"What's the definition of a mine? A hole in the ground with a liar on top."
The most famous aphorism about the mining business is usually credited -- possibly apocryphally -- to Mark Twain, who before assuming the mantle of America's great literary wit was just another mining speculator gone bust. But generations of fleeced investors since Twain's day would nod angrily in agreement -- losing a fortune on too-good-to-be-true mining deals is a tradition as old as mining itself.
So it goes with rare-earth elements, a group of materials used in the manufacture of various high-tech applications and the object of the latest subterranean fad. Since a border dispute between China and Japan pushed rare earths into the headlines last fall, prices for some of the elements have shot up to an incredible 1,000 percent of what they were just three years ago -- and as in Twain's day, there is no shortage of smooth-talking suits who will tell investors this is only the beginning. I should know: For a few months, I was one of the suckers.
Before we get to that, a brief geology lesson: "Rare earths" is the catchall phrase for 17 elements mostly near the bottom end of the periodic table that are essential for cutting-edge optical and magnetic applications in hybrid cars, wind turbines, iPads, mobile phones, and smart missiles, among other things. What rare earths aren't, however, is rare -- in years past, they were mined everywhere from Florida to Indonesia -- or terribly valuable. In 2009, global sales of all raw rare earths combined came to less than $2 billion -- half the market for palladium alone, and 1 percent of the market for gold. These aren't exactly precious gems: Most rare earths are priced by the ton, not the ounce.
China started cornering the rare-earths market in the 1990s not because it was the only one with the stuff in the ground, but because everyone else gave up. Mining rare earths requires some of the most invasive and ecologically destructive open-pit extraction practices in the world, and China's lack of environmental regulations and its cheap labor meant that it could easily undercut even the biggest suppliers. The one active mine in the United States, operated by the company Molycorp in Mountain Pass, California, halted production in 1998 after a radioactive-waste spill and was shuttered four years later.
For fly-by-night speculators, rare earths couldn't be packaged more attractively. No amount of polite explanations like the above will strike the word "rare" from their name, and the stuff has a knack for attaching itself to headline-worthy buzzwords: "China," "green technology," "iPhone." The rare earths' names -- dysprosium, neodymium, yttrium -- may be a mouthful, but everyone knows how to spell "opportunity." Many companies currently dealing in rare earths have seen their stock valuations jump more than 500 percent on speculation alone, even as global demand for what they're selling has remained more or less flat.
I first heard about rare earths last February, while researching the link between mining -- including rare earth mining -- and guerrilla conflict in rural India. Almost as an afterthought, I noticed China's monopoly and the potential for a big price jump should China decide for any reason to twist the screws. Acting on the hunch, I dumped my meager life savings -- about $9,000 -- into the rare-earths sector, and waited for the payoff.
Investing in speculative mining companies is a bit like buying lottery tickets -- for every firm that pays off, there are dozens whose promises of vast riches disappear into the fog of stock dilution, mismanagement, environmental catastrophe, and fraud, as well as the ever-looming possibility that companies digging for pay dirt will find only the regular kind. The business is full of cautionary tales like that of Bre-X Minerals, a small Canadian gold-mining company that opened up shop in an Alberta basement in 1994. Bre-X started putting out spectacular press releases about phantom gold findings on its Philippines property; the stock soared, and soon the company was worth almost $5 billion before a single ounce of metal was mined. By 1997, however, its claims couldn't be substantiated, and one of the company's geologists died under mysterious (and ambiguous) circumstances. Individual investors and pension funds eventually lost everything, and the cases are still clogging Canadian courts.
Then there are the geopolitics: Events perpetually threaten to upend whole mining subsectors, with countries flooding markets or nationalizing firms more or less on a whim. For rare earths, with their Chinese near monopoly and high-tech military applications, the odds of the whole market being turned on its head were particularly good -- and that was exactly what happened on Sept. 7, when a Chinese fishing boat collided with two Japanese naval vessels along a disputed border in the South China Sea.