Lifton on “Sunset Blvd” and Molycorp: Too Big to Succeed?
Looking back on it, I think that Molycorp’s challenges were predictable from the day it adopted its Project Phoenix as a goal. The goal, as I have always understood — was a plan to become the world’s largest producer of light rare earths. At the big coming out party in New York City hosted by Dahlman-Rose in 2011 at which the Dahlman Rose partners picked $130 a share as their target price for Molycorp shares I asked the then Molycorp CEO from the podium (I was the keynote speaker) if he would verify what I then had heard said by Molycorp’s PR department that the target production of Molycorp would be 50,000 MT/year; the same total as all of Inner Mongolia combined. His public response was “Yes.”
In fact the restructuring now going on in the Chinese rare earth industries is driven by the same market forces that are forcing Molycorp’s hand with that business model unfulfilled: overcapacity with no parallel increase in demand is driving prices for the light rare earths, cerium and lanthanum, too low for Molycorp to succeed. China’s, and the world’s, largest vertically integrated rare earth producer, Baotou, admitted publicly two years ago that it was overproducing both cerium and lanthanum just to keep up with neodymium/praseodymium demand within China itself. I reported on this at the time, and I have been referring to it since then to direct attention to the fact that cerium and lanthanum production are now liabilities that are necessary in order to produce neodymium and lanthanum.
In today’s world with its vast overcapacity in those rare earths most commonly found and most commonly produced, cerium and lanthanum, there is no economic logic in adding to the non Chinese capacity for producing them other than the perceived threat to the security of their supply. But even this is a bogus concern when you realize that as much as 85% of the existing demand for these two rare earths is within China’s domestic rare earth industry, which has substantial excess capacity even at that level of demand.
Molycorp’s failure to reach profitability is, in my opinion, masking a fundamental change in global resource production economics now being spearheaded by China. Like the academic tendency to over specialize and to look at the trees as if they are not part of a forest so also are investors today less and less likely to look at an asset class member as part of a larger economic system.
This trees and forest misidentification is my explanation of Wall Street’s actions in linking Molycorp’s performance to that of every other rare earth venture (almost entirely consisting of “junior” exploration companies), and making investment decisions about companies that are completely unrelated to Molycorp as if they were subsidiaries of Molycorp. I think that the Molycorp business model deducible from its physical and economic actions is no longer viable. The Chinese government’s current restructuring of its SOEs, state owned firms, supports this thesis, and in fact guarantees it.
I personally last visited Mountain Pass the summer before it went public. At the time of the plan, as it was explained to me, was to re-start the operation by bringing the existing solvent extraction separation plant back on line utilizing as feed stock an existing stockpile of material prepared before the mining operation was shut down in 1998, which material I was shown and which I was told was 20,000 tons of material already “concentrated” to 70% TREOs (total rare earth oxides). The utilization of the system at the conclusion of the re-start would be such that output could be a total of 4000 tons of separated product per annum. This would allow, with the existing stockpile, for at least 3 years of operation before mining needed to be back up to continue and hopefully expand operations. This seemed like a good plan.
Later in the Fall of the same year I was doing some due diligence consulting for a firm in Toronto, one of the clients of which was Resource Capital, which I was told was the lead partner in restarting Molycorp. The Resource Capital executive on the speaker phone from Denver asked me what would be my recommendation of the best time to go public. I answered, “Right now (November, 2009), because the market is heating up.” He told me that their plan was to wait until the system was up and running in 2012. But the very next April Molycorp went into a quiet period, and in June, 2010, the company made its IPO.
Returning to June 2009: After my tour of the mine; the solvent extraction plant; and the R&D laboratory, which was supporting the re-start of the SX system by modeling it and providing analytical services, the then CEO and I sat down for a private conversation. He asked me for my views. I told him that I believed that once up and running the company could make a profit by just selling its installed capacity of the SX system, which I estimated at 6000-7000 tons per year of combined products. I said that the most valuable of these, in my opinion, were didymium and lanthanum and that if prices kept going up (as they were then) it looked to me as if they could make a profit of several million dollar a year. He responded that the new Molycorp had a much larger “vision” and that it was going to be made into the largest rare earth producer in the world (again) and a billion dollar company. I disagreed, but I wished him luck.
In the 1950 Hollywood Classic, “Sunset Blvd,” the antagonist, a screen writer named Joe Gillis sets the theme of the movie when he meets the silent era former movie star, Norma Desmond. I have inserted into the quoted passage below a revision of the script that might now be called “Mountain Pass.”
“You’re Norma Desmond (Molycorp). You used to be (the world’s largest producer of light rare earths) in silent pictures. You used to be big.”
“I *am* big. It’s the (market) *pictures* that got small.”
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>