EDITOR: | March 18th, 2015 | 15 Comments

Lifton on Molycorp media coverage: Do not believe everything you read.

| March 18, 2015 | 15 Comments
image_pdfimage_print

Molycorp-VisionToronto’s Financial Post seems to be unable to distinguish the Molycorp “tree” from the rare earth sector “forest.” An article in the FP for Tuesday, March 17, 2015 boldly analyzed the financial distress of just one company, Molycorp, as a “signal” that the entire industry of which it is a part, the “rare earth industry” has failed.

This is at best poorly informed journalism.

What has occurred is that a company (and this would be true no matter what industry the company was in) that has had no profit in the 12 quarters since it began commercial production has reached the point where a ratings agency has decided that it cannot ever make a profit in its present form. This is the meaning of the phrase “not a going concern,” which the agency used in its analysis.

It is the business model of the firm (in my opinion) Molycorp that has failed to perform, not the rare earth industry.

As I said yesterday Molycorp, in my opinion, is too big to succeed, because there is little market, and no demand at this time, for 85% of its production. This stems from both the nature of a light rare earth deposit and the processing regime chosen by the management of that deposit in order to turn it into a producing mine. Molycorp owns that very rare bird, a hard rock primary light rare earth mine. This means that the rare earth minerals are present in such high concentration in the deposit that it can be mined primarily to recover them. This contrasts with many iron deposits globally in which rare earths are present and which are at this time China’s and the world’s major source of light rare earths because the iron deposit is being aggressively mined and is producing them (rare earth minerals) as a relatively concentrated residue.

Prior to Molycorp’s restart in 2007 the source of light rare earths had been the Chinese iron deposits in Inner Mongolia, which themselves became the globally dominant sources of light rare earths in the late 1990s when their selling prices eclipsed those of the former leader, the first Molycorp.

Prior to Molycorp’s dominance the world got its rare earths from the monazite “beach sands” of the USA, Brazil, Malaysia, and India. The “sands” were also the only known source of what we now term “the heavy rare earths.”

I recall as a young researcher that monazite sands from Florida “beaches” were processed by Rhone-Poulenc in a solvent extraction plant in Freeport, Texas. I do not recall any headline in the main-stream-financial-media that the Freeport operations of Rhone-Poulenc were to close due to the discovery of a large deposit of bastnaesite in California, because Rhone-Poulenc closed them for another reason-its failure to get a thorium disposal license renewed. I do not recall that even that event, which the main stream press ignores, got any mention at the time.

Let’s go from memory lane to the fast lane: In my opinion Molycorp’s business model was flawed by its focus on light rare earths and its plan to out produce the Chinese industry as a whole, not just to become competitive with it. The hope must have been that economy of scale and non-reliance on the cyclical iron market would allow it to produce at lower cost that the Chinese industry.

The plan was too ambitious and it failed to take account of the changing face of “market critical rare earths, MCREs.”

Looking at the rare earths markets right now there is a growing global demand (almost entirely inside of China for the moment) for rare earth metals used in permanent magnets, lasers, and high strength alloys of magnesium and aluminum. Thus today it is “obvious’ that a deposit containing both neodymium and the heavy rare earths is the “ideal” for development. I believe that if Molycorp came to the market today as a junior it would not be funded. The largest deposits meeting today’s criteria for development are evolving nicely in the North American, European, Australian, and South African rare earth junior sectors, but I believe that even so they will not collectively have enough proven resources of neodymium to meet the entirety of the growing demand for that rare earth element in the magnet space. This is a good thing, because it means that the entire production of heavy rare earths and whatever light rare earth magnet metals, neodymium and praseodymium, can be produced by all of the juniors together will not satisfy the markets growing demand for these rare earths. Each of these deposits individually and even all of them together are the right size and have the current MCREs distribution! These are the metrics to follow: RS + (sum of) MCREs + COGS. Management has little to do with the MCREs distribution in an ore body-other than to discover it. But management has everything to do with the choice of the size of the mine to be developed and the choice of the financing and technologies to be used to minimize the COGS.

