded commodities. This has a big advantage: they are not subject to speculative trading or derivatives in the way that gold, silver and other commodity metals are. This also means the pricing cannot be easily manipulated by outsiders in the way it often is with gold and silver. (The Gold Anti-Trust Action Committee website, http://www.gata.org, has more on manipulation of gold and silver prices, if you are interested.)
In other words, with rare strategic metals, you don’t need to worry about investment banks holding short positions that are greater than all of the gold or silver produced in a year, or the IMF attempting to suppress prices by leasing gold that they don’t have.
Whether or not you buy into the stories of manipulation, rare metals certainly offer a break from this form of unfair play. The pricing is determined only by free market supply and demand. Demand is already strong for rare strategic metals and, we believe, likely to get much stronger yet.
Germany, Europe’s industrial powerhouse, has long been a hub of the rare metals market. A German company, Haines & Maassen (H&M), has been a leader in the European metals industry since 1948. We will come back to them later in this report as a recommended source for investment metals.
Pricing of Rare Metals
As you will discover if you try to Google rare metals prices, there is no fixed ‘spot’ price as in the precious metals markets, again because rare strategic metals are not traded on exchanges. Prices are typically fixed by a willing buyer and a willing seller in private, usually over the telephone. The pricing information is not made public.
Nonetheless, industrial buyers and professional traders certainly know exactly what price they are prepared to settle for. The material is used every day and there is really no significant stockpile, so the market feeds hand-to- mouth on a regular basis.
There are some guidelines, however. For example, the Metal Pages site publishes some guide prices on an approximately weekly basis: http://www.metal-pages.com/metalprices/rareearths/
Prices are indicative, and based on delivery in a warehouse in the port of Rotterdam, duty unpaid.
You’ll notice that many of the prices are quoted in RMB – or Yuan Reminbi, the Chinese currency. This is interesting too for investors. Currency investing is outside the scope of this report, but the fact that you are buying a commodity that’s priced in RMB – a currency that is generally regarded as undervalued, especially by the US government – is definitely interesting.
Ultimately, of course, you do need to work with somebody who understands the pricing. You cannot show up as a retail investor directly at one of the metals traders and expect to get a good deal. Later in this report, we will give you the contacts you need.
Rare Metals Funds
As we’ve already said, there are no exchanges on which rare metals are traded. Most trade is controlled by a few specialist dealers around the world. We will investigate buying physical rare metals later, but first let’s look at the options you have for investing through your brokerage account.
Perhaps the most obvious strategy is to invest in a fund.
The first rare metals exchange traded fund, REE Fund http://www.ree-fund.com was launched by Swiss company Dolefin about a year ago. It is regulated by the Swiss Financial Market Authority, FINMA. REE fund is only distributed in Switzerland. The fund is not currently approved for distribution in any other country, and management say they have no plans to seek such approval.
REE is not organized like familiar precious metal ETF’s (they tend to price shares based on an index, or by actually taking a physical position in the underlying metals). Instead, the REE Fund invests in approximately 30 companies worldwide that “promise to be part of the leadership in the emerging REE industry,” according to the fund’s promotional flyer. Their concept, “mine to market” means the ETF will make investments in firms that span the gamut of mining, refining, processing, alloying and distribution to the market.
So, if you have access to the Swiss market, REE looks pretty good as a way of gaining exposure to rare metals mining companies, but it’s not a play on the metals themselves.
By the way, don’t confuse the Swiss REE Fund with another similarly-named company that trades on US markets, with the ticker symbol REE. That symbol refers to Rare Element Resources Ltd, a junior mining company.
The Market Vectors Rare Earth/Strategic Metals (NYSE:REMX) index tracks the performance of the rare earth and strategic metals segment. It’s the only significant play in this market traded on a US exchange, though at $525 million, it’s still relatively small.
Again, REMX is a global index tracker that owns shares in about thirty publicly traded companies that either generate or have the potential to generate at least 50% of their revenues from Minor Metals/Minerals or Rare Earth Metals/Minerals. It is run by Van Eck Associates Corporation, a New York-based financial outfit.
An ETF traded on US markets seems like the easiest solution for most investors. Again, it’s fine if you just want to invest in a basket of mining companies that might only have 50% exposure to rare earth metals, maybe not even the specific metals you want exposure to. It is certainly not the same as investing in physical rare metals.
