EDITOR: | February 15th, 2015 | 24 Comments

Lifton on rare earth industry reorganization rumors

| February 15, 2015 | 24 Comments
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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.

For the record, this is simply a response to the inquiries I am receiving due to the commentaries on other sites such as Can USA afford Molycorp to go bankrupt? and Rumors Hammer Molycorp.


Jack Lifton

Editor:

Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>


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Comments

  • Tracy Weslosky

    Jack. I just wrote a friend this morning that this week reminds me of early 2009. Our rare earth and technology metals members are up +20.94% this week. It feels like Technology Metals are officially making a turn towards an increasing interest from investors…or so I am writing today in InvestorIntelReport. Molycorp’s NYSE MKT: MCP closed at USD$0.9730 and was up +40.97%, but as we know: needs to stay firm north of $1….should be an interesting week.

    February 15, 2015 - 9:20 AM

  • hackenzac

    Moving LCM to California seems a little far fetched. Don’t you think the Europeans would want to keep it around? Why not just buy from China the same or similar furnaces that LCM did? WTO rules keep that door open right? We all know about the complexity and filth of rare earth separation but what about the metal making? What are the challenges for that in North America? I can’t imagine that it’s that tough of a thing to achieve. Also, let’s not forget the GWMG private spin off of GTI in Michigan. What’s up with them? Are they in operation, modernizing, making big plans or what?

    February 15, 2015 - 11:54 AM

  • springer

    Tracy, i think you should ask Mark Smith’s opinion on selling Molycorp Silmet’s Rare Metal Division to Niocorp. He knows Silmet and its pure Nb capabilities pretty well.

    February 15, 2015 - 11:56 AM

  • Jack Lifton

    hackenzac,

    In the alternate universe you describe just buying an airplane makes one a pilot. I don’t know where to begin, and I really shouldn’t bother to comment on such factual cluelessness and appeals to authority but..
    1. I suspect that LCM’s “furnaces” and spin-casting equipment were designed and manufactured in the UK, Germany, or the Czech Republic all well-known source countries for precision equipment. Even Chinese companies prefer German machines and machine tools.
    2. I do not know of complexity and “filth” of rare earth separation that I have seen anywhere. If I had to rank such operations the Chinese ones that I have seen are by far the most wasteful of reagents and solvents. The operations of Molycorp, Lynas, and Solvay are not only the three largest in the world but ARE REMARKABLY CLEAN. I ran a chemical processing plant, and I can tell you that spills of expensive reagents are dangerous and EXPENSIVE.
    As to rare earth metals making I urge you to go to Ames National Laboratory in Ames, Iowa, and look at their pilot plant equipment for making any and all of the rare earth metals in high purity and then discuss complexity or “filth.” Your comments about these processes are beyond ignorant; they are willful libel of scientists and engineers who follow the extremely tight health and safety rules and regulations of the United Kingdom, The European Union, The USA, and The Sultanate of Malaysia.
    3. The “GTI” spinoff was a sale by GWMG of its GWTI subsidiary in Troy, Michigan, to the Eutectix Corporation, which is no longer associated with GWMG, and I only know that Eutectx has expanded the scope of the former GWTI operation. It is a private group so you’ll need to ask them what they’re business model is.
    In summary the high-tech equipment industries of the USA, Europe, and Japan do not need instruction or innovation from China. It is the other way around.
    For those of you readers that understand this let me point out that I have seen more innovation in minerals and metals process applications and their scope in the last decade than in the preceding 4o years in which I have been involved in this area.
    The strong dollar is a bigger impediment to producing rare earth metals in America than any other factor discussed here. Luckily for the West the strong Yuan and the present turmoil in the Chinese economy are negating the strong dollar. I am betting on American industry to bring the rare earth total supply chain in North America back on stream.

    Jack

    February 15, 2015 - 12:16 PM

  • hackenzac

    GWTI, not GTI, now known as Eutectix.

    http://eutectix.com/

    February 15, 2015 - 12:18 PM

  • hackenzac

    Pretty aggressive reply Jack and not very appreciated. If you don’t want to call well documented Chinese rare earth processes filthy as they do them, OK but that’s not the way everybody else see it. Furthermore, LCM uses CHINESE furnaces! Oh, and sorry about the typo with GWTI, kind of pompous of you to jump on that in particular. Are you gonna sue me for libel?

    February 15, 2015 - 12:28 PM

  • hackenzac

    So let me see if I have this straight, you think that LCM’s Chinese furnaces should go to California? You call me willfully ignorant? Well backatcha buddy. You know what non sequitur is being a graduate of the defunct Detroit School of Law. Since you are promoting LCM’s move to California and they use Chinese gear is it that outrageous of a hypothesis that a US operation my be at least equally served by purchasing the same “state of the art” gear that GWMG did?

