Last week, Molycorp Minerals (MCP) went to bat before the House Foreign Affairs Committee, represented by CEO Mark Smith. What was needed was a confident batter presenting an urgent case for national survival. But instead of a strong slugger, all we got was a little leaguer. Opportunities were missed and runners were left stranded. The industry sent a very conflicted Mr. Smith to Washington.
First of all, Mr. Smith never questioned the categorization of the metal class, namely that heavy rare earths (HREEs) are lumped in with the more common, garden-variety light earths (LREEs). Not once were the members of the committee informed of the importance of the highly critical dysprosium and terbium minerals, or the serious consequences China’s supply monopoly poses for American industry.
Indeed, the Machiavellian hand of China’s mining industry was not merely overlooked, but praised. Mark Smith’s presentation before the Congressional Committee read like an apologia for the nation’s draconian quotas. Not once in his presentation did he make reference to American sources of these valuable minerals. Instead, Molycorp was hailed as king of the REE hill, as if there were no other viable rare earth entities. It became an obvious case of not-too-skilled investor relations.
In every missed opportunity there exists a valuable learning experience. What else was omitted that would have made for a stronger presentation?
1. Where does Molycorp get its heavy rare earths? Smith claimed Molycorp possesses a complete suite of rare earths at their Mountain Pass property. Assays have shown that this mountain possesses predominately light rare earths with little or no heavies.
2. Why does Molycorp venture to far-away Estonia to process U.S. ore when it can be done more efficiently and economically on American soil? A new industry could be created here offering jobs to build a new, native industry.
3. What was the significance of the aborted deal between Hitachi (HIT) and Molycorp? The Japanese claim that Molycorp did not possess sufficient heavy rare earths to satisfy Japanese industrial needs. Smith glossed over the strategic importance of heavy rare earths right here in the United States.
4. Why was no mention made of the Critical Minerals Act that has been languishing on congressional desks for many months? Encouraging Federal Government to support this act might have served to fast-track vital legislation. What could be more pertinent than weaning the U.S. from its dependency on China?
5. Chinese policy makers have stated that the nation needs strategic rare earths for its own markets and that there are simply not enough of these resources to go around. They’ve even said they would welcome American firms to develop the sector on Chinese soil. Why not explore this opportunity to assist our Chinese colleagues, thereby furthering a more harmonious relationship?
Let’s hope that a more voluble and reasoned representative will inspire Congress at the next opportunity. Sadly, only four committee members were present at the hearing. Maybe someone else can send a slugger up to bat to advance our indigenous rare earth industry. We should also think of our neighbors in Canada and Europe struggling to advance their own assets.
It’s not just Congress who could use some enlightenment on this oft-misunderstood market; even major investment firms demonstrate limited understanding of the rare earth sector. J.P. Morgan recently downgraded Molycorp’s rating, slanting its sector thesis by forecasting declining prices. Nowhere did they differentiate between the heavies and the lights. Dysprosium and terbium prices have not gone much lower. Investors fear that Molycorp will flood the rare earth supply when they come online, but this is not the reality.
Right now, Molycorp is half a loaf. All these two giants have to do is look to our recommendation list to find suitable heavy rare earth additions to complete the catalogue, or else they open themselves up to evisceration by bankers who may be playing both sides of the field.
Finally, is it not passing strange that J.P. Morgan chose to issue this negative pronouncement on the eve of Bernanke’s two-day conclave in Washington? Keep in mind that J.P. Morgan is being sued by individual silver investors who allege the bank “amassed an unfairly large position in silver futures and then used its position to drive down prices of silver and increase its own profits.” (Wall Street Journal) This lawsuit may indeed throw into question good-old J.P.’s credibility as an impartial observer. Do not forget that our rare earth stocks have an incredibly large short-interest position. This is not the time to flee the battlefields in this vital sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.