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Molycorp And The Pandora Production Principle

Feb. 03, 2014 8:30 AM ETLYSDY, MCP47 Comments
James Kennedy profile picture
James Kennedy

Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

While U.S. Dependence on China is virtually unchanged The Wall Street Journal, Pentagon and Congressional Research Service Get It Wrong - Again.

Joseph Sternberg with the WSJ recently opined that the rare earth crisis is over (see How the Great Rare-Earth Metals Crisis Vanished ). The WSJ article appears to be based on deeply flawed analysis taken from a recent Pentagon report "Annual Industrial Capabilities Report" that is saturated with "free market" jargon (the Pentagon's report reads like talking points from the outsourcing department of a multi-national corporation - that can't be good) and mirrors conclusions within the recently released Congressional Research Service (CRS) report "Rare Earth Elements - Global Supply Chain".

The following analysis suggests that something close to 100% of the world's "high value rare earths (rare earths minus Cerium and Lanthanum)" must originate or pass through China's vast value chain under the current market configuration. This is not good news for new technology companies looking to make 'green products', advanced sensors & electronics, advanced materials, high efficiency motors, standard, electric or hybrid automotive components or just about anything with a display screen.

Regarding U.S. national security and defense, China in fact, can control the procurement and production for much of our Nations rare earth dependent weapons and communications systems as well. The recent disclosure that the F-35 fighter uses rare earth magnets from China is just the tip of a very large iceberg. My analysis suggests that the problem is ubiquitous and omnipresent.

Major media outlets, Wall Street analysts, the CRS and Pentagon suggest that U.S. sustainability is now well in hand through Molycorp's Mountain Pass mining

This article was written by

James Kennedy profile picture
Mr. Kennedy provides consulting services to the financial, mining and nuclear energy industry on strategic issues related to Rare Earths, Thorium and the U.S. regulatory environment.

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Comments (50)

Sorry, I meant to type $2.50/share. Same outcome, however.
robert.b.ferguson profile picture
I doubt that bankruptcy is in the cards. To many major players would be left holding the bag including General Electric (GE) which has a sizable stake in (MCP). Keep in mind that GE has an office in the west wing and that CONgress is interested in domestic production.
As of June 3rd, 2014, MCP stock is around $.250 and NObody is interested in buying into a secondary. Isn't it logical that BK is ahead for this company?
Michael Roat profile picture
How can domestic Chinese lanthanum prices not rise? Demand is increasing and supply is decreasing. China is consolidating capacity and eliminating illegal production. Stricter environmental regulations have increased the cost of production and this has to be passed along to consumers. Lanthanum is a very important and in demand material. I have a difficult time believing it will be sold below the cost of production. Cerium, however, I agree with you. The largest Chinese producers are increasing their listed prices and the government has plans to purchase for the State Reserve.

If the 40% difference in domestic and FOB prices holds, which it should given the tax policy has not changed, China's lanthanum exports will increase in price as well. Molycorp and Lynas will begin supplying their customers with steady amounts of material through long-term contracts, so it will not be placed on the spot market. These customers may be purchasing in the spot market currently, albeit at very low amounts. Therefore, the removal of demand from these customers will be minimal when compared to normal times and volumes. The effect of customers re-entering the rare earth market due to depleted stockpiles and diversity of supply is unquantifiable to the average investor, although this has significant upside implications.

The main point I want to make is the industry went through a massive destocking cycle the past two years and now that prices have reached a floor or will bottom soon, I expect the purchasing patterns to shift to restocking. When this occurs, the true supply and demand balance of La will become apparent, as we are already seeing with NdPr.

On a slightly different note I anticipate Molycorp earnings to improve in Q4, as compared to Q3, which were rather disappointing. I expect higher volumes out of the resources division. Chemicals and oxides will likely have sold increased volumes, accompanied by more profitable margins due to the work through of high cost inventory. MMA average sales prices will increase, but this will be negatively offset by lower seasonal volumes. Inventory write-downs should decrease due to declining production costs. Earnings will undoubtedly be negative, but I do expect improvement.

Uncertainty is quite a burden. We will go to great lengths to escape from it but this is what I think. Feel free to criticize anything I said.
James Kennedy profile picture
Votingmachine, Unlike the U.S., Japan, Korea and Germany do not like that their technology industries are being forced to move to China (I do agree that most U.S. companies are happy to move). In fact, they see the loss of these technologies, jobs and GDP as a national security issue.

Regarding the nearly $5 trillion in value added goods, if you lift the hood on your Toyota Prius or BMW you will find at least two dozen rare earth components. You see, it is ubiquitous and omnipresent. China can shut down just about every automobile assembly line in the world.
ausheds profile picture
In support of that thought, the new Benz S Class has 120 motors & a 100 LED's in the cabin alone, let alone the 24 speakers, plus NiMH battery and goodness knows what else. Fair chance we can guess where the RE for all that componentry originated.
votingmachine profile picture
I think that is a stretch of the "value-added" chain. A banana is not part of the value-added chain for sticker manufacturers.

