The direct result of Molycorp’s (MCP) decision to double production capacity at Mountain Pass to 40,000 tons per annum is a major blow to the junior rare earth companies with deposits consisting primarily of light rare earth elements.
Lynas Corporation (LYSCF.PK) forecasts in 2014 there will be an approximately 20,000 tons per annum supply deficit in rare earths. One of the assumptions of this forecast was that Molycorp’s Mountain Pass mine would only produce 20,000 tons per annum.
So on a top down basis, Molycorp’s decision to double production fills the supply deficit before we get into the bottom up analysis of the metallurgy of the Mountain Pass deposit. As most following the rare earth space know, there are mines consisting primarily of light rare earths and those consisting primarily of heavy rare earths.
Mountain Pass is primarily a light rare earth deposit. Based on the Matamec Explorations (MTCEF.PK) corporate presentation (see image below), the light rare earths will have their supply deficits filled by 2014 for the most part, which does not surprise us since the two mines scheduled to go into production in the next two years outside of China (Mt. Weld and Mountain Pass) are both light rare earth companies.
While this may cause concern about the economics of Molycorp’s doubling production decision, we would point out that Molycorp will be low-cost producer due to their improved technology in terms of extracting rare earths from the mine ore, so in a price war Molycorp is the likely victor.
But primarily, the shortage in 2014 in the rare earth space is in the heavy rare earths and not the light rare earths. And with so many junior miners targeting a 2015 or 2016 start date, it does not suggest a very promising economic picture if heavy rare earths are not the primary component of the deposit.
With this in mind, the Molycorp decision to double prediction is very bearish for the light rare earth junior miners. We would advise that those looking for junior rare earth exposure focus on those with a deposit metallurgy that have a strong heavy rare earth element component.
We remain bearish on Rare Element Resources (REE) and direct attention to the Barron’s article this weekend that pointed out that the 2015 start date is a very aggressive target which was pointed out earlier this month in the above mentioned article . We also view this as a negative for Arafura Resources (ARAFF.PK) and, based on the large Chinese ownership, we view it now primarily as a play on a future external source for China once Chinese supply no longer satisfies Chinese domestic demand. In our opinion, Arafura is not a likely beneficiary of the Western world's rare earth supply deficit.
We suggest investors take a strong look at Molycorp and Lynas for their near term production potential giving them the chance to capitalize on the rare earth shortage and redevelopment of the Western rare earth industry. We would focus our junior rare earth exposure in the heavy rare earth names. Our favorite name is Quest Rare Minerals (QSURD.PK) for the quality of the deposit and the imminent H12011 catalyst of a United States exchange listing. A heavy rare earth mine will be required to complement the primarily light rare earth metallurgy deposits of Mt. Weld and Mountain Pass, and we like Quest Rare Minerals to be that mine.
Disclosure: I am long MCP, LYSCF.PK, QSURD.PK. The facts in this newsletter are believed by the Strategist to be accurate, but the Strategist cannot guarantee that they are. Nothing in this newsletter should be taken as a solicitation to purchase or sell securities. These are Mr. Evensen’s opinions and he may be wrong. Principals, Editors, Writers, and Associates of The Strategist may have positions in securities mentioned in this newsletter. You should take this into consideration before acting on any advice given in this newsletter.