Corporate Blog

Lifton on Molycorp Coverage: Don't believe everything you read.

The following originally appeared on Investorintel.com. Courtesy of TRER director Jack Lifton.

Toronto’s Financial Post seems to be unable to distinguish the Molycorp “tree” from the rare earth sector “forest.” An article in the FP for Tuesday, March 17, 2015 boldly analyzed the financial distress of just one company, Molycorp, as a “signal” that the entire industry of which it is a part, the “rare earth industry” has failed.

This is at best poorly informed journalism.

What has occurred is that a company (and this would be true no matter what industry the company was in) that has had no profit in the 12 quarters since it began commercial production has reached the point where a ratings agency has decided that it cannot ever make a profit in its present form. This is the meaning of the phrase “not a going concern,” which the agency used in its analysis.

It is the business model of the firm (in my opinion) Molycorp that has failed to perform, not the rare earth industry.

As I said yesterday Molycorp, in my opinion, is too big to succeed, because there is little market, and no demand at this time, for 85% of its production. This stems from both the nature of a light rare earth deposit and the processing regime chosen by the management of that deposit in order to turn it into a producing mine. Molycorp owns that very rare bird, a hard rock primary light rare earth mine.

This means that the rare earth minerals are present in such high concentration in the deposit that it can be mined primarily to recover them. This contrasts with many iron deposits globally in which rare earths are present and which are at this time China’s and the world’s major source of light rare earths because the iron deposit is being aggressively mined and is producing them (rare earth minerals) as a relatively concentrated residue.

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Prior to Molycorp’s restart in 2007 the source of light rare earths had been the Chinese iron deposits in Inner Mongolia, which themselves became the globally dominant sources of light rare earths in the late 1990s when their selling prices eclipsed those of the former leader, the first Molycorp.

Prior to Molycorp’s dominance the world got its rare earths from the monazite “beach sands” of the USA, Brazil, Malaysia, and India. The “sands” were also the only known source of what we now term “the heavy rare earths.”

I recall as a young researcher that monazite sands from Florida “beaches” were processed by Rhone-Poulenc in a solvent extraction plant in Freeport, Texas. I do not recall any headline in the main-stream-financial-media that the Freeport operations of Rhone-Poulenc were to close due to the discovery of a large deposit of bastnaesite in California, because Rhone-Poulenc closed them for another reason-its failure to get a thorium disposal license renewed. I do not recall that even that event, which the main stream press ignores, got any mention at the time.

Let’s go from memory lane to the fast lane: In my opinion Molycorp’s business model was flawed by its focus on light rare earths and its plan to out produce the Chinese industry as a whole, not just to become competitive with it. The hope must have been that economy of scale and non-reliance on the cyclical iron market would allow it to produce at lower cost that the Chinese industry.

The plan was too ambitious and it failed to take account of the changing face of “market critical rare earths, MCREs.”

Looking at the rare earths markets right now there is a growing global demand (almost entirely inside of China for the moment) for rare earth metals used in permanent magnets, lasers, and high strength alloys of magnesium and aluminum. Thus today it is “obvious’ that a deposit containing both neodymium and the heavy rare earths is the “ideal” for development. I believe that if Molycorp came to the market today as a junior it would not be funded.

The largest deposits meeting today’s criteria for development are evolving nicely in the North American, European, Australian, and South African rare earth junior sectors, but I believe that even so they will not collectively have enough proven resources of neodymium to meet the entirety of the growing demand for that rare earth element in the magnet space. This is a good thing, because it means that the entire production of heavy rare earths and whatever light rare earth magnet metals, neodymium and praseodymium, can be produced by all of the juniors together will not satisfy the markets growing demand for these rare earths. Each of these deposits individually and even all of them together are the right size and have the current MCREs distribution! These are the metrics to follow: RS + (sum of) MCREs + COGS. Management has little to do with the MCREs distribution in an ore body-other than to discover it. But management has everything to do with the choice of the size of the mine to be developed and the choice of the financing and technologies to be used to minimize the COGS.

Neither Molycorp nor Lynas, the two newest and largest light rare earth dominant deposits to be brought to production outside of China in the last 25 years has been able yet to meet its target production or even its target capacity. In my opinion this is because both tried to disguise a “way out” idea, the building of a giant solvent extraction plant dwarfing anything ever built before, as a use of “traditional technology.” It is instructive to note that the company known as Indian Rare Earths has now completed an 8000 ton per year rare earths separation by solvent extraction plant in Kerala, India, to process monazites derived from beach sands. I have been told that the plant is simple and well designed and that it works. Indian Rare Earths’ “partner” in this was an arm of Japan’s Toyota. Journalists should be asking Toyota why it partnered with Indian Rare Earths rather than Lynas or Molycorp.

But to return to the rare earth industry let me finally say and summarize my opinions this way:

There are a number of deposits in advanced development that have the right size and the right distribution of MCREs. We need all of them to go into production, but the markets are unforgiving of the risk of loss of capital. The risk today is not one of metallurgy or even grade – with the variety of newly applied separation technologies available to supplement traditional solvent extraction – it is the future market pricing of the MCREs and the perceived ability of a junior to understand that customer satisfaction, the delivery of the customer specified goods on time and at the agreed pricing, is the key to success.

I do not see this “market savvy” in many of the juniors, but it can be learned or acquired.

The junior rare earth space is very much alive outside of China and in fact it is adapting to the market rapidly.

Don’t believe everything you read in the papers.