Released date - January 10, 2013 - A fund for one of the more exotic mining bets the average investor can make is falling Thursday, keying off a big loss by a single stock.

Market Vectors Rare Earth/Strategic Metals ETF (REMX)  is down by one percent. Rare earths are tough-to-mine metals with a number of high-tech uses, including in cell phones and semiconductors. One of the fund’s components, Molycorp (MCP), said it “anticipates lower than expected revenue and cash flow for 2013, and is evaluating its capital needs for 2013.” Shares of that company are plunging 22% this afternoon.

Molycorp makes up about six percent of the rare-earth fund. Thompson Creek Metals (TC), another firm with a 5.5% weighting in REMX, is down 1.2%.

Rare-earth metals’ importance in high-tech manufacturing hasn’t translated into stock-market success. The Market Vectors fund had an eleven percent 2012 loss that was preceded by an even bigger tumble — 32% — the year before.

Molycorp’s stock woes exemplify the trend. The stock dipped near $8 this morning, a level it hasn’t seen since November. The longer trend exaggerates it: The stock traded close to $80 after its late 2010 initial public offering.

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JAPAN will launch a survey of its Pacific seabed in the hope of finding rare earth deposits large enough to supply its high-tech industries and reduce its dependence on China.

Researchers from the Japan Agency for Marine-Earth Science and Technology will start the probe from January 21 on the seabed near Minamitorishima island, some 2000 km southeast of Tokyo, he said.

Finding large-scale proven reserves inside Japan's exclusive economic zone would be a boost to Japanese industry, which currently relies on imports from China.

These imports have in the past fallen victim to the delicate political relationship between the two countries, notably in 2010, when manufacturers complained supply was being squeezed during a spat over disputed islands.

The row, over a Tokyo-controlled archipelago known as the Senkakus that Beijing claims as the Diaoyus, has flared anew in recent months.

The survey will follow an earlier finding by Tokyo University professor Yasuhiro Kato, who took mud samples from an area.

He said these indicated deposits amounted to around 6.8 million tonnes of the valuable minerals, or 220 times the average annual amount used by industry in Japan.

Rare earths are used to make a wide range of high tech products, including powerful magnets, batteries, LED lights, electric cars, lasers, wind turbines and missiles.

China produces more than 90 percent of the world's supply of rare earths, but has clamped down on exports of them in a move Beijing says is aimed at protecting its environment and conserving supplies.

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The United States Department of Energy has granted $120 million toward the creation of the Critical Materials Institute (CMI), which will be responsible for developing new methods of rare earth element production and management.

The CMI, led by Ames Laboratory and includes over a dozen research partners, hopes to create technology to avoid supply shortages while also reducing rare earth dependency on China. According to a report by Bloomberg, China provides about 95 percent of the world's rare earth shipments, and recently decreased production limits to conserve the environment and keep their supply in check. The CMI will focus on diversifying the supply of rare earths, develop substitute materials, and improve methods of reusing and recycling materials.

Rare earths include a group of 17 similarly structured elements that are used in the production of phones, disk drives, televisions, and other consumer products, and can also be used to manufacture wind turbines, electric vehicles, and advanced batteries.

Dependency on the import of rare earths is the result of insufficient technology and manufacturing facilities, as opposed to lack of raw material — the Mountain Pass mine in California, for example, has one of the largest deposits outside of China. The CMI will help discover new and more efficient ways to tap into the resources, while also decreasing the use of materials that can potentially have supply shortages in the future.

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An official with the Japan Agency for Marine-Earth Science and Technology has said that researchers are preparing to start a new survey for valuable deposits of rare earth minerals in the country’s Pacific seabed. The search is scheduled to begin on January 21st, and will see them probing roughly 2,000 kilometers (1,250 miles) southeast of Tokyo, near the small island of Minamitorishima. A successful find of minerals will help Japan to reduce its reliance on China within the high-tech manufacturing industries.

