When valuable rare earth metals may actually be worthless

Two years ago Moneyweb was alerted to an unusual type of investment being offered by a company called Electio. The firm was inviting investors to buy baskets of rare earth metals, which are commodities used in a range of specialised high tech applications such as smart phones, solar panels and missile defence systems.

The investment case for buying these baskets, according to Electio, was that these metals have “properties that make them indispensable to the manufacture of contemporary technological components”. Supply is also supposedly inelastic, meaning that as demand inevitably increases, the price can only go up.

Due to this situation, Electio’s website suggests that investors can expect to see growth of 14% to 19% per year.

After scrutinising the offering, Moneyweb however raised a number of concerns. Primary amongst these was that Electio was unregulated, and if something went wrong, it’s unclear what recourse investors would have.

The suggested high returns were also extremely suspicious. An analysis of rare earth metal prices showed them to be volatile, and, like any commodity, there is no reason to believe that their prices would ever move in a straight line.

Finally, Moneyweb pointed out that the true value of anything is only ever what you can sell it for. Electio did not guarantee liquidity, meaning that even though investors may be told that their rare earth metals are going up in price, unless they could ultimately find someone to buy them from them, they were essentially worthless.

Unfortunately, it appears that this is exactly the position in which many investors have now found themselves.

Moneyweb has recently received complaints from a number of Electio clients who have been unable to get any money back from the company. The reason they have been given is that there is a lack of liquidity, which means that Electio is unable to sell their baskets and thereby free up their investment.

The below email is an example of a communication sent to a client who asked to sell their baskets in October last year. Ten months later, there has been no further progress.

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Questionable valuations

An investigation by Moneyweb has also raised serious issues around what clients were being told with regards to what their rare earth metals were worth. The values that Electio assigns to its baskets appear questionable.

To illustrate this concern, one Electio client initially bought a basket of metals for R52 237 on May  5 2015. On May 9 2016 she received an email from Electio accounts manager Shuanita Singh to say that the value of her ‘portfolio’ had grown to R63 644. Another email from Singh on September 2 2016 indicated that it had gained further to R66 841.

This represented a 27.96% growth in 16 months.

However, research done by Moneyweb found that rare earth metal prices actually declined over this period. The VanEck Vectors Rare Earth/Strategic Metals ETF, which is listed on the New York Stock Exchange and provides the best idea of the price performance of rare earth metals, fell by close to 37% in these same 16 months.

It is therefore unclear from where Electio is getting its pricing, or if there is any basis at all for the basket values it sends to clients. The emailed ‘statements’ contain no information at all other than a single line indicating the current value of the client’s ‘portfolio’.

No answers from Electio

Moneyweb made numerous attempts to get an explanation from Electio, but these were unsuccessful. In 2015, when Moneyweb made its first enquiries, it dealt with the company’s MD Kyle Pillay. However he appears to have left Electio and emails sent to his address went unanswered.

Messages sent to the email address on the company’s website also received no response. A call to the company’s office number reached someone who refused to give her name, because she said she was not authorised to speak to the media. She told Moneyweb that she would have someone “from senior management” contact us, but that never happened.

Moneyweb also tried to contact Shuanita Singh, who was the last account manager most clients dealt with. However, the person who answered the cell phone number she had given to clients claimed that it was a new number she had only just received, and that she did not know who Shuanita Singh was.

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