Rare earth metals have turned out to be fairly common after they were first discovered as exotic new chemical elements in 1787. However, investment opportunities in rare earths are as scarce as their name suggests.

There are 17 types of rare earths and — unlike most metals, whose demand is driven primarily by economic cycles — demand for individual rare earths shifts with technology. And there has been a rapid shift in technology over the past decade with the introduction of applications such as hybrid vehicles, which require up to 30 kilograms of rare earths each, as well as iPods, BlackBerrys and MRI machines that rely on rare earth-rich magnets.

As a result, global demand is expected to climb to 200,000 tonnes, valued at US$2 billion-US$3 billion, in 2014 from 130,000 tonnes this year — driven mostly by growth in magnet and battery alloy applications.

Unlike most other commodities, rare earths are traded by private contracts only. Prices vary wildly, depending on the metals’ scarcity and application, and can also be volatile. For instance, terbium oxide — used in LED screens — recently traded at US$550 per kg and also saw a one-day price spike of 14% in early March, while cerium oxide, found in alloys and catalysts, was valued at US$4.60/kg.

The supply situation is even more unusual. More than 90% of global production of rare earths comes from China, but that resources base is rapidly diminishing and the country has its own rare earths needs. As a result, China has imposed production and export quotas as well as export taxes of 15%-25% on rare earths. China’s government is also clamping down on illegal mining operations in its clay deposits, which contain some of the most valuable of the rare earths.

“The real story is the non-Chinese supply options,” said Ian London, vice president of corporate development for Toronto-based Avalon Rare Metals Inc., at the recent Prospectors and Developers Conference in Toronto.

Avalon’s Nechalacho deposit in Canada’s Northwest Territories is expected to become a major long-term supplier of rare earths in the next few years and is one of the most advanced projects of its type in the world. Avalon is in the midst of preparing a pre-feasibility study for the project, due out this spring.

Avalon is far ahead of most of the pack, but it has company. There are an estimated 130 junior companies exploring for, developing or acquiring rare earth deposits. But even if these projects yield robust metal grades and tonnages, there is the added complication of metallurgy. Rare earths tend to occur together as a cocktail and each project is unique, meaning processing to strip off the unwanted metals can be difficult and expensive to do correctly.

As a result, financial advisors and their clients evaluating investment opportunities in the sector must look closely at the prices of the rare earths that the mining company expects to exploit vs the cost of producing a commercial product from the mine concentrates, says Jack Lifton, an independent consultant in Michigan who focuses on the market fundamentals of rare earths and who recently spoke to a record audience of 600 at the Mining Indaba conference in South Africa: “Take a look at the margins, including repaying the debt. If you look at those numbers, you winnow down the number of rare earth opportunities to a small handful.”

For example, Australia-based Lynas Corp. Ltd., which is well on its way to becoming a producer and is one of Lifton’s favourites, estimates that two-thirds of its total cash cost to produce a finished product will be attributable to its advanced materials plant in Malaysia, including 50% alone for the reagents that separate the desirable metals from the others.

Clouding the investment picture further is the threat of a metals scarcity. A perceived lack of future supply could put a halt to any technological innovation that relies on rare earths, thereby curtailing demand.

“There is a push to use more magnets in wind turbines, but not many end-users have made that shift because of the uncertainty of supply,” says London. “In some cases, companies are trying to engineer away from using rare earths.”

Aside from Lynas, Lifton follows Avalon, Saskatoon-based Great Western Minerals Group Ltd. and Colorado-based Molycorp Minerals LLC. He is also a consultant for Idaho-based U.S. Rare Earths Inc., which owns an early-stage exploration property in its home state.