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Molycorp Mired In The Mud: Perhaps A Domestic "American"Total Rare Earth Supply Chain Should Be A Collaborative Project.

|Includes: GWMGF, iQIYI, Inc (IQ), REE, UURAF

I advise my natural resource production development clients that the best approach to being in the business of natural resource supply is always to plan and build to produce, profitably, less than the market segment available to you demands and to always produce at both the lowest cost per unit output and with the lowest breakeven revenue requirement. Those who fantasize that their particular resource has an endlessly growing market assume that the higher the production the better and that "economies of scale" will allow them to price their output at a lesser price than their equal size competitors. Invariably these "the bigger the better" ventures wind up with such high OPEX that they cannot compete in the real marketplace when prices or demand or both drop. Note that this is exactly what happened to the original Molycorp between 1998 when it shut down new mining and 2002 when it shut down separation of ore concentrates into marketable rare earth chemicals and their mixes. As recently as 1984, 14 years before their first shutdown, Molycorp had been the world's largest rare earth producer and certainly the only large primary rare earth mine on the planet. But by 1998 rare earths co-produced with iron in China's Bayanobo region (Inner Mongolia) had eliminated Molycorp's scale-based price advantage.

In 2007 Molycorp's assets were acquired by a new group that decided to compete with the by then almost complete Chinese dominance of the rare earth mined material sector by going head-to-head again on volume and hoping to cut costs way back to where they could be competitive. The original Molycorp business revival model (2007) also speculated (and heavily promoted the idea ) that there would be a significant degree of support from the US military both in terms of demand and to insure security of supply.

In 2011 the US Department of Defense finally admitted that it would only need 150 tons per year of rare earth permanent magnet alloys; this would be 0.2% of annual global rare earth permanent magnet production. By 2012 acquisitions had built a Molycorp that had 81% of its employees in the People's Republic of China and no credible company owned resource of the critical heavy rare earths required for military magnet production. Molycorp had rapidly become a company of little interest to the US DoD.

Yet the chest thumping promotion of we will be the biggest (EVER!) continues.

Unfortunately for the above mind-set the natural resource world is swinging back to politically aligned regional self-sufficiency as a goal and away from globalization of the natural resource supply chain. This is not just do to geopolitics; it is also due to the fact that the development to marketability of a natural resource-as an example think of crude oil marketed ultimately as gasoline or as fine chemicals-today is increasingly reliant on a region's technical skill base and its ABILITY to provide and maintain infrastructure, reliability of services, and low costs, and political stability.

Developing nations and nations with econimes wrecked by socialismor communism have now recognized that domestic engineering and scientific skills are best used in the service of their domestic economies. Nothing is better proof of this than the fact that the KGB's successor, the FSB, is suspected to now be the largest industrial espionage operation in history. China is on the way to technological self-sufficiency and there is no better proof of that than the fact that the Chinese are today OPENLY seeking to acquire engineering and productivity improvement technologies. Just two years ago Chinese official spokesmen vehemently denied that any such help would ever be necessary.

As a young operations manager/founder of a computer memory manufacturing operation in the early 1970s I worked with an engineer who told me that he had been a tank commander in World War II. To be precise he told me that he had commanded a German Tiger tank equipped unit at the battle of Kursk, the largest tank battle in history fought between Nazi Germany and Soviet Russia in the Ukraine.

He said that in their arrogance the German generals and military technocrats had decided that bigger and more complex was better. Their Tiger tanks had the now legendary 88 mm gun, which was the best of its type ever made, and "Doctor" Porsche (Yes the same one who designed the Volkswagen and whose son brought us the modern Porsche) had also designed a monster tank, as a sort of secret weapon, which the tankers called the Elephant. This beast weighed in at 80 tons and mounted the equivalent of a 6" naval rifle. It was supposed to simply sit in place and destroy the Russian tanks at a range that left the Russians helpless to reply.

Two unexpected but entirely discoverable, if anyone had cared to look or think, things happened: 1) The Russian tanks had a new armor, sloped armor, invented by a Ford engineer, and Stalin had literally moved the Soviet armor manufacturing capacity beyond the Urals and so beyond the range of the Luftwaffe. This resulted in swarms of Russian tanks whose sheer numbers and increased effective armor thickness overwhelmed the German superiority in firepower per tank, and 2) The Elephants were so heavy that in the muddy fields the Russians chose for the battle they simply bogged down and became unmovable becoming targets for swarms of smaller Russian tanks that "killed" them piecemeal.