Cars do contain RE's, but they are not a value-added RE. They are cars with components that have RE's in them. And while China does supply components to every car assembly line, China also imports grain, copper, oil, etc. The world economies are interdependent, and interconnected. Not servants to a China RE monopoly.

The reason for the move of production to China is primarily the cheap labor and cheap shipping. The hours of labor in China are cheap, and the cost of container shipping trans-Pacific is low.

Companies are happy to move to low cost production. People and countries would prefer economic security. I think the world is highly interconnected and China is vulnerable to economic conflict, as well as powerful. They are an important economy, that needs the rest of the world. Don't over-estimate the role of RE's in the distribution of economic power. RE's are not the be-all behind $5 trillion of goods, and China has economic dependencies that would quickly surface if they ever get too carried away with economic conflict.
Skaterdude profile picture
Your analogy is not quite accurate. Yes, the sticker is not part of the banana value chain, but the fertilizer is. In the same way, the RE-containing components are essential to the function of the car (if you want to meet fuel economy and emissions standards). You could argue that the Monroney label is akin to the sticker on the banana, but even then, the label is required on the car to sell it (in the US) while the sticker on the banana is a convenience (to provide the number to enter into the checkout register and indicate the country of origin).
votingmachine profile picture
You make this comment:
"The total economic value of the entire rare earth market is only about $3 billion (mines to metals). The big money is in the value adding and that is what China is after. Through its monopoly China now controls the future of nearly $5 trillion in rare earth dependent, value added goods and services. And through this monopoly China is stripping the rest of the world of its remaining IP and high technology jobs."

I see that China has had a monopoly on RE's which they did nothing with until recently. The way they got that monopoly was the same way they got the a large amount of other business traffic: by being a lowest cost source. There is not an additional $5 trillion of rare earth dependent goods that they leveraged a monopoly into. There may be trivial amounts of RE's used in a large dollar value of finished products but China being the low cost source of RE's was not the driving force in acquiring that supplier business. They got that supplier business with low wages, and low costs.

Sewing needles are cheaper in Bangladesh than the USA. But that is not the reason we buy T-shirts from Bangladesh. It is the cheap labor, and the cheap workplaces, along with the safety laws that allow you to burn the workers alive and pay no penalties. Those things make T-shirts cheaper than any US manufacturer.

China's GDP was under $10 trillion in 2013. I don't think that half of that was achieved by the low cost RE monopoly.

The thrust of your blog is that the RE's are cheap, and particularly that lanthanum and cerium could be in over-supply in the near future. Over-supply will hurt any profit margins. I think that ignores the neodymium and praseodymium situations. Those should see demand growth, and could be in under-supply. While it is true that cerium and lanthanum are the largest part of the ore, they are a small part of the revenues.

As an over-simplification, say MCP sells 3000 mt of Nd+Pr at $80 and 17,000 mt of Ce+La at $5. The revenues are $240 million for the Nd+Pr and $85 million for the Ce+La. Now it is true the market forces are hurting the small part of the revenues, but that large 80% of materials, is a smaller 26% of revenues. Cut the Ce+La price to $2 and the revenues go from $325 million to $274 million.

The issue for the US is costs. Currently, the shipping costs from China to the US are cheaper than the cost advantages of China production for compact, high dollar items. Calling it important for National Security does not change the economics.
robert.b.ferguson profile picture
Look at Great Western Minerals (OTCQX:GWMGF) Their facilities are already in production with expansion well under way.
Skaterdude profile picture
At one of the recent earnings calls they said that XsorbX would not contribute to earnings for the near future - to maybe late 2015?
How would they use a US/Canadian supply of HREE (ore?)? I think the ore is too bulky to truck up to Mtn Pass for refining. What are you suggesting?
Puzzling why MCP would leave such an important chunk of their vertical integration in China with no plan to set up a US refining / processing facility, but perhaps it's an issue of capital availability. If it were my company, I think I would ditch the Mtn Pass capacity increase in favor of setting up the final refining steps locally.
wGraves profile picture
They would have to get the stuff crushed, and then they might as well perform first stage separation. Then get it to a rail head. There's a rail connection about 10 miles from Mtn. Pass at Primm Valley. Want to bet that the railroad might be willing to run a spur? Otherwise, truck it.
ausheds profile picture
Guys, neither Mt Pass nor Lynas LAMP have the ability to process HRE to final separation so forget that fantasy. Lynas have a tolling arrangement for the 960tpa of SEG/HRE projected from the LAMP, most likely with Rhodia, and most likely at their La Rochelle facility in France.
Skaterdude profile picture
I was only thinking of the same level of processing that's currently done for the ore at Mtn Pass.
wGraves profile picture
It is historical fact that China's movement of NEO facilities to the Chinese Mainland was a brilliant move. By restricting export of refined material, they can force manufacturing onshore as the price for obtaining raw material at a local rather than FOB export price. But NEO's technology was developed in the West and is still present in the part of the company now merged with Moly. Threatening to disrupt Japanese supply chains was a good move. Doing it was a big mistake. Now the Japanese are looking for reliable suppliers and would probably pay a premium to Moly or Lynas for their stable western supplies. I would look for three possible moves which might tell us more about the strategic situation. First, acquisition by Moly of an HREE supply in the US and Canada. Secondly, the reestablishment of NEO's refining capacity outside of the zone of control of possible enemies. Thirdly, development of new applications for Cerium. The most promising one I can think of is the use of Ce in high-efficiency fuel cells for conversion of methane and propane into electrical power. I don't know enough about SorbeX to venture an opinion on it's possible success in generating sales, but it's out there, and we're going to hear more about it.
All Moly needs to be stable financially is good management. Hopefully, that's coming. You may have noticed that the new CEO comes from a financial rather than a mining background. Let's hear what he has to say in the March report.
DISCLOSURE: I'm an investor in Moly. I hold a Doctorate in Physics.
ausheds profile picture
Are the former Neo assets inside China still JV's with Chinese companies?

