Seeking Alpha
Value, growth, hedge fund analyst
Profile| Send Message|
( followers)  

Molycorp (MCP) is improving operating efficiency at its Mountain Pass facility. Last month, the company completed commissioning of the final unit of this facility's multi-stage cracking plant, and it is now operational. Cracking will improve the rare-earth recovery rate from Mountain Pass, as only 8% of the ore Molycorp mines at this facility is rare earth. With the addition of this final unit of a multi-stage cracking plant, the company's recovery rate will improve and is projected to be 90%.

Molycorp is set to increase the annual production rate of Mountain Pass facility to about 15,000 metric ton, or mt, of rare-earth oxides, or REO, by the second half of this year from 10,600 mt of REO in third-quarter of last year. Furthermore, by the fourth quarter of 2014, Molycorp can increase production capacity to 23,000 mt of REO per year.

About 49% of the total rare-earth production from the facility is expected to be cerium, which does not have much demand. The company is trying to create demand for cerium through a water-purifying compound, SorbX, which it manufactures using cerium. The compound is more effective than the normally used iron and aluminum-based solutions. Molycorp is targeting North America's municipal and industrial wastewater treatment facilities to sell SorbX. To expand its customer base, the company has completed an agreement with the chemical distribution company Univar Inc. Univar has about 300 global distribution channels with a wide network in North America. Demand of SorbX is expected to increase in the long term, but for 2014, most of its cerium production will not be sold.

Magnetic materials have growth prospects

Molycorp's Mountain Pass facility also contains metals such as neodymium and praseodymium, which have a wider demand. Neodymium and praseodymium are used for creating permanent magnets due to their high field strength. Especially neodymium-iron-boron, or NdFeB, magnets are widely used in various industrial as well as defense applications. From 2013 to 2020, demand of NdFeB is expected to grow at a CAGR of 9.4%, and major demand is expected to rise from the automotive industry. These magnets are used in the manufacturing of moving car parts, battery and engine components, and other integral systems. A disadvantage of NdFeB magnets is that their corrosion resistance lessens when they are exposed to high temperature. To improve the resistance of these magnets, one of the scarce rare-earth metals, dysprosium, or Dy, has to be added. The caveat is dysprosium is scarce, has a fluctuating availability, and has a volatile price. Consequently, it directly affects the cost of the NdFeB magnet. The fluctuation in price leads buyers to look for less-effective alternatives of NdFeB magnets such as Ferrite magnets. On a dollar-per-pound basis the cost of NdFeB magnets is 10 to 20 times more than ferrite magnets.

To counter this situation, Molycorp started using hot-pressed technology to manufacture NdFeB magnets, which require 2% to 6% less dysprosium at a given temperature than normal NdFeB magnets. Less use of dysprosium makes Molycorp's magnets more cost-effective, which could help the company to improve sales.

With the completion of the multi-stage cracking plant, the rare-earth recovery rate of the Mountain Pass facility will improve, which will help the company produce in-demand metals such as neodymium and praseodymium in higher quantity. In addition, the company's technology to produce dysprosium free NdFeB magnets will make it cost competitive against its peers.

Potential supply to U.S. defense industry

The U.S. defense industry depends heavily on China for supply of rare-earth metals needed for manufacturing high-tech equipment. A major concern for the defense industry is the lack of domestic production of magnetic materials, which are used in manufacturing neodymium-iron-boron magnets. Over reliance on China is creating a supply risk for the U.S. defense industry, because China has imposed a restriction on exports for two consecutive years, aiming to protect its resources and the environment.

As supply from China is being restricted, the U.S. defense industry is looking for other sources of supply, to mitigate the risk of supply volatility. The two major projects currently operational outside China are from Molycorp, and Lynas Corporation (OTCPK:LYSCF).

Rare-earth metals used in military applications are dysprosium, erbium, europium, gadolinium, neodymium, praseodymium, and yttrium. Molycorp's Mountain Pass facility contains four out of these seven metals. With the potential increase in demand, the company plans to increase its production rate to 40,000 mt of REO by 2015, which will help it to meet demand of the U.S. defense industry. Being a U.S.-based company gives it an advantage, as the U.S. defense industry is looking for domestic sources of supply to reduce import.

Production increases from Molycorp will diversify the supply of rare-earth metals used in manufacturing magnets outside China. As the U.S. defense industry reduces supply risk due to the restriction policy of China and with the increase in production, Molycorp will be in position to displace China's export volume for some rare-earth metals.

Conclusion

Molycorp's net cash generated through operations was negative last year. However, the company is increasing production at the right time, as demand for rare-earth metals such as neodymium and praseodymium is expected to increase, especially from the automotive industries. The increase in production and the expected rise in demand for metals such as neodymium and praseodymium will boost the company's sales. In addition, it will be helped by the rare-earth export restriction by China, resulting in greater supply to the U.S. defense industry. The concern for the company, however, is excessive cerium production, as there is low demand for it. Overall, Molycorp will not be able to generate positive cash flow through its operations until the end of this year or the beginning of 2015.

Source: Molycorp: A High Potential Rare Earth Miner