Neither Molycorp nor Lynas, the two newest and largest light rare earth dominant deposits to be brought to production outside of China in the last 25 years has been able yet to meet its target production or even its target capacity. In my opinion this is because both tried to disguise a “way out” idea, the building of a giant solvent extraction plant dwarfing anything ever built before, as a use of “traditional technology.” It is instructive to note that the company known as Indian Rare Earths has now completed an 8000 ton per year rare earths separation by solvent extraction plant in Kerala, India, to process monazites derived from beach sands. I have been told that the plant is simple and well designed and that it works. Indian Rare Earths’ “partner” in this was an arm of Japan’s Toyota. Journalists should be asking Toyota why it partnered with Indian Rare Earths rather than Lynas or Molycorp.

But to return to the rare earth industry let me finally say and summarize my opinions this way:

There are a number of deposits in advanced development that have the right size and the right distribution of MCREs. We need all of them to go into production, but the markets are unforgiving of the risk of loss of capital. The risk today is not one of metallurgy or even grade – with the variety of newly applied separation technologies available to supplement traditional solvent extraction – it is the future market pricing of the MCREs and the perceived ability of a junior to understand that customer satisfaction, the delivery of the customer specified goods on time and at the agreed pricing, is the key to success.

I do not see this “market savvy” in many of the juniors, but it can be learned or acquired.

The junior rare earth space is very much alive outside of China and in fact it is adapting to the market rapidly.

Don’t believe everything you read in the papers.


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>


Copyright © 2017 InvestorIntel Corp. All rights reserved. More & Disclaimer »


Comments

  • Andrew

    It is instructive to note that the company known as Indian Rare Earths has now completed an 8000 ton per year rare earths separation by solvent extraction plant in Kerala, India, to process monazites derived from beach sands. – See more at: http://investorintel.wpengine.com/rare-earth-intel/lifton-on-molycorp-media-coverage-do-not-believe-everything-you-read/#sthash.FnqoL3NV.dpuf

    Can’t find any news of a completed solvent extraction plant. Possibly still in planning stages?

    March 18, 2015 - 5:48 PM

  • Chris

    In the case of Lynas, supply contracts with BASF and Solvay underpinning most of phase 1 (11Kt/pa) production.
    Lynas phase 2 (additional 11Kt/pa) production was funded by SOJITZ and JOGMEC on the proviso that 77% of phase 2 production would be secured for the Japanese market exclusively.

    The reason why Toyota did not partner with Lynas is probably because they missed the boat.

    March 18, 2015 - 5:52 PM

  • Lid

    Jack,
    “Don’t believe everything you read in the papers” is a good topic, it may also be used here, Moly Corp and Lynas’s problem are being LRE producer, not by other means as you stated “traditional technology.” , before even Moly Corp and Lynas produce even a single gram of LRE, the stock pile of LRE in China is already huge enough to supply the whole world for many years to come.

    March 18, 2015 - 6:16 PM

  • Jack Lifton

    Andrew,

    I know two men who have visited the Indian monazite SX plant in the last few months. Both are prominent in the rare earth industry, and both are experienced scientist-engineers; one is a geologist and the other a chemical engineer. They both reported to me separately that the plant was finished and that the only issues appear to be of Indian politics.
    The journalists who cover rare earths are apparently unaware of this development. I will try to verify my statements as soon as I can.

    Jack

    March 18, 2015 - 9:17 PM

  • jim bond

    Andrew:
    Seems to be a private company. I have found only limited information but it seem to be operating and exporting finished rare earths. Google Toyotsu rare earths India

    March 19, 2015 - 10:28 AM

  • Jack****

    What I am about to say may stun Ms. Weslosky, who by the way, has not yet stopped by for an afternoon cocktail. I am truly bummed by that.