    February 15, 2015 - 12:48 PM

  • Jack Lifton

    hackenzac,

    The University of Detroit School of Law, a member of the Jesuit Universities’ Law Schools Association is not defunct. You’re thinking of DCL, the Detroit College of Law.
    The USA is a much better economic climate than continental Europe. Although the UK is doing well it is not much of a market for rare earth metals or alloys as raw materials. If you don’t like California then perhaps Nevada is more to your taste. Henderson, NV, is 9 miles from Mountain Pass. In addition the USA has several long standing magnet manufacturers such as Thomas & Skinner, Arnold Magnetics, and Electron Energy that produced rare earth permanent magnets as recently as the 1990s. A domestic source of competitively priced and high quality REPM alloy could put them back into REPM manufacturing. Electron Energy makes samarium cobalt REPMs for the DoD from Chinese samarium and Canadian cobalt. Samarium can be produced at Mountain Pass as a high purity salt and Formation Metals has a developed cobalt mine in Idaho (I believe) that is only waiting for the world price of cobalt to rise to resume production. Prof Karl Geschneidner of Ames developed the modern metallothermic process for producing rare earth metals; he is still at Ames and in his mid to late 80s stillo rides a bicycle to his office, weather permitting. There are a lot of good reasons also to have furnaces designed and installed in the USA by American manufacturers. The best of them is their extreme competence.

    February 15, 2015 - 1:03 PM

  • hackenzac

    One more thing Jack, my comments in a comments section of your incendiary piece would arguably fall in the relm of slander and not libel. You must have been smoking dope the day they covered that at the Detroit School of Law. If I slandered anybody, it’s the Chinese but they have it coming. I never implied as you erroneously inferred anything about new developing processes in USDoE labs. That’s what I was respectfully asking you about but you came back with insults like a jerk. I call BS on you factually and your style. It’s not cool buddy, not at all. I would dial down the pompous assholery if I were you. If you can’t respect amateurs who make queries and ask for clarification you can’t get nor do you deserve any in return. Good day sir.

    February 15, 2015 - 1:13 PM

  • Fred

    Rather than re-shuffle the deck, I’d rather see MCP intelligently play the cards they are holding. The recent good news from them was in their ability to expand the production of LREEs currently in oversupply. There doesn’t seem to be any urgency in other parts of their company. Why aren’t they pushing their water purification chemicals? Why isn’t Silmet teaming up with a HREE junior to re-tool Silmet for expanded production? MCP can raise capital and produce profits from these. Instead, MCP wants to emphasize its lowest potential play.

    February 15, 2015 - 1:14 PM

  • walbangerharvey

    Great article–very thought provoking. For a long while I have thought that what now is Great Western very well might survive in some form and actually become a money maker. But, given its debt/debt structure, I also have assume that shareholders would get little, and probably nothing, for that future success. Personally, as an investor I only am interested in what a company can make for ME–otherwise its success means nothing to me. This seems to be lost on GWMheads. Their discussion usually centers on the Steen ore, the manufacturing facilities and other aspects of the company. Little discussion focuses on the tiny chance that they would share in any future profit.

    Prepare for an onslaught from this group. I no longer am sure they even are a group of investors. They seem to have degraded into a sect of some GWG Religion. They even have their own high priest on the GWG Stockhouse board, where many spend entire days. It now is more of a social site than an investors’ site.

    February 15, 2015 - 1:44 PM

  • Springtrader

    Jack; An MCP/GWG merger would be great; for MCP. MCP needs a source of CREEs and what would be better for them than to acquire the world’s richest mine to supply them. Also, I’m sure MCP would love another chance to own LCM, which they tried to buy for a song a few years back. They have spent millions trying to patch together what LCM is capable of doing, and it seems they haven’t had a great amount of success at it.

    As for GWG, I don’t see what a merger with MCP would do for them. GWG doesn’t need MCP’s light REEs and all MCP has to offer that GWG needs is a separation plant. GWG has plans to hire a toller to separate Steenkampskraal’s output, and from what I understand, there is enough opportunity to find acceptable separation capacity in a world that doesn’t seem to be able to start any ree mining operations outside of China. Speculations include Mintek in S. Africa, which I know a poster named Fixed enlightened you about in another Investorintel discussion thread. Mintek is highly capable and has been fitting its pilot plant with all the capabilities needed for a joint venture with GWG. I personally expect this to be the way forward.
    Everybody seems to want to write-off Great Western as a stand-alone success story. Why? I don’t know. All the boxes on their ‘getting to production’ to-do list have been checked off, including environmental studies, permits, metallurgy, and facility planning. The refurbishment of the Steenkampskraal mine has also progressed to a point that nears completion, if it isn’t already done.

    The only hindrance to moving forward for GWG is management’s ability to find the capital to get the project rolling. They are nearing a cash crunch scenario regarding the interest due on the convertible bonds the company issued a couple years ago, but they are currently in active discussions with the bondholders regarding a restructuring of them. A successful completion of those talks would pave the way for additional financing and a provide a clear path to Steenkampskraal production.

