EDITOR: | August 31st, 2015 | 26 Comments

Lifton on why Molycorp failed.

| August 31, 2015 | 26 Comments
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What makes a successful mining venture? The answer is the bringing into production of a mine the products of which sell for a profit. It’s as simple as that. Yet when you look at the web site entry “about us” on almost any junior mining venture you are told only that this corporate officer or that director has top school credentials and professional credits and has already made money for shareholders of previous ventures. But upon examination it almost always turns out that the money was made for those others who bought the shares low and sold high. Just about none of these previous ventures became successful producers of profitable products. This classic smoke and mirrors approach reached an all-time high with Molycorp, which was not only started with the very best credentials but was the best seller of sizzle with no steak that anyone ever saw, and I think, was more responsible for the rare earth boomlet than any other single factor.

Factors such as the commodity super-cycle and the manipulation of markets by inscrutable villains from the Far East pale before the psychological impact of “It was started by a major Wall Street investment bank, you know!” “They MUST know what they are doing.” They did and they do.

Junior mining ventures can not make money by producing goods, so their shareholders can realize short term gains only by themselves manipulating the share price through announcements of resource size advances or predicted low cost operations or  “understandings” with downstream customers, who themselves are stock market darlings. Mines take 10 years from resource discovery to production, so there’s NO way to make profits during the first 10 years of a venture other than to buy the shares low and sell them high.

I personally look upon Molycorp as a flawed business model and in my opinion, a perfect illustration of how money cannot buy success. In fact Molycorp’s glaring error was that it did not “war-game” either the long term availability of markets for its products or the probability of success of its attempt to build the largest ever rare earth separation plant to jump over the heads of all of its competitors in economy of scale.

Again, in my opinion — I think that Molycorp’s failure was due to its control by financial engineers rather than mining and chemical engineers and a good marketing staff.

The addition of Constantine Karayannopoulos to Molycorp’s management was the right idea but it was too late. Project Phoenix was already sinking, perhaps had already sunk, under the weight of poorly thought out decisions by financial managers looking down on the chemical engineers who were trying to make a silk purse from a sow’s ear.

Institutional investment awards its highest accolade “a good long term investment” only to those startups with good, financial and technical operations management and with a good marketing plan.

Mining is a long term investment. If you are investing only for the short term and you invest in mining then that’s just the category you have picked to play in the stock market’s casino.


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

  • whaleblubber

    I believe that somewhere in the mix of causal factors is the duping of the market by the big end of town. Hyping and pumping of MCP remains legendary–weren’t some of the big and heavily invested institutions calling for a share price well up into the $70 range? The company also played a role in this. For years they always seemed to be able to come up with some “new revelation” when needed to boost slumping share prices. I recall one time when they all of a sudden “discovered” they had a big ore body rich in HREE. In my opinion the company’s demise is a net plus for the domestic ree industry. For years they cast their dark shadow over others and now, finally, the sun can shine through and reality can prevail. The collective loss of $100s of millions by retail investors is a shame. Certainly, the MCP story will become a textbook example, meriting at least a sidebar, of how not to develop a company.

    August 31, 2015 - 3:38 PM

  • irishrover

    I would agree with you Jack that this was a financially engineered company led by people with no understanding that this is NOT a mining business but a specialty chemical business. The problem began with an excess of wealth (easy funds) managed by a group that assumed the prevailing wisdom is BIGGER IS BETTER. No where has a 20,000 TPY plant been run. The Chinese run modules of 3-5,000 TPY max. Economies of scale do not really exist in separation, to a large degree. If one train is out of balance it does not affect the whole operation. The SX line was beast that had to be fed consistently but with upstream problems this just highlighted the lack of understanding by previous management. Agree when NeoMaterials team was brought on the Titanic had already hit the iceberg

    August 31, 2015 - 7:27 PM

  • Tim Ainsworth

    First day outside lock up: secform4.com/insider-trading/1489137-3.htm

    Nice work if you can get it.

    August 31, 2015 - 10:58 PM

  • Jack Lifton

    Tim,

    I’m not a subscriber to that service. Can you take a screen shot (or two) of whatever you think is most “informative” and share it??

    Thanks’

    Jack

    August 31, 2015 - 11:05 PM

  • writing on wall

    When I first heard of moly Corp , I was an unemployed contractor in 2011. of the downturn in the economy, I saw an ad in the newspaper, it read now hiring operator trainees. I applied, and was hired with the promise of how the company was going to take care of me and that this would be the job that I would retire from. I bought all of it, because I wanted to believe. From the beginning at the two week mine safety orientation they preached safety . I am not going into detail but they did not talk the talk and walk the walk. They seemed to throw away money by purchasing big ticket items such as motors , pumps and agitators, some of these items cost upwards of 50 to 100 thousand dollars. When these products did not fit the designed application , they were set aside and never used. I never saw an thing sent back to the manufacturer for credit. For the most part, I rarely saw upper management, but they would always offer overtime. In the 2 and a half years I was there I did not see one loaded flat bed with product leave the property, so I know the company was not turning a profit. As a former small business owner myself, I saw the writing on the wall from the beginning.

