Can Molycorp bounce back in 2014?
After showing signs of a rebound in the first days of 2014, when its shares rose almost 15% after another bumpy year, Molycorp slumped back to below USD$ 5/share as January comes to a close. All things considered, 2013 was kinder to the Company than 2012, when its market value dropped by more than 60%. Since 2012, Molycorp was forced to confront a series of setbacks. Its mine construction costs were higher than expected and the CEO that resurrected it, Mark Smith was forced to resign. boron magnets (even if in China, as some detractors are keen to point out). Molycorp can therefore benefit from markets associated with downstream finished products used in hybrid vehicle motors and batteries, wind power generators, rocket guidance systems and several known and as yet unknown applications. However, as pointed out by its critics, Molycorp has not proven being capable of producing heavy rare earths and it is still experimenting or refining a new rare earths processing technology, which, until now, has translated to more risk than opportunity.
Molycorp does have assets: the Mountain Pass mine in California and the former Neo Material Technologies processing facility that MCP bought at a price of over USD$ 1 billion. Ironically, in the past three years, during which Molycorp’s market value has plummeted (by a factor of six), it has also become a more sophisticated company.
Molycorp remains North America’s only rare earths elements producer and at the end of 2013, it launched a new multi-stage cracking plant at Mountain Pass. The plant aims to boost REE recovery rates as well as production, lowering operational costs. Molycorp, like other REE companies has had to endure low rare earth prices, which have impacted revenue and investment. The worldwide recession lowered demand for consumer goods (or at least lowered the perception of demand) kept most commodity prices down. However, there are indications, even from sluggish Europe, that a period of recovery is underway, which combined with China’s increasing regulation of its own rare earth industry, should help to increase – or at least stabilize – REE values in 2014. However, even as it can count on its Magnequench/Neo facilities in China, Molycorp also suffers from the fact that the United States, through a series of shortsighted regulations, allowed much of its rare earth technology to move to China.
North America has plenty of rare earth metals needed to fuel the promised green-tech revolution, but the technological expertise and facilities are still overwhelmingly located in Asia. This means that Molycorp, and anyone else taking the REE processing plunge on this side of the Pacific Ocean, must be ready to face major investments to regain the lost expertise. As an example, consider that shares of Australian rare earth producer Lynas Corp (LYC: ASX) fell some 7% after a deadly incident on the production line last December. Lynas lost almost 60%of its value in 2013, dropping to a price last seen in March 2009. In April 2011, the market capitalization of the Australian company had reached a high of nearly 5 billion AUD.
Lynas began production on LAMP last November, delivering its first shipment of 144 tons of rare earth oxide in the second quarter 2013. Lynas, as Molycorp, also felt the sting of low metal prices, announcing last June that it would reduce output at the Mt. Weld mine to low demand. Lynas also endured a lengthy approval process and lawsuits from environmental groups trying to block its LAMP processing facility, whose operating permit is still temporary.
When compared to Lynas, Molycorp – its main competitor – looks stellar; Indeed, Lynas’ s troubles acted as the trigger for Molycorp’s late December / early January jolt. Molycorp and Lynas are essentially competing against each other to gain light rare earth (LREE) production supremacy outside of China. Industry insiders suggest that , where LREE’s are concerned, Molycorp, Lynas and maybe another smaller producer outside of China would be sufficient to meet world demand. As for heavy rare earths, one or two projects outside China would be sufficient to meet demand. Meanwhile, China continues to clean up its rare earth industry. Companies, reportedly, failed to reach the 2013 production quotas while authorities continued to shut down irregular operations. Chinese authorities have also blocked permits for some large producers, such as HEFA Rare Earth Co., because they had not fulfilled their environmental requirements.
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There is the potential that the lower quotas for 2014 combined with a systematic application of the stricter regulatory standards, may not satisfy the non-Chinese market, even accounting for the sharp decline in demand for rare earths from economic concerns. Molycorp, providing it can achieve the – repeatedly – revised targets (this will require additional large capital increases), has the potential to deliver light rare earth elements such as cerium , lanthanum, and neodymium, which is sought so the market for permanent magnets. The decline in already scarce heavy rare earths, however, is significantly greater, potentially leading to a price increase for all rare earths. The decisive factor will be China’s continued determination to curb illegal mining and smuggling – permanently. Extreme air pollution in China has been proven to cause significant health risks.
Now, China has planned massive investments to combat this problem. By 2017 alone, China plans to spend some USD$ 150 billion on clean energy sources and environmentally friendly vehicles, needing large quantities of strategic raw materials. Not surprisingly, China has been building up strategic reserves. Moreover, REE demand has been driven by smartphones in recent years, and predictions are, especially in China, that smartphone consumption will rise sharply (in China smartphone penetration is not even 25%). The US Geological Survey (USGS), in addition, expects rare earth demand to increase in the US as well, by as much as 10-16% per year for the next few years, driven by neo-magnets. REEs used in other industrial applications will also rise in demand – including LREE’s.
Therefore, if Molycorp can ‘hang on’, complete its infrastructure upgrades, it will finally start navigating in more profitable waters and offer its investors more than a glimmer of hope, but actual substance.