This will actually be the second survey of the area, following last summer’s findings of a 6.8 million ton deposit of rare earths by University of Tokyo professor Yasuhiro Kato. Should that turn out to be accurate, it would be enough minerals to supply Japan’s consumer electronics and hybrid car engine needs for more than 220 years. This deposit is the first to be found within Japan’s exclusive economic zone, a huge benefit for the island nation that currently can only rely in imports.

As over 90% of the world’s supply of rare earths comes from China, the push for Japan to reduce its reliance stems greatly from the ongoing diplomatic tensions over a group of disputed islands. Politics have often gotten in the way of Japan’s supply from China, most notably in 2010 when the Beijing government briefly suspended all shipments. Similar action was threatened again shortly after the eruption of anti-Japanese protests in China in mid-September.

While China claims it has increased its restrictions on rare earth exports, not just to Japan, but to the international community as well, because of environmental concerns. Tired of the tight squeeze, Japan has been joined by the U.S. and European Union in filing a complaint over unfair practices with the World Trade Organization (WTO). Several other countries which are believed to have their own mineral deposits, including Vietnam, are eager to cooperate with Japan, which supplies the financing and processing technology, so both can benefit without having to deal with China.

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The US Department of Energy has funded a $120m research center to address shortages in rare earth metals and other materials critical for US energy security.

Ames Laboratory in Iowa will lead a team of researchers at the new Critical Materials Institute (CMI).

“Rare earth metals and other critical materials are essential to manufacturing wind turbines, electric vehicles, advanced batteries and a host of other products that are essential to America’s energy and national security,” said assistant secretary for energy efficiency and renewable energy David Danielson.

“The Critical Materials Institute will bring together the best and brightest research minds from universities, national laboratories and the private sector to find innovative technology solutions that will help us avoid a supply shortage that would threaten our clean energy industry as well as our security interests.

The department’s 2011 Critical Materials Strategy reported that supply challenges for five rare earth metals (dysprosium, terbium, europium, neodymium, and yttrium) may affect clean energy technology deployment in the coming years.

In recent years, DOE and others have scaled up work to address these challenges. Among the recent investments, DOE’s Advanced Research Projects Agency–Energy and Office of Energy Efficiency and Renewable Energy have supported more than $40m in magnet, motor and generator research.

Other national labs partnering with Ames include Idaho National Laboratory, Lawrence Livermore National Laborator, and Oak Ridge National Laboratory. University and research partners include Brown University, the Colorado School of Mines, Purdue University, Rutgers University, University of California-Davis, Iowa State University and Florida Industrial and Phosphate Research Institute.

Industry partners that have joined to help advance CMI developed technologies include General Electric, OLI Systems, SpinTek Filtration, Advanced Recovery, Cytec, Molycorp and Simbol Materials.

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Last July, the WTO opened an investigation into whether China is unfairly restricting the export of rare earth metals - the substances vital not only to your iPod and smartphone, but also to so many other important things, from missiles to cars to wind turbines to light bulbs.

So how has China responded?

In the quiet of the Western world’s Christmas holiday, it blew a raspberry, tightening export restrictions once again.

“China, the world’s biggest rare earths supplier, cut the first-batch export quota for next year by 27 percent as overseas demand for the elements waned,” Bloomberg News reported in the Taipei Times on Dec. 29.

China’s Ministry of Commerce sets rare earth export limits twice a year. It pegged the first allotment for 2013 at 15,501 tonnes, down from 21,226 tonnes for 2012’s first setting.

To be fair, China had loosened restrictions last August, soon after the WTO began its investigation after the U.S., European Union and Japan complained about Chinese limits and tariffs on the metals. The 9,700 tonnes that China allowed in 2012’s second half brought the full-year limit to a three-year high of 30,996 tonnes, Bloomberg noted.

RARE DOMINANCE

For historical reasons including a disregard for environmental concerns in toxic rare earth mining and processing procedures, China controls about 95 percent of the world’s rare earth market.

