Lifton on rare earth industry reorganization rumors
I am constantly pummeled by readers who think I have a vested interest in a potential bankruptcy of either Molycorp or GWMG. I have no such interest. In fact I would like to see the deposits owned by those two companies continue in operation and development respectively. Only the shareholders can determine if either of the current managements should be retained. I have no vote in this, and I will keep my opinion of the players to myself.
I think that a bankruptcy process could be very beneficial to the supply side of the non-Chinese rare earth industry. I do not know if the Chinese legal system allows bankruptcy in the American (and Canadian and UK) way, which is to offer options ranging in extremes from total dissolution and sale of all of the assets to satisfy creditors to reorganization under the existing (or new) management but with a new business plan with a (Court determined) high probability of success. I would very much appreciate an overview of Chinese law from any reader who is experienced or knowledgeable in this area of Chinese commercial law. But what a Chinese company can, cannot, or could do is not my point here.
I think that, from both my own observations and from publicly accessible information, I would choose Molycorp and GWMG as the two “best” North American candidates for a court ordered reorganization. In both cases this would mean a new business operations plan, and, in fact, I think that a merger of the two would probably enhance both in a critical way. It would certainly be a better looking company if combined and with non-core-competency, or redundant, units hived off and sold.
I would structure the new combined company thusly:
I would keep:
- The mine at Mountain Pass,
- The GWMG Mine in SA and the other deposits owned (or in which GWMG has a substantial interest) by GWMG in North America,
- The SX facility at Mountain Pass expanded to include a capacity to separate HREEs,
- LCM (which I would move to California), and
- A long-term marketing JV with an independent Neo for the new MCP’s products and services
The above to be entirely funded by the sale of Neo, the Molycorp Rare Metals divisions including the Silmet operation in Estonia (which might well be sold back to its previous Russian owners). I don’t know how Molycorp Rare Metals is structured or if there are any outside interests in any of its parts, but I think that the unit would be better off on its own to sink or swim.
I am not a financial advisor as I am reminded constantly by Tracy and many readers, but as a reasonably savvy person I will say that I think that the above plan would give the least “haircut” to bond holders, and might even allow recent equity holders to recover their investments in the long term. Long term equity holders would be “wiped out” but the largest of these have been the beneficiaries of the run-up in the past, so they won’t be really hurt at all.
Please do not send me comments on financial engineering or on my secret (so secret that even I don’t know anything about it) infatuation or distaste for particular individuals. I will not respond to those. But I would appreciate a discussion of why anyone thinks the above “plan” is not beneficial to the non-Chinese supply situation.
Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>