L0511182859 Expiration 4/12

Paul D. Schwartzmeyer
Registered Representative pschwart@walnutstreet.com 585-757-2347

paulschwartzmeyer.com
Things you probably won't read anywhere else.

Rare Earth ElementsIn this article: The Rare Earths * Lanthanum * Cerium * Europium * etc....

The New Gold! Rare earth elements, are they really that rare?
The photo above is a big hole. Most boys like digging holes. When those boys get older, they're no longer constrained from digging big holes in the back yard by their mothers, the new constraints are environmental lobbies, state licensing and the cost of 60 ton shovels. But the result is the same. Nobody wants a big hole in their yard. Because of this, when it comes to rare earths, we no longer dig big holes in America. Today, 90% of all rare earth elements are mined in China. The chart below (1) tells quite a story. As late 1984, America was still producing half the worlds rares and was self sufficient. Today, with the closing of the mine called Mountain Pass, in the Mojave Desert, the US no longer mines rare earths. We have a lot... we just don't want any new holes dug in the United States.
* What are rare earth elements and why should I care if we run out. * Are rare earth elements all that rare? * What are the rares used for? * What are the factors that effect their price?

The rare earths have a variety of metallurgical, chemical, catalytic, optical and magnetic properties that make them indispensable in today's high tech world. They're used in fiber optic cables, as doping agents in batteries, and as polishing agents in glass. They're a key ingredient in liquid crystal displays. What's most amazing to me though is that the mines were shut for environmental reasons but rare earths are critical to saving the environment. They're a key component in the miniaturization of batteries, in carbon dioxide emissions reductions and in magnetic refrigeration technology. (2)

The price of metals, and not just rare earths, but all metals including copper, gold, aluminum, iron, nickle and zinc, are affected by many different factors, but the recent run up in price can be attributed to just a few. They include the collapse of the dollar, the off shoring of US manufacturing and the rise of the third world. This has led to severe displacements in the supply and distribution chain. For example. The US uses 20% of the world Aluminum but we no longer mine bauxite, the ore, in significant amounts. The US does not produce an appreciable amount of any of the top metals, Aluminum, Cadmium, Iron, Cobalt, Copper, Zinc or nickel. The US produces a relatively large amount of lead, but even here, China produces half the worlds lead. The US is still the worlds biggest consumer and is becoming irrelevant as a producer.

In fact, the world is experiencing a shifting in the supply and demand dynamics which will, or perhaps has already led to supply disruptions and price spikes. For example.

L0511182859 Expiration 4/12

Things you probably won't read anywhere else.

- China blocked shipments of rare earth elements, which caused prices to skyrocket. (3) - Potash producer Canada, recently blocked the sale of some of its potash mines to China. Three years ago, Russia and Belarus were stopping shipments of potash to China over price haggling. (4) In fact, much of the worlds commodities are controlled by governments who's geopolitical ambitions drive production and distribution of commodities and production. Also, some old tensions that have begun to raise their ugly heads. China has recently started to argue with Japan over disputed island in the South China Sea. Russia has also had it's disputes with Japan over Islands it acquired during World War 2. Many of these arguments actually stem from disagreements over commodities. Countries control 70% of the worlds commodities. The problem with the USA is that we don't have policies to deal with trade. For example, China has a strategic cooking oil reserve. As bizarre as this may sound if you read my last newsletter you'd know that in most of the third world, cooking oil is essential to their economic survival. While the mining of rare earth minerals moved from the US to China, the US never adopted a plan to save essential mining operations for national or economic security. We believe open markets are more effective than planning in producing economic results. But we also assumes other countries won't use their commodities to blackmail us. There is another issue with the rare earth elements that most people don't consider. You rarely if ever mine one thing. Many gold mines also produce copper. They exist together underground. In the case of rare earths, the ore type, (that is the rock it's extracted from), is actually named for the concentration of the rare earth elements it contains. That combination will determine not only the mining but processing and waste disposal system of the mine. The point is, even though rare earth minerals aren't really that rare, (most are 20-30 times more plentiful then gold, for example) finding the right concentrations of usable elements without large amounts of radioactive or toxic elements is much more difficult. Once they're found, regulatory and environmental concerns as well as the enormous amounts of money required to open these mines makes new start up operations risky endeavors. This is why it's so important that existing operations stay viable. In the 70's the mine at Mountain Pass California was opened to service the growing market for color televisions. That industry no longer exists in the USA. In fact, the United States won't produce a single television this year, an industry we once monopolized. But the loss was greater than just televisions. We lost the mines, the engineers, the designers, the transportation systems and the expertise that went along with it. As I have mentioned many times in newsletters, in capitalist systems, commodities flow to money. In our open market system, where everything's for sale at a price, anybody in the world with a computer or a blackberry has the same right to buy the soybeans that grow 100 feet behind my house as I do. As more and more countries control the commodities within their borders, increasingly politics will play a larger role in determining where things go and what we pay. The opportunities to invest in rare earths, like investing in any commodities investment will be huge but the risks just as big.

Paul Schwartzmeyer
(1) (2) (3) (4) Source: US Geological Survey, fact sheet # 087-02. ibid: US Geological survey The New York Times, 'After China's Rare Earths Embargo, A New Calculus October 29, 2010 The Potash Equilibrium How China buys and Russia Sells, Mineweb, John Helmer, July 2007
The statements and opinions in this article are those of Paul Schwartzmeyer and do not in any way reflect the views of Walnut Street Securities, Inc. (WSS) The material is for informational use only and should not be viewed as an offer to sell or a solicitation to buy any security from or through WSS or it's affiliates. WSS makes no representation or warranty relating to the facts presented or that all material facts necessary to make an investment decision are presented.