A rare commodity with the potential to fire up your portfolio

Rare earth is the latest in a string of commodity sectors to capture investors’ imagination, and although easily written off as an area of niche interest, it is no surprise that its dire supply situation will trigger a decent uplift in price.

The commodity, which actually incorporates 17 chemical elements that includes yttrium, europium and dysprosium – are crucial components for in-demand green energy technologies such as wind turbines as well as the newest generation of mobile smart phones. This has spurred rapid growth in their use, alongside the switch away from oil as a core provider as fuel.

Leading fund managers increasingly fear that now China has begun to close off its supply of rare earths to the wider world, this demand can only escalate. While this poses an obvious threat to the makers and consumers of environmental energy products and the next wave of electronic devices, it provides shrewd investment managers with an opportunity to exploit.

‘These fundamentals, exacerbated in this instance by the concentration of supply into one dominant provider, China, are now providing very attractive returns for investors as the reward for providing funding to increase supply,’ said Investec UK Smaller Companies fund manager Philip Rodrigs.

He believes that some of the best opportunities to tap into the potential of rare earth sit in the smaller companies space. There are also several ‘rare earth-type’ plays in the UK market, he says.

Tantalum is one such example. It possesses many of the key qualities of rare earth given it is now in critically short supply – due to an international agreement not to use material from the troubled Democratic Republic of Congo (DRC) region, Rodrigs explains.

‘As a result the price of tantalum, an irreplaceable component of micro-electronics due to its high capacitance where the surge in smart phones is fuelling demand, has rocketed from $37/lb to around $120/lb, Rodrigs points out.

‘Importantly, the price is realistic as an Australian mine has recently agreed to commence operations only upon securing contracted prices around this level due to its high costs. Noventa is a Mozambique-based miner of tantalum, processing some of the largest known deposits of the metal.’

Similarly, supply-constrained rutile offers similar rare earth-like characteristics and is also set to see upward pressure on its price. While as not familiar as copper, rutile contains titanium dioxide – important in the production of paints and turbine blades. Unlike tantalum, rutile is not in short supply, but the large scale mining projects needed to retrieve it are. This justifies its inclusion in Rare Earth’s exchange traded fund (ETF).

Another buyer of rare earth is AGF Investments duo Bob Lyon and Ani Markova, who run the Smith and Williamson Global Gold and Resources fund.