How to invest in rare earths without getting your hands dirty

In a three-storey bunker in Frankfurt, 300 tonnes of strategic metals and minerals are carefully stacked across three floors and 15,000 square feet. Built as an air raid shelter during the second world war, the bunker has six-foot-thick concrete walls, cutting-edge security and is protected by armed guards.

Some of these precious materials are owned by investors. Others by manufacturing companies building up stockpiles to protect their production in case of geopolitical trade embargoes and supply difficulties. But you don’t have to buy and hold these materials to benefit as an investor.

Rare earths – there are 17 altogether – have become essential in modern manufacturing. They appear in smartphones, cars, wind turbines, satellites and sophisticated modern weaponry. The American F-35 stealth fighter is said to need approximately 920 pounds of rare-earth materials¹. The US Virginia-class submarine needs 10 times that².

The irony is that America’s adversary, China, has a near monopoly in the production of many of these materials. It was responsible for production of nearly 70% of the world’s rare earth production last year and holds nearly half of the world’s reserves, according to the US Geological Survey³.

It’s not that these materials are as scarce as the title, ‘rare earths’, suggests. Opening a mine can take years. Processing the materials excavated is complex. China overtook the US a long time ago in rare earth production and now has world-beating expertise in processing. It produces nearly all the rare-earth magnets. As a result, it now has a strategic advantage in tariff negotiations with the Trump administration.

Other minerals are supply-constrained and valuable, too – like lithium, cobalt, nickel and copper. Several emerging market countries are rich in these materials, which are needed for batteries and power infrastructure. Demand for them is only likely to intensify as the world electrifies.

Rare earths appear in smartphones, cars, wind turbines, satellites and sophisticated modern weaponry.

Let’s start with some of China’s mining champions we own, which are central to global supply chains.

CMOC – or China Molybdenum as it was previously known – is one of the world’s largest producers of molybdenum, tungsten, niobium and cobalt. Its operations stretch from China to Africa. Molybdenum is used as a steel alloy to increase its strength and resilience in extreme conditions. Niobium helps make lightweight alloys in aircraft and is critical to the manufacturing of superconducting magnets in MRI machines⁴.

CMOC, whose share price has nearly doubled this year, is responsible for a third of global cobalt supply. Its shares are not cheap any longer but not expensive either. The valuation remains supported by strong earnings and cash flow growth.

Western Mining Group is more diversified, spanning copper, lead, zinc and rare earths. Its Yulong copper mine is undergoing an expansion to increase capacity. This should extend the mine’s service life and significantly bolster China’s copper self-sufficiency. Tongling Nonferrous Metals, a key copper smelter, also contributes on this front. These two shares are not so easy to buy through retail investment platforms.

Away from China, in copper, there is the mining conglomerate, Grupo Mexico – the largest mine operator in Mexico, Peru and the third largest in the United States. It operates 14 mines and 52 processing plants, produced a million tons of copper in 2023 and has the largest copper reserves in the world⁵.

You do not have to rely solely on miners. One approach we take is to invest in banks in countries that are being enriched by mineral production. A large part of their loan books is likely to be exposed to commodity producers. Banks tend to be on lower valuations than the miners themselves and can generate generous yields to shareholders.

So in Chile, rather than invest in lithium producers, we invest in Banco Santander. While the bank does not directly finance lithium production, its business grows as miners, energy companies and infrastructure projects expand to meet global commodity demand. Rising activity in these sectors can boost lending fees and overall economic activity. Its shares have doubled in the past year⁶.

Taken together, China, Latin America, India and Africa – along with resource rich nations such as Indonesia, form the backbone of the global resource trade, making them pivotal hubs for investors seeking exposure to the world’s energy transition.

Pollution and ethics always come into the equation when considering mining. Everyone wants a clean energy world but creating it is a dirty business. Pressure to produce as efficiently and cleanly as possible has forced companies to close some mines, reducing production. This has created downward pressure on capital expenditure, which in turn has contributed to prices rising.

It has also led to many of the bigger players divesting themselves of less efficient mines to improve their overall carbon and pollution footprint. Whether this is actually better for the planet is another matter. The new owners are unlikely to prioritise environmental concerns once operations are handed over.

Historically this was a sector that carried large debt, but the disposals mean that some of the big players now have very strong balance sheets. They have much cleaner operations. They take their shareholders seriously, seeking to distribute free cash flow to investors. And they are usually on attractive valuations, yet with strong growth potential.

That bunker in Frankfurt highlights how important these resources are. In a world under pressure to transition to low-carbon energy production, demand for these materials is only set to grow. In my view, there may never be a better opportunity to get exposure to this area.