    My Lifton is correct about lack of market savvy. This is an industry wide problem, not unique to Molycorp. (Perhaps a topic for a future blog.) It is easy to look at Metal Pages or Asian Metals, copy a number into a spreadsheet, and call it a business plan. It is more difficult, but more realistic and meaningful, to identify the major potential customers for your products, and to understand their needs thoroughly, via continuous discussions. Better still, to identify and contact your customer’s major customers, as well, to get an idea of what the future might look like. This specialty is called marketing and business development, which does not occur on its own, as many lawyers, geologists and investment bankers, who run this industry believe.

    March 19, 2015 - 12:01 PM

  • Tracy Weslosky

    Thank you Jack****. For starters you identified an error on another post, which has now been removed: thank you.

    Now with regards to Jack’s commentary on do not believe everything you read, I too was unappreciative of the article that Jack referenced as the writer in question clearly is like many writers today — in that they do not understand the business, and write for speed.

    This is one of the many reasons I am so appreciative of our editorial team here: they are knowledgeable professionals in their respective industries, and they can tap into a substantial depth of knowledge when they write.

    Thank you for your comments, but the only person dropping by to drink with you this week will be MCP’s IR team as they must be completely devastated that their stock keeps sinking. Again, I have been a supporter of MCP for many reasons and I believed that one of these magnanimous business personalities involved in this financing would have surprised us all with another Hail Mary that MBA students would reference on how investment bankers do protect the interest of their clients for decades to come….

    The stopwatch keeps ticking and as I learned many years ago — stay right to the end, as you never know what will happen.

    March 19, 2015 - 4:15 PM

  • Tim Ainsworth

    “India is commissioning a plant to produce up to 5,000 tonnes of rare earths a year” Aug 14

    http://www.scientificamerican.com/article/india-to-chip-in-with-five-percent-of-global-rare-earth-output/
    http://www.trei.co.in/
    http://www.toyotsu-rare-earths.com/e/index.html

    But interestingly a similar story from 2012:

    “Toyotsu Rare Earths India Private, a wholly owned subsidiary of Toyota Tsusho would use monazite sand classified as mine waste, and supplied by Indian Rare Earths Limited (IREL), which extracted uranium and thorium, to produce rare earths like neodymium, lanthanum and cerium.”

    “The participation of a foreign company in exploitation of beach sand minerals was also made possible by modification of the exploration policy of the DAE. The latter, by virtue of being the sole custodian for production of nuclear fuel like uranium and thorium, enjoyed a monopoly over beach sand because of its thorium content.”

    http://www.miningweekly.com/article/japanese-company-to-start-rare-earth-production-in-india-2012-03-01

    Perhaps they’ve sorted the Th now?

    March 20, 2015 - 9:31 AM

  • Tim Ainsworth

    Moderated again, maybe just try searching:

    “Toyotsu Rare Earths India Private, a wholly owned subsidiary of Toyota Tsusho would use monazite sand classified as mine waste, and supplied by Indian Rare Earths Limited (IREL), which extracted uranium and thorium, to produce rare earths like neodymium, lanthanum and cerium.”

    “The participation of a foreign company in exploitation of beach sand minerals was also made possible by modification of the exploration policy of the DAE. The latter, by virtue of being the sole custodian for production of nuclear fuel like uranium and thorium, enjoyed a monopoly over beach sand because of its thorium content.”

    March 20, 2015 - 9:33 AM

  • Tim Ainsworth

    You should find:

    “Japan’s Toyota Tsusho Corporation was set to start rare earths production in India by April, from monazite sand mined in the country.”

    Dated 1st March 2012

    No idea why I have to play jigsaw puzzles here.

    March 20, 2015 - 9:35 AM

  • Tim Ainsworth

    In a presentation in October last year https://www.youtube.com/watch?v=vxp-nNFP8iI Dudley Kingsnorth related recent data he’d collected directly out of China: 15ktpa, or 40%, of the NdPr consumed by Chinese magnet manufacturers was illegally produced.
    Rough correlation would suggest that 15ktpa of La & 30ktpa of Ce are also being produced illegally, irrespective of whether all that volume is entering the market.
    Does the current price of NdPr support the economically & environmentally sustainable production of this 60ktpa REO?
    If not, where is the economic threshold?
    Seems the RE industry may have a chicken & egg dilemma.