If so, do those JV arrangements control the movement of proprietary tech outside the country?

If it were possible where is the market for Neo products?
Buy when everybody is selling, sell when everybody is buying.

Both Molycorp and Lynas are some of the best stock to invest in regards to REM sector.
In regards to HREM, both these companies can invest or purchase outright junior HREM mining companies to power them into a major player in heavy rare earth minerals.

And although Molycorp had overspent capex expenditure at the peak of the REM boom, the good thing is that their capital expenditure would be going steadily down from 2014 onwards.

Molycorp out of the two has the strongest potential to be a dominant player of the rare earth industry - being the only vertically integrated company of its kind.
Vartu profile picture
Lynas has a state-of-the-art plant for processing rare earths and nearby are major deposits of the heavy rare earths. Their LAMP has been having teething problems, but once fully sorted out, it will be a very major asset.
ausheds profile picture
Lynas has no need to purchase any further RE assets, HRE or LRE, as it has the Duncan Deposit already sitting at Mt Weld.
Development will obviously be dictated by demand/price and the eventual process route but preliminary numbers suggest Duncan can supply 50% of global Eu demand 2016, 20% of Tb, 20% of Dy & 10% of Y plus 5000tpa Nd/Pr & 5000tpa La.
Quite frankly look to the volume end of the business, and the respective end use segment CAGR's, and the LRE is more valuable than the HRE, particularly if Dy thrifting & LED/OLED continue rolling out.
Regardless, the potential production suite is the best balanced to market by some margin.
tenofwands profile picture
Relax. Nobody will ever surpass America in its ability to consume frivolously under ever-more leveraged conditions. I will hold on to my 1,000 shares of MCP.
James Kennedy profile picture
Geo-Chemistry does not lie: +80% of Molycorp's production is Cerium and Lanthanum.

Cerium makes up 50% of production -- and they cannot sell it now. What happens when they increase production to 20,000 tpy, or 40,000 tpy. As production goes up prices for Lanthanum will also fall below cost. In fact, prices for all of the lights will fall.

As for the F-35 issue, my point is that the problem infects every single rare earth dependent weapons system.
Skaterdude profile picture
They (MCP) have also noted that they can not refine the Cerium, so they do not incur the cost of refining Cerium to get the other stuff. Your article talks about supply but not demand, so you completely miss the market balance issue. Also, what do you define as heavy rare earths? MCP does produce some (Nd, Praaeodymium, etc.). Perhaps not in high percentages of total output but certainly in large amounts. I agree though that it seems odd to send concentrate to China.
ausheds profile picture
James, get up to speed on La.
Catalysts are the only major demand segment where ROW retains the dominant position so prices will have more an FOB bias than Chinese domestic. Chinese export figures show demand approaching peak 2008 levels >15ktpa presumably to US FCC given the large increase in Chinese exports to that destination.
With NiMH battery demand also strong it has allowed Lynas to put a minimum $15kg price on further La sales. Also plays to one of Moly's strengths with 33% La in the suite, and the major market on their backdoor step.
Ce is also a predominantly ROW market thru CC washcoat and Lynas manufactured to specification Ce/La carbonate has a $5kg efficiency saving to one end user as it negates the need to reprocess Chinese material. Ce certainly remains a problem, most particularly for Moly.
Your focus above suggests you don't even understand the basic premise of your article in that the Chinese have purposely captured control of the high value add segments of magnets, alloys, batteries & phosphors, along with the ability to fully separate & finish HRE. The catalyst markets, Ce/La, are predominantly ROW.
Perhaps if you spent more time referencing source material and less time pulling misquotes from lightweight commercial journalism you may be able to put a more cohesive summary together.
votingmachine profile picture
They will only increase the production level, from 20,000 tpy to 40,000 tpy, if there is demand for additional RE's in the market. Meanwhile it is better to look at it that they are producing 10,000 tpy of non-cerium RE's and could increase that if demand indicated the plan was solid.