    The question of how much current common share investors might lose in the restructuring talks is a valid one, but with an enterprise so promising, even losing half of the company to gain production would still leave investors with better returns than all of the other ree junior wannabes. The profits potential of Steenkampskraal supplying the downstream manufacturing of LCM are that great.

    Here’s hoping rising rare earth prices result in a renewed influx of money into the rare earth mining space. Rising prices might be the catalyst for GWG to find the money it requires.

    February 15, 2015 - 2:27 PM

  • hackenzac

    Steen is not the world’s “richest” mine but they have top men working on it, TOP MEN!
    https://www.youtube.com/watch?v=Fdjf4lMmiiI

    February 15, 2015 - 2:46 PM

  • Fixed

    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. – See more at: http://investorintel.wpengine.com/rare-earth-intel/lifton-benefits-reorganization-rare-earths-sector/#sthash.lARqRXaf.dpuf Not sure whether Moly’s management should be retained but do believe GWMG’s should be given the benefit of the doubt since they have not yet shown what it is they are in the process of doing. Let’s wait till we know what it is, then judge their competence. As far as Hackenzac…lol…let’s just agree he is…well you know…lol…knowledge… to put it nicely.

    February 15, 2015 - 5:27 PM

    • Tracy Weslosky

      This has been a brutal market over the last 2 years and all of the management teams of all of the rare earth companies have been forced to play their A game with substantial endurance and with less capital than many need. I have consistently supported the issues around sustainability as these metals lead the technology market, and well: technology is where the action is at. As for blaming anyone? I would like to know where all the analysts that had MCP had $65 and higher — anyone remember their names?

      February 16, 2015 - 11:53 AM

  • Springtrader

    Fixed; Great Western’s recent unwillingness to communicate likens itself to the behavior of a paranoid conspiracy believer. You’d think everyone was out to get them. On second thought, with the world’s richest REE mine and the western world’s only REE alloy maker, maybe everybody IS out to get them…and their silence is well-warranted. 🙂

    February 15, 2015 - 7:16 PM

    • Tracy Weslosky

      Silence is inane for a public company. If you want to be silent: be a private company.

      February 16, 2015 - 11:48 AM

  • Investor

    Are you serious? TOP MEN. Who cares! You need a crash course in metallurgy and mining engineering or at least speak to someone who is qualified in these fields. Stop being emotional about it and try to be objective! If you guys keep going with your heads in the sand, STEEN will forever stay TEEN and will never grow up!

    February 15, 2015 - 7:45 PM

  • Fixed

    Tracy, did you call Marc LeVier or was the number you had disconnected? Why is Marc being so “inane”…? The mystery of what is going on and why Marc will not talk is quite perplexing…or is just that absolutely nothing is going on if so say “nothing is happening”…or is it better to keep everybody on pins and needles speculating on everything from bankruptsy to getting fully financed to just plain mismanagement or a flawed business plan…the list goes on and on…time will tell…time will tell.

    February 16, 2015 - 12:36 PM

  • hackenzac

    “Silence is inane for a public company. If you want to be silent: be a private company.”
    Where’s that ‘thumbs up’ button?

    February 16, 2015 - 12:50 PM

  • Springtrader

    Tracy; GWG is at a point where they don’t have to promote themselves anymore. Their project is ready to go. They say what they have to; but no more, and I think it is because there are sharks in them there waters. If LeVier is able to work through the financial issues we might start to hear more from him then.

    February 16, 2015 - 1:07 PM

  • Mr. kean

    Seems alot of people want GWG to fail. Why? What are they afraid of? FOOLISH REALLY. As of now I’m in the green on it so onward and upward

    February 16, 2015 - 3:55 PM

  • Jakeslicks

    Sorry Jack,
    This article is so absurd I have a hard time believing you actually put it out there. Just pick up and move LCM to California? Really Jack, Really? Hello? With MCP on the verge of being delisted from the NYSE and bankruptcy and GWMG on the verge of of either running out of cash or finally getting the financing it it needs after years and years of research and studies combining these two complicated entities would ensure failure. I appreciate your articles, sometimes, however I do equate your perspective of the universe being very similar to that of a college professor who has never done anything except be a college professor. I did very much appreciate my college professors especially the ones who were part time professors but had their own long standing firms. That credibility thing is tenuous Jack.

    February 19, 2015 - 10:19 AM

  • Fixed

    I know what GWMG is doing and wonder how many experts out there have ever read this which pretty much says it all …please only ask questios after reading cause you will find the answers to the questions after reading it. Oh and why would anybody come to the conculsion that this mine is only 13 years….It’s pretty clear that is a MINIMUM LOM.It’s a “Great” read for those who don’t know or think they know what GWMG is in the process of doing. Don’t be scared go ahead and read it you may learn something…lol…http://www.gwmg.ca/sites/default/files/VMD1445%20Steenkampskraal%20Project%2020%20June%20%20FINAL%20GWMG.pdf

    February 19, 2015 - 12:09 PM

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