Probably the most interesting of the ‘fund’ options for investing in rare metals is Dacha Capital, which trades as an over-the-counter stock (on the pink sheets) in the US, with the ticker symbol DCHAF.PK
Dacha’s stated aim is to develop physical inventories, by establishing trading relationships and building up stockpiles of the metals in suitable warehouses outside China. Thereafter it will employ a “buy and hold” investment strategy, with a few opportunistic trades from time to time.
Dacha has chosen to focus on a very few Rare Earth elements, the ones which they believe offer the most attractive investment opportunity. Currently, as of October 2012, their Focus List, according to their website, consists of the following elements: Neodymium, Gadolinium, Europium, Terbium, Dysprosium, Yttrium, Lutetium, Indium, Gallium, Selenium, Tellurium, Rhenium and Hafnium.
Their list is constantly being measured and tested for relevance and in order to calculate the right time to sell. In April 2012, for example, Dacha sold 2,900 kilograms of Lutetium Oxide from its inventory held in Singapore at a price of US$1,750 per kg. Based on the original purchase price of US$309.60 per kg, the Company realized a pre- tax gain of $4.1 million.
“An investment in the Corporation,” says Dacha’s blurb, “provides an investment alternative for investors interested in gaining exposure to Strategic Minerals without the risks inherent to mining companies.”
Junior mining companies
Of course, instead of investing in funds, you could invest directly in the shares of mining companies. Many resource businesses are now making efforts to explore and exploit in light of recent economically feasible price ranges. U.S. rare earth mining companies like Molycorp are desperately looking to reopen old mines and find new deposits. Boeing, a major industrial consumer, recently agreed to fund searches for rare earth deposits using remote sensors.
Despite their efforts however, there are no indications the supply will outweigh demand in the foreseeable future. Rare earth exploration is almost exclusively the domain of small-cap or ‘junior’ mining companies. Little-known companies frequently announce “discoveries” of desirable minerals. These discoveries are normally of small amounts of material, which the junior miner hopes will be the precursor of an accessible, minable, large, high- grade body of ore. The next stage for the mining company is to raise funds in order to develop and extract the concession.
It is almost impossible, however, to target exposure to specific metals you might want in your portfolio. Most of these mining companies own rights to a spectrum of metals, both rare and not rare. Some might be valuable while others are worthless, and it’s usually impossible to extract one without the other.
Here are some mining companies you might want to do further research on, if you are interested in investing directly in junior mining companies in this sector.
Avalon Rare Metals (TSE: AVL or PINK: AVARF). Great Western Minerals (CVE: GWG)
Lynas Corporation (ASX: LYC)
Arafura Resources Limited (ASX: ARU) Quest Uranium Corporation (CVE: QUC) Rare Earth Resources (CVE: RES) Molycorp (NYSE: MCP)
Quest Rare Minerals (CVE: QRM)
In Australia, there are also currently a number of rare earth mining projects at various stages of development. India is out, however – all three rare earth production companies there are government-owned. The Indian government is no doubt keen to keep these resources accessible to the burgeoning Indian high-tech industry.
When it comes to China, there are investment plays available. You could consider investing in the world’s largest producer: the quoted Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd (Baogang) (600111:CH). Quoted companies extracting rare metals elsewhere in China include: China Rare Earth Holdings Ltd (CREQF:US), Aluminum Corporation of China (Chinalco) (ACH:US), and Neo Material Technologies (NEM:CN).
A word of caution however: This is a very volatile field marked by big runs up and then dramatic pullbacks. If you don’t like volatility this is not a good field of investing for you. I advise people to invest in this field only with those funds they can really afford to lose.
Are junior rare metal miners in bubble phase? That might be an exaggeration, but it looks suspiciously like it at the moment. While it might be true that mainstream investors have yet to jump aboard the rare metals bandwagon, prices for many of these explorers have shot up dramatically in recent months. Prices are likely to continue higher as the story of rare earth metals is disseminated and more investors jump in, but many are already calling this sector “The Next Big Investment Bubble.” As every prudent investor knows, bubbles tend to pop much more quickly than they are inflated, leaving the latecomers swimming naked.
It could certainly be worth some further research and some low-ball GTC offers to buy on pullbacks. If we’re looking at one of the next great investment bubbles, it would be nice to be on board as it inflates, and long gone when it pops. But timing entry points is particularly tricky.
