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Why did Molycorp buy Silmet in Estonia, and was it worth the money?

|Includes:GWMGF, STZYF

If you understand the title of this article then you are a follower of the events shaping the present and future price of the Amex traded shares of Molycorp, the project to revive rare earth mining and downstream refining and processing, I hope, in California. It announced yesterday in a press release that it has purchased the Estonian sited operations of rare earth processor, Silmet.

There is nothing new to be discovered about Silmet, an Estonian operation established during the Soviet Era as a typical central place to process uranium ores and fuels and also to separate (ore concentrates of) rare earths into their individual elements and to process those separated forms into metals and alloys. Like all Soviet era attempts at central planning Silmet suffered from the worst problems of a centralized command economy; its payroll was bloated and its production quotas were set by Moscow bureaucrats determined to produce ever more goods to "achieve" the goals set by politicians for production levels for each successive five-year plan. The market fundamentals of supply and demand were not considered relevant if there was a five-year plan output level to achieve.

One has to wonder by the way what the relationship was between the processing operation in Kyrgyzstan now "owned" by Stans Energy and Silmet in the (good?) old days.

In general at the conclusion of the Soviet era the prices for all metals crashed as massive inventories of metals produced only to satisfy a five-year plan flooded the world market at any price in an attempt by post-Soviet reformers to garner some, if any, value from the vast amount of labor and capital poured into the extractive materials sector by bureaucrats In their mostly vain efforts to satisfy the whims of their political masters in Moscow.

Silmet was at that time, just 22 years ago, considered to be part of a massive radioactive waste problem in the former Soviet Union. It was thought that the secretive Russians had been accumulating radioactive waste from mineral processing-to be fair from not just rare earth mineral processing, but also uranium ore and fuel processing,and "storing" it in Estonian reservoirs of process waste. I well remember it being asked "Can astronauts see Estonian lakes at night by their glow?"

Silmet seems to have been privatized after the demise of the Soviet system by a group that also owned the long-time producing Siberian rare earth mine in the Kola Peninsula, and a magnesium metal producing plant in the Ukraine. I should note at this point that rare earth mining, refining, and magnesium production are today virtual monopolies of the Peoples Republic of China due to the operation of global capitalism based on lowest costs offered.

As far as I knew until yesterday's Molycorp announcement Silmet was supplying rare earth metals and alloys to Eastern European and Russian customers from the somewhat less than 3,000 net tonnes of rare earths contained in the Russian ore concentrates produced by its sister company.

It has been my understanding that the highest quality purified rare earth metals and alloys are produced in Europe only by Less Common Metals in the UK (a wholly owned subsidiary of Canada's Great Western Minerals Group) and by Rhodia Rare Earths in France, both, I understood, utilizing Chinese raw materials.I welcome evidence that Silomet has been competing with either or both of these entities on price and quality. If so, then Molycorp really made a deal that though pricey may have significant value to its business model.

I am for the moment a bit confused by Molycorp's actions. I thought it had a long history, as it has said repeatedly in press releases and its SEC filings, of producing high purity chemical and metallic forms of the rare earths. I thought it was asking the US Government for loan guarantees to rebuild, modernize, and expand its rare earth refining and processing facilities in California to create jobs in the USA. 

Now it seems as if it is saying that $90,000,000.00 of its shareholder's money has been well spent, or pledged, to buy Soviet era technology that others have overlooked(?).

Silmet is said by Molycorp to have 550 employees who have the capacity to produce 3000 metric tonnes of rare earth "products' per year. This will 'double" the press release says Molycorp's production capacity immediately to 6,000 metric tonnes per year.

Is Molycorp going to ship ore or ore concentrates to Estonia for processing there?

Will Silmet continue to also process ores or ore concentrates from Siberia or places other than Mountain Pass?

If so, who now owns that Russian mine?  

What customers standards are met today by Molycorp and/or Silmet products?

What, in fact,are Molycorp's and Silmet's products?

Is a 550 person operation in Estonia profitable, and, if so, is it still profitable when American corporate overheads and the repayment of its purchase price are factored in?

Was there outside or inside financing involved in the purchase?

If it was financed all or in part by the previous owners who are they??

When will we see an environmental impact statement for Silmet detailing how the problems associated with radioactive ore processing today and in the past have been addressed?

Why should the US government guarantee a loan by the US Treasury to a company to develop technology it has already, apparently, purchased for operations overseas for overseas customers???

I want to believe that Silmet was a "sleeper," a valuable property overlooked by those supposedly in "the know." I also want to believe that Silmet's acquisition will enhance the value of Molycorp and create American jobs.

Did Molycorp simply buy "time?" In other words will Molycorp-Estonia now immediately deliver goods to its customers as proof that Molycorp is first in operation of the current crop of non-Chinese juniors? 

Was this purchase to realize the mine to magnet (alloy?) story and make it more credible?

Finally I want to believe that the US Defense establishment agrees that buying raw materials or finished goods from Molycorp is not affected by the undisclosed remaining ownership of this formerly Russian owned and operated entity. A simple statement to that effect by the Us DoD will suffice.

I think the investors in Molycorp deserve answers to these questions, before the next round of US Congressional debate on the issue of loan guarantees begins. 

I am a believer in American natural resource production and processing self suffciency. I want Americans to have good jobs and to maintain American standards of living and well-being before any American taxpayer funds are used to help others to do the same. Is that too much to ask of a government?


Disclosure: I am long OTCPK:GWMGF.