Rare Opportunity

    1 December 2012

    What the hell are you talking about?
    These 17 chemical elements, with names such as neodymium, dysprosium and europium, are used in the manufacture of objects ranging from lasers, aerospace components and nuclear batteries to camera lenses, energy-efficient light bulbs and self-cleaning ovens.

    Where do they come from?
    Today 95 per cent of the world’s supply comes from China. Deposits are dwindling fast and unless new sources are discovered, global demand will drastically exceed supply. California used to produce a fair amount, but closed its Mountain Pass mine because the Chinese undercut prices. Production has resumed there, but the Chinese still call the shots.

    Why haven’t I heard of anyone investing in rare earth metals before?
    Until last year, there was no investment market in rare earth metals. Manufacturers bought these substances directly from suppliers, meaning that rare earths represented a pure commodity play based on supply and demand.

    What has changed?
    Denver Trading, which acts as a broker to the industrial sector, decided to create a new business model for retail investors, licensing companies that it describes as ‘agents’ to sell small amounts of rare earths and arranging for them to be stored in bonded warehouses in London or Zurich. Purchases are certified as genuine by independent third-party experts.

    How many companies are offering this service?
    About 20 so far. If your email address is registered with any financial websites you’re bound to have received several enticing messages by now.

    How are the prices of rare earth metals performing?
    Well, some prices have risen dramatically, mainly because the Chinese have been curbing exports of rare earths and stockpiling them. This is the eye-catching part of the pitch. Who wouldn’t want to profit by 500 or 1,000 per cent? But prices have fallen of late — volatility goes with the territory.

    How does the business model work?
    Given that just about all the companies selling rare earth metals to investors are ‘agents’ of Denver Trading, there is an issue about how stable that market is. If Denver Trading were to go out of business, you could be left with bags of rare earth metals sitting in a bonded warehouse, and no easy way to liquidate your holding. Denver’s agents want a minimum investment of £3,000 to £5,000 and recommend holding deposits for around five years.

    How do Denver Trading and its agents make money?
    Denver Trading holds stocks of rare earth metals — an expensive business — which it later sells at a profit. In a rising market Denver Trading buys back your rare earths at a discount to the market price. In a falling market investors have nowhere to go other than to Denver Trading.

    What else should I worry about?
    The Chinese might release stockpiles into the market, thus depressing prices, or countries other than China might develop new sources of supply (Vietnam, for example). And another thing: existing manufacturers are seeking new methods of production that will no longer require rare earths.

    What’s your advice?
    Never invest through companies that do not list the names and backgrounds of their principal executives on their websites. Other than that: fasten your seatbelts, you’re in for a bumpy ride.