Remember the bottom line: mining is a risky business. It always has been and always will be. Junior mining stocks are highly speculative, and are much more volatile than the commodities themselves. This is not an area for the faint hearted.
For longer term growth with more stability, it would be much better to invest in the commodities themselves. While Dacha Corporation is the closest you can come to holding physical metals via a stock market investment, wouldn’t it be great if there were a way you could actually buy physical metals through a reputable company set up to help investors in this regard? Fortunately, this option now exists…
Buying Physical Metals
There are more than a few folks who would rather get exposure to a diversified basket of the actual rare strategic metals, rather than holding paper. Based on what you’ve read in this report, you may well be asking by now:
Is there a way I can gain exposure to rare strategic metals without having to take on exposure to volatile mining companies, extracting dozens of possibly irrelevant minerals, in even more volatile financial markets?
Up until very recently, the answer was no. There was no real way for private investors, or even institutional investors for that matter, to buy into stockpiles of actual physical metals. Buying these rare strategic metals used to be nearly impossible as the world’s suppliers only sold to industrial buyers, and the hassles with things like transport, storage, licensing and taxation meant that participants had to be serious hands-on metal traders with real infrastructure.
However, there is now one company we know of in the entire world where individuals can purchase these rare strategic metals for asset protection in relatively small quantities. We have investigated the company and its principals, visited with them, and carried out in-depth due diligence.
We’ve already mentioned that German company Haines & Maassen (H&M), has been a leader in the European metals industry since 1948. Since the advent of widespread rare metal use, H&M has made it a priority to become one of Europe’s primary dealers. They mainly supply the auto and aviation industries, optics, tech and R&D firms.
In 2009, recognizing the business potential and the benefits of stockpiling minerals, but not wishing to tie up their own capital, H&M partnered with the Swiss firm Schweizerische Metallhandel AG and together they came up with a smart way for mainly Swiss and German sophisticated/qualified investors to claim their own stakes in physical rare strategic metals ownership. Instead of selling metals in substantial amounts to industrial clientele, the partnership splits the metals into smallish quantities, allowing individuals to own them physically while securely storing them in a high security duty free warehouse near Zurich Airport, or in the new duty-free zone on the former Howard Air force base in Panama City, Panama.
Schweizerische Metallhandel AG has recently opened offices, under the name SMI Swissmetal Inc., in Panama City, in order to bring this investment to a worldwide audience and to reach out to investors in the American time zones.
SMI accepts retail clients from all over the world. Buyers have access to most rare strategic metals as well silver and gold granulate, a form of that is more convenient for industrial use than the more traditional gold and silver bullion bars.
SMI has identified six of what they believe are the most critically important elements to industry: Indium (In), Hafnium (Hf), Gallium (Ga), Bismuth (Bi), Tantalum (Ta) and Tellurium (Te). Interestingly, four of these elements are the same as those identified by Dacha Capital as having the best stockpiling potential.
Metals are currently allocated into four different ‘baskets’ which carry either three, five or all six types of metals, depending on how much exposure and diversification clients want. The baskets are then vaulted either in the Zurich or Panama duty free zone, where they sit until the buyer wants to change things.
What’s very important to us is that all the metals are 100% physically and legally owned by the buyer at all times. He or she can either take possession of the metals or, like most investors, let them sit in the vault and accumulate value over time.
Under the SMI program, H&M ships customers’ metals, in vacuum sealed bags, stored in metal drums and on pallets, to a bonded warehouse vault run by security storage company Zürcher Freilager AG. Zürcher Freilager are better known for holding gold and other precious commodities, but their duty-free storage facilities, that have been in operation since 1923, are equally suited to holding rare metals.
Upon the purchase of metals the customer receives an invoice and proof of ownership which contains the Swiss vault’s storage number and charge number. The charge number identifies the metals from the mines to the refinery, and on to the metal trader.
The shipping and vaulting process takes around three weeks. After that, customers are free to travel to Switzerland with their certificate of ownership to physically inspect their metals at the storage vault (appointments are necessary, of course, as this is a strictly controlled secure zone). Procedures in the Panama duty-free storage facility are very similar.
What about the exit strategy? A VAT-free sale happens when the customer instructs SMI to sell the metals. SMI may be prepared to buy the metals themselves at market price, or they may arrange re-export and sale to an industrial buyer. In this case, the costs of re-export are always borne by the buyer, not the seller.
