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Will rare earth metals make you rich?

Is Electio’s offering worth the risk?

CAPE TOWN – In the current market environment, where returns from traditional asset classes are likely to be subdued over the next few years, many investors are looking for alternative investments that can offer an attractive return profile. So something that advertises returns of 14% to 25% per annum is likely to pique some interest.

This is the case with Electio, a brokerage offering investments into rare earth or tech metals.

The rare earths are a collection of 17 metals with magnetic, luminescent, and electrochemical properties that are generally found in combination. Their appeal is that, to a greater or lesser extent, they have all found uses in modern technologies like lasers, smartphones, solar panels and electric car batteries.

Electio is advertising returns of 14% to 25% a year to investors who purchase their ‘baskets’ of these commodities. These are physical sets of different combinations of the metals, which are stored in a secure facility in Dubai under the custody of Bermuda Commercial Bank.

According to Electio’s website, rare earths are “ indispensable to global innovation and the development of new generation technologies”. It adds that “with global demand soaring and capacity limited by access to supply of the raw materials, investments in technology metals are expected to yield returns of 14 to 19% per annum”.

This is somewhat confused elsewhere on the website where expected returns are given as 14% to 25%, but nevertheless, the claim is that there is likely to be robust price growth. 

“The returns advertised are forecast returns for 2015 and are calculated based on both historical performance and expected future market conditions for the year ahead,” explains Kyle Pillay, Electio’s General Manager.

What makes the rare earth market interesting is that one country – China – controls somewhere between 80% and 95% of production. And it doesn’t appear that keen on sharing.

In the last decade it tried imposing export quotas, but these were disallowed by the World Trade Organisation. It has since changed its approach and is trying to limit exports by taxing them heavily.

China’s control of the market makes many believe that the supply and demand balance is very much in favour of producers, and therefore likely to lead to ongoing appreciation in metal prices. That is, in essence, the investment case that Electio puts forward for why these commodities make such a great investment.

By offering investors a way to buy the physical metals, it also believes it is offering something that appeals to those who either require a Shari’ah compliant product or simply want to hold something tangible.

“In our opinion, Electio’s structure provides the most direct way of investing in these metals,” says General Manager Kyle Pillay. “In the same way that an investor may choose to hold physical bullion instead of investing in a gold exchange-traded fund (ETF), we provide an alternative to investors who wish to invest in rare earths, but do not wish to hold a financial product. When conducting our market research nearly four years ago, many investors were licking their wounds from the financial crisis and expressed a desire to hold more ‘real’ assets and fewer paper assets.”

The risks

While there may be a case for investing in rare earth metals, Electio’s offering does however set off a few warning lights.

The first is that Electio is not regulated. As the company points out on its website, commodities are not a financial product, and so it doesn’t have to be a regulated financial services provider to act as a brokerage in trading them.

That doesn’t automatically mean that Electio is not doing what it claims to be doing. However, it does mean that anyone who invests on its platform does so knowing that Electio does not have to meet the regulatory and legal standards required of an ETF provider, bank or unit trust manager.

Electio does state that it has its own protections in place, in the form of auditors, administrators and the custodian bank. However, it is not operating under a set regulatory framework, and while that doesn’t automatically mean it is dishonest, it does mean that investors are potentially without recourse if something goes wrong.

Secondly, although Electio advertises high potential returns, it doesn’t show the historic performances of its baskets. It has been offering these products since 2013, but there is no performance data on its website.

A little research into rare earth metals reveals that the prices of these commodities are in many cases currently half of what they were in 2010-2011. That is when they soared on fears that China was going to use its market dominance to stymie western economies by cutting off supply.  

That threat didn’t materialise, and so prices collapsed again. Anyone who invested in rare earths during the 2010-2011 crisis may therefore have to wait an awfully long time to see any return at all, never mind 19% or 24% per annum. 

Electio only started its product offering in 2013, and so missed that particular boom and bust, but to some extent this is the nature of commodities. One only has to look at the oil price, to know that these things do not move in straight lines.

Commodities also do not pay any sort of interest or dividends. The only value you get out of them is in the movement of the price, so there is no compounding effect as there would be in other asset classes like shares, bonds or property.

The third concern is that Electio does not guarantee liquidity. In other words, investors are not assured of finding a buyer for their baskets of rare earth metals when they decide that they would like to sell them.

The importance of this is something that many investors underestimate. A basket of rare earth metals may be valued at a certain amount, but it is actually only worth that if you can sell it. If you can’t find a buyer, it is actually worth nothing.

There are many cases of products that sounded like wonderful investments, but when the time came to realise the gain by selling them, there was no market. That is part of why unit trusts and ETFs are so appealing. Liquidity in those products is guaranteed. You know you can always sell them.

Finally, for anyone to invest in a product like this, they had better know what it is they are investing in. Taken at face value, Electio’s marketing makes it seem that rare earth metals are a one-way bet.

However the rare earth metals market is relatively small, and it is not easy to find much information on it. Even finding historical and current prices is no simple matter. So this is more than just an alternative investment, it’s a rather obscure one.

If someone doesn’t really know how rare earth metals are used, the scale of the demand, the chance that replacements will be found, or the number of new projects that are coming on-stream, buying them would be a gamble, not an investment. It’s worth remembering that one of the golden rules of investing is that if you don’t understand it, don’t buy it.

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If it sounds too good to be true, then it probably is.

Rare earths, when heated produce faint wisps of smoke. And where there’s smoke, there’s usually the fire of people’s money getting burnt.

As someone who has actually been supplying rare earths to industrial consumers for more than 25 years, I would not even contemplate investing such parcels. Patrick’s comments about liquidity is of utmost importance. Most users of rare earths buy directly from the manufacturer or their accredited agent. They are not interested in buying odd, small spot lots from an unknown source. The costs and risks of compromising the final quality of their product is just too great. It is also highly unlikely that a single end user would want the mix of metals that has been put together. On a more technical note, the baskets of rare earths on offer consist of METALS – most of the applications described on Electio’s website cannot us the rare earths in their metallic form but require the rare earth to be an oxide or other compound. This applies particularly to erbium, europium, cerium, and ytterbium. There are very few industrial applications for these elements as metals so if you have some you will have almost no possibility to sell them unless you can find another mug (sorry, investor) to take them off your hands.
My advice – find another investment

Who is interested in a basket of rare earths? Many rare earths such as lanthanum or cerium (light rare earths) are not worth much and there will be continued oversupply as producers such as Mt Weld, Kvaneveld, Mountain Pass, Steenkampskraal and every man and his dog with a carbonatite come on stream. Any shortfall will be plugged by the Chinese.

Anyone interested in REE should consider heavy rare earth producers who have a lot of yttrium, terbium dysprosium in the deposit. This stuff will remain in short supply, despite the Chinese, and may prove to be a good investment. Forget the carbonatite and alkaline rock type deposits as far as REE go.

Rare earth mining carries serious risks of environmental damage , South Africa should ban it .

End of comments.

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