Price Trends For Rare Earths Tell The Whole Molycorp Story

| About: Molycorp, Inc. (MCPIQ)

by Lisa Reisman

We spend quite a bit of time analyzing metal price trends to better understand not only what moves markets, but also where anomalies may exist and what that means for metal buying organizations. One trend that continues to trouble us involves the poor price performance of the rare earth metals sector.

It currently stands as our worst performing metal price index.

Exhibit One:

Rare earths prices, October 2013. Source: MetalMiner IndX(SM)

Unfortunately, this price chart doesn't tell the entire story. It tells the lay reader that, from a price perspective, rare earth metals as a whole have performed horribly since October 2012 (and we'd add they have performed horribly since January of 2012, which is when MetalMiner first launched the Rare Earths MMI).

Peeling back the rare earth price onion

But when we take a closer look at the underlying price data, a new story emerges. That story goes something like this: the light rare earth metals (e.g., cerium, which makes up over 48.8% of Molycorp's production, and lanthanum) continue to struggle price-wise:

Source: MetalMiner IndX(SM)

These metals have failed to increase in price largely because of a severe over-supply situation. In essence, China can comfortably supply the world with these light rare earth metals. And that directly impacts companies like Molycorp and Lynas (OTCPK:LYSCF).

Heavies tell a different story

On the other hand, many of the heavy rare earth metals have recently rebounded from a price perspective. These metals include dysprosium, europium, neodymium, and terbium, as shown below. Yttrium is technically a light rare earth, but we're including it anyway because it behaves more like a heavy rare earth metal from a price and industry use perspective.

Source: MetalMiner IndX(SM)

Source: MetalMiner IndX(SM)

But industry insiders tell us that China, the largest rare earth metal producer in the world for both heavy and light rare earth metals, has aggressively sought to invest in projects from around the globe that contain heavy rare earth deposits. The fact that China has begun an aggressive search outside of its borders explains a lot in terms of China's longer-term rare earth metals strategy. China has decreased exports of heavy rare earths due to illegal mining and lower demand, according to Molycorp (in their most recent 8K filing).

With China's more aggressive stance towards cracking down on illegal mining operations (after all, it doesn't take much for an entrepreneur to leach rare earths), the new reality on the heavy rare earths suggests that China, like many of its neighboring countries, also practices Resource Nationalism (banning or limiting the export of one product in favor of producing the higher value-added product). In this case, the Chinese would prefer to do the separation and processing of rare earth metals, not the mining.

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