Change is afoot in the industry. As Bloomberg noted, one of the reasons China curtailed exports is that worldwide demand has dropped off. You can probably attribute that to the sluggish global economy. Also, companies in Japan and elsewhere are finding ways to reduce their reliance on rare earths. And Western companies like Molycorp in the U.S. have started up rare earth operations, although Molycorp has faced criticism for selling to China rather than to the U.S.

With demand down, prices have fallen. China is not only limiting exports, but it has also limited production - all of which should choke supply and in the rules of supply and demand, help lift prices.

China has also started a massive consolidation of its rare earth industry, led by Baotou Steel Rare-Earth. It says it is doing this for among other reasons, to assert more control over cleaner industrial practices. With China’s central planning prowess, it should also give it greater ability to control the global market that it already dominates.

This year will be a busy one for rare earth developments in China and internationally. Rare earths are of double importance to the economy, not only for their direct use in products, but also because they occur in minerals that  contain thorium and uranium, two nuclear fuels that could help move the world off of CO2- emitting hydrocarbons.

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Its reported that Lynas expects to return to  commercial rare earth product production within a few weeks at its Malaysian plant, which has been emeshed in ongoing environmental and safety disputes with area residents.

The process has achieved recovery rates of more than 90 percent of contained rare earth oxides through the cracking units, which are now ready for production of individual rare earth products, the company said.

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Frontier Rare Earths shares picked up Tuesday as investors eagerly await the preliminary feasibility study for the company's Zandkopsdrift rare earth project in South Africa - expected out in the first quarter of this year.

Shares in the junior rare earths company were up almost 7 per cent to 80 cents Tuesday afternoon.

In December, the company said that Korea Resources Corp (Kores) - the state-owned mining and natural resource investor - offically acquired the initial 10 per cent stake in Zandkopsdrift.

Along with the 10 per cent interest, Kores has also acquired an off-take right and obligation for 10 per cent of Zandkopsdrift rare earth production, for a total cash payment of C$23.8 million.

The acquisition is part of a strategic alliance agreement initially signed between the two parties in December 2011, with an expanded deal announced in late October last year.

Under the expanded deal, Kores has the option to increase its interest in the project to up to 50 per cent, becoming an equal partner with Frontier, with an off-take right and obligation for up to 50 per cent production from Zandkopsdrift.

Frontier said the acquisition makes it the  only junior company in the rare earths sector to have signed and  completed a definitive agreement with a significant strategic partner.

The option to increase Kores' interest will be given when Frontier files its definitive feasibility study for the project - currently slated for the fourth quarter of next year.

As of late December, the company had $52 million of cash under its belt, which is expected to suffice for both the preliminary and definitive feasibility studies, as well as work on other exploration programs.

The junior rare earths company started the prefeasibility study on the Zandkopsdrift property in April of this year, and says that "good progress" has been made, with most requisite studies now either completed or at an advanced stage.

The report is targeted for the first quarter of this year, after which the company expects to immediately start work on the definitive feasibility study.

Frontier's preliminary economic assessment (PEA) report on the project, released last February, reported that Zandkopsdrift is estimated to contain roughly 950,000 tonnes of total rare earth oxide (TREO), applying a one per cent TREO cut-off, and gave a whopping net present value of $3.65 billion, after tax and royalties, at an 11 per cent discount rate.

Internal rate of return for the project was seen at 52.5 per cent, after tax and royalties, with a two year payback from start of production.

Average production was pegged at 20,000 tonnes of separated rare earth oxides per year over a 20-year mine life, with production due to start in the second half of 2015.

Under the deal with Kores, the Korean company is also to arrange project financing for the entire development and must committ to provide its pro rata share of funding for the portion of  costs not covered by the project financing.

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How many times have we heard the saying "Bet on the jockey not the horse"? This can be easier said than done with the requirement to do extensive due diligence on the jockey and still face execution risk. Yet with factual data at our finger tips, many times distractions draw our attention away from one of the easiest measures of a potentially undervalued situation. What do the officers and directors of that company think of their equity investment opportunity and are they willing to do anything about it? How much equity do insiders own? Has management been purchasing shares?