I am an advocate of vertical integration in the rare earth sector, but it can only work up to a certain degree of manageable complexity, for the simple reason that chemical engineers and metallurgists need skilled and detailed managerial oversight and guidance in their own disciplines and the fact is that those who seek to combine and integrate mining, chemical, and metallurgical engineering management under one umbrella have so far proved unable to do so PROFITABLY.

The best plan for vertical integration in the rare earth arena outside of China today is that of Great Western Minerals Group, which has 1) A previously operated thorium mine in South Africa that it is converting over to a FREESTANDING rare earths focused mine, 2) An agreement with an experienced financially successful Chinese rare earth refiner to build a solvent extraction plant at the South African mine site to separate the particular rare earths mix found there from each other, 3) An established British sited and operated rare earth magnet alloy producer, which has traditionally operated using Chinese sourced rare earths for the last 20 years and 4) is constructing a new rare earth metals refinery in the UK to produce high purity rare earth metals from the separated high purity rare earth salts to be produced by the SX plant in Africa and which metals so produced will then enhance and ultimately replace Chinese material. The result will be a Western non-Chinese vertically integrated producer of rare earth permanent magnet alloys, which alloys will go to the current European and Japanese, highly experienced, rare earth permanent magnet makers that today already buy such Chinese metal based alloy materials from Great Western's Less Common Metals wholly owned subsidiary. The customers will not know when Chinese feed stocks cease to be used by LCM. In the GW model each technological unit is self-contained and internally managed technically. Only finance functions are directly controlled by the conglomerate's management.

By contrast I think the Molycorp model seems to have placed or hired less experienced technical management and engineers, who have not produced a profit except in an anomalous period of price spikes, with which they had nothing to do,over the seasoned engineers and managers of the only consistently profitable (majority) western owned, but sited mainly in China, rare earth separation and metal and alloy maker. Molycorp seems to have allocated neither time nor capital for the steep learning curves it would need to surmount and surpass to understand the businesses it decided to buy rather than develop.

If I were trying today to construct a domestic American total supply chain for producing rare earth based end-user components I would forge the total supply chain from some or all of the following links:

A. Light and Heavy Rare Earth Process Leach Solutions:

Rare Element Resources (NYSEMKT:REE), and

Ucore Rare Metals (OTCQX:UURAF)

B. Deradioactivation of, Separation of, and purification of the total spectrum of the rare earths (atomic numbers 57-71) and their commonly associated elements (Scandium and Yttrium)

Intellimet (Private)

C. An American Rare Earth Metals' Metals Maker:

Great Western Technologies, Inc. (A wholly owned American subsidiary of Canada's GWMGF.PK)

D.An American magnet alloy maker,

Again this would be Great Western Technologies, Inc. as above,

E. An American magnet maker (One or all of the many members of the USMMA, the United States Magnet Materials Association), and

A rare earth metals recycling company.

I would organize this as Technology Metals Recycling Corporation (private).

I note that it is my belief that one broad spectrum rare earth separation and refining operation could provide enough capacity for all of America's domestic demand, and I note that the technology to do this with solvent extraction (SX) and Ion Exchange (NYSE:IEX) already exists in the USA as does solid phase extraction (NYSE:SPE), which is now in the process of proof of concept validation.

In order for the USA to become self-sufficient in rare earths it will be necessary for capitalists to make actual production at a profit a goal of equal importance with making quick money in the stock market.

The most capital needed for a domestic American total supply chain would be to construct the two mines above already in development. This would be around 500 million dollars. ALL of the rest of the supply chain could be put into operation with less than 125 million dollars.

America could not only be self sufficient in rare earths but be exporting rare earth products competitively for the above investment. America's investment community has already invested many times this amount in unrealistic get-rich-quick dreams.

The money wasted on Solyndra would have made America self sufficient in rare earths. Washington bureaucrats should stop talking to each other and to those who buy them dinner and a lot of drinks and start looking at the real markets and needs of the American industrial economy.

Disclosure: I am long OTCPK:GWMGF.