If the metals are removed from the Free Zone and then sold onshore, the Swiss authorities will impose an 8% sales tax. However, there would normally be no reason to do that. Neither Switzerland nor Panama has capital gains tax and neither imposes any other kind of tax or reporting on physical metals held in bond.
When selling through SMI, who is based offshore in Panama, there is likewise no tax and no reporting from the SMI side. The sales proceeds can be transferred to almost any bank account, anywhere in the world using any currency. (Of course you might be liable to declare profits on your tax return, depending on your country of residence and citizenship. You should take appropriate professional advice on this.)
So what does it cost? Buying physical rare strategic metals should not be regarded as a short-term speculation. SMI recommends a 3-5 year or more investing horizon. This is partly because the entry costs are quite high – currently 14.75% at the time of writing, though this could change so e-mail SMI for current details.
This definitely seems on the high side at first glance, for those of us used to buying physical gold or silver, which might command a premium of 3% or perhaps 5% at the outside. So why so high? Bear in mind that this premium includes the cost of transporting and insuring the metals from Germany to the Swiss or Panamanian warehouse, customs and administrative processing, and the professional advice and management that are included. The management includes obtaining a numbered metal holding for you with the storage company, and relabeling and repackaging for conversion from wholesale to retail.
But above all it’s the cost of doing business in a physical commodities market with no exchange. As a buyer you are getting access to wholesale traders of rare strategic metals, something you could never do on your own. You are buying at the same price that industrial buyers are paying today, plus a fee for access to this market.
No doubt the cost of entry will fall substantially over time, as this kind of investment becomes more widespread. By then, however, we would also expect the prices of the metals to be much higher than they are today. So you can look at it like paying a premium to get in on the ground floor.
SMI’s typical ‘key industry’ metals basket (A), for example, rose from $10,800 on February 2010, to $17.555in September 2012, leaving investors with a very healthy return even after the premium (total 73.5%, or 21% per year).
The Construction and Engineering basket (C) rose from $ 9337 in October 2011 to $10.896 in September 2012. (15.5% in its first 11 months)
That said, we would not recommend this as a ‘get in, get out’ program. A conservative outlook would recommend a 3 to 5 year time frame, by which time it would be important to revisit and review the outlook to take into consideration future demand, and new supply that may be coming on stream by then.
How to Create a Bearer Instrument Backed by Physical Metals
Although one of the advantages of the Swiss Metals program is physical ownership of metals, some clients might find it convenient to create their own metals-backed paper. Asset protection services are available through Peter Macfarlane and Associates S.A., whereby an offshore LLC, corporation or foundation can purchase these metals for total anonymity and privacy.
In this case one strategy might be to use a Panama bearer share corporation as the owner, since ownership of the metals portfolio can then be transferred simply by passing the bearer shares to someone else. While bearer shares are rarely accepted by banks these days, rare strategic metals are not subject to the same kind of restrictions. There is currently no difficulty in purchasing a metals portfolio in a bearer share corporation since only the purchaser has to be identified, not the beneficial owner. In this case, the owner on record at the storage company would be the Panama Corporation, and that is all the storage company need to know.
Peter Macfarlane & Associates S.A. may be contacted via http://www.PeterMacfarlane.info
Investing in rare strategic metals is a great way to hedge against inflation. As the USD, Euro, and others are going south, hard assets are the best place to weather the storm. Yes, gold and silver are fantastic safe havens, but rare metals offer a chance for greater excitement for a small part of your portfolio, while still owning hard metal assets.
It is also important to reiterate that one of the strategic aspects of the SMI program is to get out of fiat money. SMI provides you with the option to operate at virtually all currency and banking levels. You can buy in New York, you cash out in Singapore, Hong Kong, etc. You buy with the USD; you can trade out in Renminbi, Chilean Peso, etc.
We invite you to explore ownership of rare strategic metals and to do your own research. If it sounds like something up your alley, by all means, contact Swissmetal Inc. to start the conversation. It is worth noting that all readers of this report will receive a special offer when referencing the Q Wealth Report.
Contact SMI on US Toll free: 1- 855 854 4679 or fill out the form below to take advantage of this offer. A representative of the company will contact you promptly to answer your questions.