I am not sure you are correct that an additional 10,000 tpy of non-cerium RE's is going to move the supply-demand curve to much lower prices. The demand curve will increase with economic growth. The new supply is a discontinuous step change. Molycorp has a capacity and will ramp to that capacity. Lynas has a capacity and will ramp to that. Then there is not another new production capacity to tap outside of China, for quite a long while. As you point out the non-Chinese sourcing is currently a necessary condition for Defense supplies.

It is clear that new supply is coming into the market. That could be offset by new demand. I think that is what will happen.
James Kennedy profile picture
DenverDude, Sorry, the article is accurate.
Skaterdude profile picture
What is the profession under which you give your "professional opinion"? You seem to be a developer / promoter who has perhaps done some reading on the topic: http://bit.ly/1cOMerH
James Kennedy profile picture
And your name is "Skaterdude". To answer your question, see http://bit.ly/1kVOzTv
Skaterdude profile picture
That doesn't say anything about your educational background. Chemistry? Physics? Nuclear engineering? Are you a registered PE?

Sure people can get a lot of experience after college, but a good technical and financial foundation is essential to understanding the key issues in this area. I encourage anyone to comment here, but when someone throws in the word "professional" I think it requires some backup. Speaking at conferences doesn't cut it - people can be invited or propose a speaking topic without having the detailed technical background. (I don't claim to have the background or credentials necessary to submit a professional opinion.)
ausheds profile picture
I find it pathetic that the author attempts to pass off a learned treatise based on misquotes from secondary commercial sources, particularly when contrary hard data is readily available.
Totally lacks any credibility as a result, with the enormous irony that he's taking another author to task on the very same issue. Hope he doesn't do this stuff for a living.
votingmachine profile picture
The magnet in the F-35 is a trivial thing. One report said it is a $10 magnet. Let us just presume you have to get a Toyota Prius, scrap it, re-machine the main magnet, and put that in, for a net cost of $50,000. The F-35 goes from $200 million to $200.05 million.

Chinese manufacturing dominance is a problem. It is a global economic problem. China is still a totalitarian government that is now allowing limited free market activity, coupled with government strategic oversight. At the national level, everything is a Chinese government monopoly.

But this isn't a rare earth problem. I find it confusing that this blog attempts to frame a very large global economic and political as a rare-earth, supply-chain problem.
captainccs profile picture
For the want of a nail .... the kingdom was lost.

votingmachine profile picture
I'm familiar with the quote. I'm also not seeing the F-35 in any way dependent on a Chinese magnet. The magnet was considered too inconsequential to replace with a non-Chinese sourced magnet. Read the link posted in this blog and see:
"The waivers apply to inexpensive parts, including $2 magnets, installed on 115 F-35 test, training and production aircraft, the last of which are due to be delivered in May 2014. Lawmakers noted that several U.S. companies make similar magnets."
So what we have is a magnet that was used accidentally, and will be re-sourced to a US supplier. This is not some terrible indictment of the US supply syystem, or even of a sloppy Department of Defense.
From the same link:
"In one case, it would cost $10.8 million and take about 25,000 man-hours to remove the Chinese-made magnets and replace them with American ones, the documents indicate."
To be clear: the magnets in the F-35 ARE NOW US MAGNETS. They were made in China, bought, and inadvertently used in a US Jet. China CANNOT embargo those particular magnets. And in the future, the source will be US. It would be stupid to take the Chinese manufactured magnet out, throw it away, and put in an identical magnet with a "Made in USA" stamp.
There are worries about critical material supplies for the Department of Defense. But this magnet is not one. It is something of an embarrassment, but it is not a sign of a small component (the nail that is in want, for the shoe, for the horse, for the ...) that is disabling, and unavailable.
Vartu profile picture
Who knows what other strategic systems employ components requiring rare earth elements. If in their national interest, China could make it very difficulty to procure.
bz1516 profile picture
I agree with your thesis that china has a stranglehold on REOs, but this is an investment site and there is no actionable idea here. MCP and LYC are right now better shorts than longs with no change in sight.
That seems to be the point. If you're not short MCP already, you better get short fast.
DenverDude profile picture
The author has limited understanding of Molycorp's facilities and capabilities. Molycorp has operations in the US, Canada, China, Japan and Estonia that refine rare earths and produce RE products. Accepting the author's conclusions is acceptance of his assumptions which are flawed.
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