    August 31, 2015 - 11:17 PM

  • Tim Ainsworth

    Sec Filings Insider Trading – Molycorp Inc. (MCP)

    http://www. secform4.com/insider-trading/1489137-3.htm

    Roughly $3Bn stripped out by Board, Mgt & VC’s in two tranches @ $50 & $51, earliest opportunity Feb/March 2011.

    Immediately after selling $180M of converting prefs:

    http:// phx.corporate-ir.net/phoenix.zhtml?c=236277&p=irol-newsArticle_print&ID=1527936

    That’s punting.

    September 1, 2015 - 1:14 AM

  • Ricki

    A good article. Sometimes the truth hurts. Unfortunately I think some of the juniors out there will make the same errors claiming to be “different” or “special.” Some of the management don’t even have the good credentials or top university background that you refer to and would be better suited selling second hand cars than selling mining projects. In the end the free-market sorts them out but not before shareholders have bought the bull sh** and management run for the hills having personally profited by dragging projects out over the years.
    If it’s not too late my advice to shareholders is do your homework. Have management ever delivered any mining project to market? Don’t believe the slick talk.

    September 1, 2015 - 2:25 AM

  • charles.1

    How on earth can the former senior management of Molycorp still be working in our industry? Are our memories so short or just a true demonstration that there really is a sucker born every minute. Karayannopoulos was a great choice for a turn around, but the ship couldn’t be righted even with quality leadership.

    September 1, 2015 - 2:31 AM

  • Tim Ainsworth

    From 1972 clever journo in Oz wrote a weekly column under the pseudonym Pierpont, of Blue Sky Mines, critiquing the more colourful “adventures” in the resource space. He employed liberal doses of satire to get away with printing far more than he could have otherwise.
    Often browse his archives when I’m feeling a little “adventurous”, and usually don’t. The more things change, the more they stay the same.

    “Blue Sky Mines

    Blue Sky Mines (No Liability Except At Gunpoint) is Australia’s most notorious company.

    The chairman is Sir Mark Time, a doddering old bonehead who was chosen as a figurehead because he doesn’t have enough intelligence to realise the dreadful plots that his fellow directors are eternally hatching against the investing public.

    The rest of the board comprises Pierpont, Spender the accountant, Bottle the geologist and Penwiper, our poor but dishonest company secretary.

    Pierpont devises schemes for robbing the shareholders, Spender stretches generally accepted accounting principles to their rubbery limits, Bottle salts the mineral deposits and Penwiper forges minutes of meetings that were never held, complete with Sir Mark’s signature.”

    pierpont.com.au/bluesky.htm

    Sykes would have had a field day with Aunt Moly.

    September 1, 2015 - 4:24 AM

  • Jack Lifton

    Tim,

    When it became obvious that the original investors and their representatives (sometimes known as the “board”) had cashed out for at least 2 billion I made the point that Molycorp was at that point a completed project of financial engineering. The blogosphere descended upon me with a load of bull**** that endlessly repeated the mantra that the founders “deserved” the payout due to their taking the risk of funding the “re-start.” When I tried to point out then that Molycorp had at that point (just as now) accomplished nothing at all in the way of competitive production I was further inundated with the bovine material from the blogosphere’s collection of what the financiers knew was an almost endless supply of useful idiot’s providing them with other people’s money.
    I now realize by the way that Goldman’s rather precipitous withdrawal from the pack of original investors before the IPO was not only a judgement of the long term viability of the project (which was correct) but, I really think, a case of not wanting to be part of such a chaotic project, or, at least, not wanting to share a cabin on the good ship “Short Term Profits.”
    The 4 original investors in the just now failed version of Molycorp put up 80 million dollars to buy the company and spent 42 million more before the IPO. They reaped 3 billion from this investment in just 4 years (2007-2011). Although the original investors had a 2,400% gain nothing at all was achieved by Molycorp for its target markets. The gain of course was from other people’s money and the largesse was shared by many storied brokerages who also cashed out. Remember that at one point Molycorp had a market “valuation” of 6 billion dollars, so we can surmise that many outside traders shared in the loot.
    Now let’s get back to building the right size non Chinese rare earth industry to service the real markets if possible.

    Thanks, Tim, for the information

    Jack

    September 1, 2015 - 8:01 AM

  • Relic

    Molycorp was indeed the success of financial engineering over commercial sense. Molycorp has only ever been, essentially, a producer of cerium oxide. A “commodity” seriously oversupplied , even before the advent of western supply. The hike of its price to US$ 130/kg, only served to reduce world consumption by a half!!! This consumption never to be recovered!!
    The market can occasionally produce an environment where the force of market sentiment, timing and reckless hype can have such a volcanic impact on a stock price!! Through all this Molycorp has never changed from what it has always been, a producer of cerium oxide, a commodity which has always been in significant oversupply, remains in significant oversupply and cannot be produced economically at these market prices, or prices anywhere close to market prices. Whilst we were all lost in the hyperbole of Wall street investors forgot to look at what was in the ground!! The ‘mix’ of rare earths is the overriding consideration, if that looks appropriate then the cost of separation comes next. Given the example of Molycorp, there should be no more examples of “ordinary” deposits being developed. Only very special resources can warrant investment.

