Trading the Rare Earth Deficit

News is circulating this week that Japan may have just found 200 years’ worth of rare earth elements in the Pacific about 200 miles off the coast of Minami-Tori Island — the first deposit ever found in Japanese waters.

You may remember back in 2011 when Japan reportedly found 100 billion tons of rare earth minerals 20,000 feet under the sea…

To date, I haven’t heard about any rare earths from the 2011 discovery being brought to surface.

Pardon me for pointing out the obvious, but finding rare earths and bringing them to surface are two very different things.

For the last two years, we’ve feared a rare earth price shock triggered by Chinese power plays.

Until Japan can produce the fruits of these deep-sea discoveries, this fear remains intact.

Officials say it’s only a matter of pumping up rare earths from the ocean floor and using acid to extract the metals: “Sea mud can be brought up to ships and we can extract rare earths right there using simple acid leaching. Within a few hours we can extract 80% to 90% of rare earths from the mud.”

For this to be a feasible plan, the cost of the rare earths must also be high enough to make it worth the trip 20,000 feet under water — a costly measure.

But there’s still hope, especially since researchers are saying a single square kilometer of oceanic rare earth deposits would provide nearly one fifth of the current global annual consumption.

According to the professor leading the research in Japan, rare earths contained in the seafloor deposits could amount to 80-100 billion metric tons.

(Compare this to the estimated global reserves by the USGS for all rare earth deposits on land of 110 million tonnes, a figure that includes China’s sources.)

Where There’s a Will…

There’s a way — especially when undercutting Chinese dominance is part of the package.

China already controls about 99% of dysprosium and terbium, both vital in the manufacture of green energy technology and military applications such as missiles.

These same elements are facing critical risks of supply shortfall until 2015 (at the earliest).

Rare earth expert Jack Lifton will tell you it’ll take another two to four years for us to see any new dysprosium production outside of China, and that this element will be in short supply for a great deal of time:

Everybody talks about how the price dropped from $2,500-1,200/kilogram (kg) of 99.9% metal… 

That is comical, because the peak people are using is the speculative bubble last year.

China isn’t likely to back down or loosen its restrictions and will wait to see what is actually being produced before folding its hand.

If Japan really wants to get things moving, they’d be loading up ships with rare earths from the site they found in 2011…

Producing deep-sea rare earths would help bring down the overall cost, headache, global anxiety attacks, and growing tension in international relations.

In the meantime, the outlook for rare earth is growing worse.

China still controls a majority of the supply and is now cautioning the world that its own reserves can’t last forever. The China Securities Journal reports China is already stockpiling terbium, dysprosium, europium, and yttrium.

The price of rare earths will only rocket from here…

Trading the Rare Earth Deficit

Know this: Rare earth stocks are not for the weak-hearted. They’re volatile.  

But there’s a good chance that with patience, these two trades will add another 20% of upside given the current environment.  

Continue buying the Market Vectors Rare Earth/Strategic Metals ETF (REMX) long-dated February calls. The REMX holds most of the hottest rare earth names, including Molycorp (MCP).

Buy Molycorp (MCP) long-dated calls, too, as it finds long-term support.

Molycorp is a company I believe has the highest chance of completing projects and generating cash flow over the next year. Higher prices are very likely.

I’m still a heavy buyer.

Remember, China holds the cards here.

It doesn’t matter what Japan finds… If they can’t bring enough to surface at a good cost, China won’t bend.

Stay Ahead of the Herd,

Ian Cooper

@IanLCooper on Twitter

Ian Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He’s the Coach behind Options Trading Coach, a beginner’s guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor’s page.