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Jack Lifton
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Jack Lifton is an Independent consultant and commentator, focusing on the market fundamentals and future end use trends of the rare metals. He specializes in the sourcing of nonferrous strategic metals and on due diligence studies of businesses in that space. His work includes exploration,... More
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Technology Metals Research
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The Jack Lifton Report
  • Why did Molycorp buy Silmet in Estonia, and was it worth the money? 10 comments
    Apr 5, 2011 7:47 AM | about stocks: IQ, 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.

    Stocks: IQ, GWMGF, STZYF
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Comments (10)
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  • chihawk
    , contributor
    Comments (2083) | Send Message
    Thank you Jack Lifton!
    Thank you for doing what the entire media has shamefully failed to do. Thank you for asking some of the tough but fair questions of Molycorp that are long overdue. You are very right to feel that Molycorp should explain how this transaction fits with their promises and prior statements to investors and the United States government. I further respect your neutral position on the issue.
    6 Apr 2011, 09:35 AM Reply Like
  • Valley Boy
    , contributor
    Comments (2220) | Send Message
    Reading between the lines on Molycorp's acquisition, I would think that they have concluded that the idea they will receive federal subsidies is not promising. They won't wait for it. The Senate and House committees which would ordinarily approve the idea are currently concentrating on the energy availability and gasoline pricing problems and not on extracting the mineral wealth. Moreover, the Republicans are in the mood to cut back public expenditures.
    "The world waits for no one" my old boss would tell me.
    6 Apr 2011, 11:06 AM Reply Like
  • FocalPoint Analytics
    , contributor
    Comments (6282) | Send Message
    I think you hit the provable nail on the head Jack! I think the deal was cut to buy time and allow MCP to claim it was first in operation. That makes a lot of sense from the perspective of attracting investors and keeping the stock price up.


    I agree with VB that its going to be a difficult sell in terms of receiving federal subsidies...


    I agree with Hawk that the entire media has shamefully failed to ask those tough questions.
    6 Apr 2011, 04:26 PM Reply Like
  • Jack Lifton
    , contributor
    Comments (430) | Send Message
    Author’s reply » Note well, everyone, that I submitted this to SA as an article, and after 24 hours with no action on it at all I decided to post it as an Instablog. I cannot understand why SA would not consider this to be a timely article considering some of the articles published recently by SA purporting to be "analysis."
    6 Apr 2011, 10:20 PM Reply Like
  • Mayascribe
    , contributor
    Comments (11198) | Send Message
    Jack: I read the 4/6 email you advanced. Greatly appreciated!


    Nonsense that SA did not publish your article about one of, if not the hottest, hugely important mineral sub-sectors around today.


    I've read borderline a plethora of SA REE articles written by "____'s" that are unifomed, clueless; laughable that they want to take on the task of counciling the uniformed about how to invest in REEs. So many innocents are going to get burned. While the big boyz unload. For huge gains.


    Was wildly perplexed why Citi downgraded Lynas many weeks ago, forcing me to coin the word, "Citidip," which, by the way allowed some of the late-in REE followers here on SA to gain a better entry price. Thank you Citibank, you manipulitive morons! For giving REE followers of Jack Lifton as well as followers of SA's leading commenter, "tripleblack," in better understanding this essential and quite important field of investment opportunity and study.


    Completely angers me that the CNBC morons still haven't a clue about how even to properly pronounce, "Lynas." Shame on them. Shame on them about about their categorical lack of knowledge about Rare Earth Elements (REE), and other REE stocks. Shame on them for never taking the time to listen to even one Lynas conference call.


    Idiots abound everywhere in life...so I hate to write, but the MSM idiots are so whacked out uniformed about MCP, it blows me away.
    6 Apr 2011, 11:31 PM Reply Like
  • chihawk
    , contributor
    Comments (2083) | Send Message
    Mr. Lifton,
    I believe the Strategist is running SA. Every good writer gets the treatment you describe. Don't worry. We will find you wherever you are.
    7 Apr 2011, 12:31 AM Reply Like
  • John Petersen
    , contributor
    Comments (30629) | Send Message
    I just listened to the first couple minutes of Molycorp’s conference call and learned that the acquisition required “just over $9 million in cash” with the balance being paid through the issuance of 1.6 million MCP shares, or about 2% of the company.


    Depending on your view of the fair value of Molycorp before the acquisition, the transaction may have been worth a good deal less than the headline number. If you think the IPO price of $14 is closer to fair value, for example, the acquisition tipped the scales at closer to $31 million.
    7 Apr 2011, 03:04 AM Reply Like
  • Jack Lifton
    , contributor
    Comments (430) | Send Message
    Author’s reply » John,


    Once again you have allowed your experience and understanding of finance to pierce the wall of PR Flack, Flack (PRFF) put up by promoters to make it appear as if lemons can become lemonade without a lot of sugar.


    The real question I have is not "why did Silmet's owners take MCP, restricted(?), paper that is probably ultimately worth a much fairer value for Silmet than the ludicrous $89 million?," but why did Treibecher insist on cash for its portion? Who got the most value out of the deal, Molycorp. Silmet, or Treibecher?
    7 Apr 2011, 05:41 AM Reply Like
  • John Petersen
    , contributor
    Comments (30629) | Send Message
    I didn't listen all the way through the conference call to find out whether the purchase consideration was shared equally by the old Silmet shareholders or if one got cash while another got paper. I was waiting for the Form 8-K filing for that particular tidbit. In any event restricted paper is not as difficult to deal with today as it was in years past because the mandatory holding period is far shorter (6 months) and for shareholders that aren't classified as affiliates resales are much easier.


    Without a good deal more detail on what Silmet is and has, it will be hard to say who got the most value or if the transaction was fairly valued. We should know a lot more when Silmet's financial statements are filed with the SEC in both stand alone company form and in pro-forma consolidated form.
    7 Apr 2011, 08:41 AM Reply Like
  • topcat18
    , contributor
    Comments (19) | Send Message
    They sold out Jack. You have been around too long to know otherwise.
    14 Apr 2011, 05:43 AM Reply Like
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