    March 20, 2015 - 10:04 AM

  • Jack Lifton

    Tim,

    I first heard the 40% illegal production figure in late 2012 from Dr Chen Zhengheng, the deputy director of the Chinese Society of Rare Earths. I’m certain that he, Dr Chen, is also Dudley’s source as Dudley has been at many meetings where Dr Chen was part of the sponsorship committee.
    Let me repeat here that the General Manger of Baoutou Heavy said publicly in August 2013 at a CSRE/ACREI conference in GanZhou, at which I was an invited speaker, that his company alone would produce 30,000 tons in calendar 2013 of surplus cerium, and that the reason for this was to increase Pr/Nd production to meet the growing demand.
    Let the Chinese speak for themselves; they are not hiding anything from the market.

    Thanks,

    Jack

    March 20, 2015 - 10:33 AM

  • Fixed

    What has occurred is that a company (and this would be true no matter what industry the company was in) that has had no profit in the 12 quarters since it began commercial production has reached the point where a ratings agency has decided that it cannot ever make a profit in its present form. This is the meaning of the phrase “not a going concern,” which the agency used in its analysis.

    It is the business model of the firm (in my opinion) Molycorp that has failed to perform, not the rare earth industry. Thank you Jack****. For starters you identified an error on another post, which has now been removed: thank you.

    Now with regards to Jack’s commentary on do not believe everything you read, I too was unappreciative of the article that Jack referenced as the writer in question clearly is like many writers today — in that they do not understand the business, and write for speed.

    This is one of the many reasons I am so appreciative of our editorial team here: they are knowledgeable professionals in their respective industries, and they can tap into a substantial depth of knowledge when they write.

    Thank you for your comments, but the only person dropping by to drink with you this week will be MCP’s IR team as they must be completely devastated that their stock keeps sinking. Again, I have been a supporter of MCP for many reasons and I believed that one of these magnanimous business personalities involved in this financing would have surprised us all with another Hail Mary that MBA students would reference on how investment bankers do protect the interest of their clients for decades to come….

    The stopwatch keeps ticking and as I learned many years ago — stay right to the end, as you never know what will happen. So let’s say that as of today there is 2 rare earth producers outside of China Molly Corp and Lynas. Moly Corp not looking good, Lynas?… as of right now not looking good…Otay spanky who is looking good in reality nobody…as not one other REE wannabe is producing Jack Squatt….so who’s next?… Hmmm…. that is yet to be determined. My bet is you know who who has not annouced a thing for over 4 months now. Other than that let the so called experts tell us right? As Tracy eludes to the fact that it is not over till the fat lady sings also you can pump it all you want but till someone outside China actually produces it’s nothing but hype end of story…lol…

    March 20, 2015 - 4:31 PM

  • Chris

    Dated 3 September 2014;
    Even though the first Memorandum of Understanding signed in 2012 looked at an export 4100 tonnes rare earth to Japan, no trade was taken place yet. This is because India Rare Earths Ltd’s (IREL) processing plant, which was going to supply to Japan’s Toyota Tsusho plant in Andhra Pradesh, was delayed due to certain clearances, driving up the cost of production.

    http://articles.economictimes.indiatimes.com/2014-09-03/news/53522845_1_india-and-japan-irel-odisha-sand-complex

    March 20, 2015 - 5:22 PM

  • Fixed

    Jack just can’t get over the you tube video you did on MRT for UCU at PDAC. Would like to hear Dr. Hammens opinion on all that you said and also would like to hear from Gareth Hatch as it seems he is going to go for adavnced SX vs MRT..Sorry but to me what you were saying was that MRT will not only cure separation of rare earths as being a problem but also may cure cancer…lol… Would love to hear a rebuttle from Dr. Hammen if you don’t mined…lol…no pun intended…As a matter of fact let me ask why Gareth Hatch and IMC have not opted to go with MRT?.. Please explain.

    March 20, 2015 - 6:28 PM

Leave a Reply

Your email address will not be published. Required fields are marked *