by Michael Kanellos
The sudden stock rise in Molycorp (MCP) -- which wants to mine rare earth elements in California and ultimately produce magnets from those elements for electric motors and medical equipment -- tends to provoke two general reactions.
The first is that fears about pending shortages of rare earth elements are exaggerated. Although China seems intent on curbing exports of rare earth minerals, the country will produce and export magnets and finished goods containing the rare earths.
Deposits in Australia and a slew of potential finds in Canada will further help with supply.
The second reaction is that we should get ready for a world of hurt. Worldwide demand for rare earth minerals comes to around 50,000 to 55,000 tons a year, said Molycorp CEO Mark Smith in an interview.
China currently controls 97 percent of the supply. In 2009, export quotas sat at approximately 50,000 tons. This year, China dropped it to 30,000 tons and further cuts next year could drop it to 24,000 tons. Both the expected shortages and the continued uncertainty are worrisome.
“This is an immediate concern,” he said. “A lot of people we are signing long-term agreements with are very tired of not knowing day to day. You have no idea what to expect.”
Demand, moreover, is slated to continue to rise. Rare earths play a vital role in the magnets inside electric motors. A 2.5-megawatt wind turbine contains approximately 4,000 pounds of magnets. Rare earth materials account for one-third of the weight of those magnets. LCD TVs and medical imaging equipment rely on rare earths, too.
Electric cars contain around 10 pounds of rare earth materials. Even if China shifts from exporting raw rare earth materials to finished goods containing rare earths, domestic consumption will invariably curb total exports to the West.
“Internal consumption [in China] tracks GDP growth,” he said.
So what does Molycorp have going for it? The Mountain Pass mine in California contains ores with an average grade of 8.24 percent rare earth content. That’s the second richest average ore grade in the world, Smith asserted. The mine also contains one of the largest deposits in the world.
“There are over 200 reports on deposits for rare earth elements with over 100 in Canada, but no one is able to find large enough deposits or high enough ore grades,” he said. “If you have an ore grade of 2 percent, you will have a difficult time making money.”
And Molycorp has got real estate. The mine exists on 55 acres. The company also owns 2,222 acres and has mineral rights on 8,000 acres.
The mine itself has been around for 58 years. Chevron (NYSE:CVX) acquired the mine through its purchase of Unocal in 2005, which had lost money for years. In September 2008, the oil giant spun it out to a group of investors for $80 million. Molycorp, the new company, raised nearly $400 million in an IPO in July. While the stock wallowed in the $13 range, it recently shot to over $30 a share thanks to China’s saber-rattling.
The mine is currently not operational. Molycorp hopes to begin some operations later this year. By the end of 2012, it wants to be producing 20,000 tons of rare earth oxides each year. The necessary permits are in place. A process being developed in-house will, ideally, help the company extract more rare earths from a finite amount of ore.
At the same time, the company will look to expand beyond mining and producing Rare Earth oxides into producing metals and alloys and, ultimately, to making magnets. Magnets mark a distinct shift from mining and metallurgy. To make that jump, the company is already in discussions with large partners about forming a joint venture.
Under the joint venture, Molycorp would supply the metals to a magnet manufacturing facility owned by the two companies in the U.S. Molycorp’s partner would in turn also get the rights to buy rare earth materials for its own magnet facilities overseas. The magnets would likely be targeted to the car industry.
“We want to participate in the upside [of producing finished goods],” he said. “The people we are negotiating with are happy to allow us to be in a JV.”
The downside? Commodities, even rare ones, are subject to chronic and steep price swings. China, in fact, has already eased back on restrictions to export to Japan. Japan and others have kicked off recycling programs to extract rare earths from old electric motors. And companies like NovaTorque are developing motors that can run on cheap ferrite magnets instead of rare earth magnets.
Some analysts have also noted that the Mountain Pass mine is heavier on “light” rare earths like neodymium and praseodymium and lighter on the heavy ones like europium. Smith disagrees, and notes that neodymium and praseodymium are the ones used in most magnets.
“I’d rather have a mine with large amounts of neodymium,” he argued.
The refining process needs to be perfected and, of course, the mining hasn’t even begun. Despite the IPO, Molycorp needs more than $100 million to get to its targeted production levels.
The next few years should be interesting.
Disclosure: No positions