A long time ago a mentor of mine told me, investors sell stock for many reasons, but only buy stock for one, to make money. And we have to assume if insiders are buying, they not only want to make money but feel especially strongly about the future of their company.

Below are three companies in the heavy rare earth metal and mining space that recently have enjoyed insider buying and I believe are worth investors consideration for a buying opportunity.

Gold Resource Corporation (GORO) is a mining company that pursues and produces gold and silver projects in Mexico. For the most recent third quarter, GORO generated $36.5 million in revenue, $23.8 million in gross profit and net income of $7.3 million. As of September 30, 2012 the company had approximately $36.2 million in cash and cash equivalents or $0.69/share. The stock has seen its share of volatility recently which is well documented in a separate Seeking Alpha piece which you can find here.

Mr. William Reid, Chairman and CEO, purchased 6,188 shares on November 21, 2012 and currently owns 2,745,669 shares or 5.1% of the company. Mr. Reid previously co-founded and served as CEO of US Gold Corp. (USGL) from 1977 to 2005 where he helped build six producing mines.

Texas Rare Earth Resources is a mining company engaged in the acquisition, exploration and development of mineral properties primarily from their 950 acre Round Top lease located in Hudspeth County, Texas. An initial independent assessment detailed an estimated over 1 billion metric tonnes of measured, indicated and inferred resources containing 531 grams per tonne or over 1 billion pounds of rare earth metals including uranium contained at this location.

The company recently issued a detailed release highlighting that the company and insiders have recently purchased over 1.5 million shares or over 4% of the common shares outstanding. The company along with three directors recently purchased 1,000,000 shares, and separately directors earlier purchased another 559,025 shares at an average price of $0.384/share. Chairman, John Tumazos, is the beneficial owner of approximately 2.3 million shares consisting of 1.8 million common shares, 149,000 warrants and 369,446 options or 6.2% of the company.

The company's current game plan is to work towards monetizing their assets starting this year. In a recent announcement, the next phase in the monetization process was initiated with the air quality baseline study so that permitting can move forward on the property which could make it more attractive for strategic alternatives. The company has sufficient capital to move forward with this strategy through 2014.

Revett Minerals' (RVM) principal assets consist of a 100% interest in a Troy silver and copper mine in northwest Montana and a 100% interest in the undeveloped Rock Creek silver copper development project also located in northwest Montana. Recently, the company issued a release providing shareholders with an update on the monitoring activities at its Troy Mine. Data collected over the past two weeks suggests that conditions at Troy have stabilized and management believes that it will be back to production quickly after conducting all safety measures.

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There’s a minor fervor Monday for rare-earth firms, sending the sector’s exchange-traded fund to what is now a nearly 5% 2013 gain. Will it last?

Lawrence Balter of Oracle Investment Research, tells Barron’s that he’s hopeful. That, at least, is what he says when it comes to the most closely watched U.S. stock in this sector, rare-earth miner Molycorp (MCP). The stock plunged 67% last year, but at $10 or so — shares are up 10% this morning, to $11.37 — “the stock discounts all the bad news and then some,” the Barron’s Trader column quotes him over the weekend as saying. Balter sets a price target of $50.

“[Molycorp is] ramping up production at a new Mountain Pass, Calif., mine and China — the world’s biggest producer of these metals, like molybendum and titanium — is closing down some mines,” writes the Trader column.

The Market Vectors Rare Earth/Strategic Metals ETF (REMX), which I predicted in my column over the weekend should do better in 2013 than its rough time last year, is ahead by 1.5% this morning.

There’s also a note this morning from Commerzbank’s strategists: Mixed in its implications for the sector. Most notably, they’re entertaining the end of China’s near-monopoly:

    Ten days ago, the China Ministry of Commerce set the first tranche at 15,501 tons, 27% down on last year’s figure. As a rule, the ministry approves another tranche in the second half of the year. In total, last year’s export quota amounted to 30,996 tons. Meanwhile, Australian company Lynas Corp has begun commercial production of rare earths in its controversial plant in Malaysia following considerable delays. This could put an end to China’s quasi monopoly.

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