Not So Rare Minerals

It sounded good at the time, as it had “rare” in its name — so I invested in companies specializing in rare earth minerals. Well, the bottom fell out when the Chinese flooded the market, and the companies I’d invested in became penny stocks or went bankrupt. On the bright side, I only lost about $250. But I retain the shares, as it costs $10 to sell. — B.M., online

The Fool Responds: Rare earth minerals received a lot of media attention some years ago, in part due to their critical role in many hightech products, such as cellphones and electric cars. Prices surged as investors got interested and bought shares.

The Chinese companies that produced most of the world’s rare earth minerals boosted production to take advantage of high prices for the minerals, and other companies around the world tried to enter the business. Then the economic laws of supply and demand took over, with an oversupply in the market driving prices down.

Companies such as the ones you invested in still had very high production costs, but were getting very little for their product.

Thus, many went out of business. Some surviving companies have changed their names, in part to avoid negative associations. For example, Avalon Rare Metals became Avalon Advanced Materials.

Commodity stocks can be extra risky, depending heavily on supply, while high production costs can leave less room for price flexibility.