    September 1, 2015 - 8:41 AM

  • Tim Ainsworth

    Well remember Jack, equally your comments around the same time as to the potential difficulties of scaling up these ROW plants well beyond anything the Chinese had achieved after 20 odd years, Lynas @ 11ktpa modules & Moly @ 19ktpa.
    Took an extraordinary multinational effort, French, Chinese, Japanese, Australian & Malaysian, together with some high quality Mgt, to JUST get LAMP over the line, and doesn’t sound like Moly even got close.

    September 1, 2015 - 9:40 AM

  • Tim Ainsworth

    But Relic, who could forget these “News” Release’s:

    Dec 11: Molycorp Secures Government Approval To Conduct Heavy Rare Earth Exploratory Drilling

    “Preliminary exploration at the site has shown rare earth mineralization with an average ore grade of approximately four percent and a relatively high percentage of heavy rare earths, such as terbium, dysprosium, europium and samarium, as well as relatively high percentages of yttrium, neodymium, and praseodymium.”

    http://phx.corporate-ir.net/phoenix.zhtml?c=236277&p=irol-newsArticle_print&ID=1640432

    Aug 12: Molycorp Announces Start-Up of Heavy Rare Earth Concentrate Operations at Mountain Pass, Calif.

    ” Molycorp, Inc. (NYSE:MCP) today announced the start-up of its new Project Phoenix heavy rare earth concentrate facilities at Mountain Pass, California, which will produce heavy rare earth concentrate from freshly mined Mountain Pass ore that will then be processed into high-purity, custom-engineered heavy rare earth products in Molycorp’s globally integrated production facilities.”

    http://phx.corporate-ir.net/phoenix.zhtml?c=236277&p=irol-newsArticle_print&ID=1728934

    September 1, 2015 - 10:03 AM

  • Jack Lifton

    Tim,

    I couldn’t agree with you more. I visited the LAMP several times during its construction and I happened to be there on the day it commenced pilot production. It was professional technical management all of the way. Some outside contractors made mistakes early on, as in all large construction projects, but today I think that the LAMP has most likely the lowest OPEX on earth for a light rare earth separation plant-far lower than anything in Bayanobo! You are also right that there were French, Chinese, Indian, Malay, and Australian engineers, managers, and workers who impressed me with their expertise and work habits.

    I have spoken extensively with past and present workers and engineers who were either employed by Molycorp or were outside contractors to Molycorp. The impression I personally got from all of them was of chaotic technical mismanagement driven entirely by financial and administrative managers with little knowledge of either the specific issues or of the whole project. Even if these individuals with whom I spoke were 100% of the “sour grapes” type the failure of Project Phoenix to operate indicates either poor planning or inability to execute a good plan. In either case the market has resolved the issue.

    Jack

    September 1, 2015 - 10:44 AM

  • Positroll

    Re: LAMP:
    just tough luck for them that prices for many LREE have fallen below any reasonable level. If you look closely at ALKs FEED release you’ll find that ALK now plans to seperate out La/Ce at the DZP, just to put it on a heap for better times (later than 2020). Looks like ShinEtsu told them to keep that crap in Australia so it doesn’t clog its toll treatment plant …
    Alk will also seperate out Yttrium at the DZP, but that still commands a reasonable price (while being of no interest to ShinEtsu), so they’ll sell that directly to third parties …

    September 1, 2015 - 12:49 PM

  • Jack Lifton

    Cerium and lanthanum have never had sufficient value to make their recovery a primary goal. Those who staged the 2011 price run-up scam had to vastly overprice both ce and la so that the “basket price” would soar sufficiently to underwrite the ruse. No one was asking at that time why ce and la prices were soaring. The insiders were too busy suckering funds as well as widows and orphans out of their money. Prices at the margin, even single spot trades were being reported as price discovery data.
    I noted then that large mining companies, the seniors, did not buy any deposits nor put any of their deposits into development. They had seen all of this type of commodity boom before, and they were busy making money hand over fist through base metals and fertilizer already long in production.
    Now that the Chinese markets have joined the Chinese governments as controllers of output I suspect that even the seniors are taking another look at securing reliable supplies of technology metals.

    September 1, 2015 - 1:46 PM

  • bassett

    To compare the LAMP facility (in Malaysia)with one built in probably what could be described as the most environmentally scrutinized state/Nation in the world (California/USA), and to actually have that facility at Mountain Pass be pretty close in OPEX is something you conveniently don’t mention at all. Do you think Lynas chose to ship all of its ore across the ocean with added expense just for the heck of it?….no, they did so in order to evade the added environmental and safety scrutiny that would have been placed on them in Australia, and unfortunately, operating a mining and separations facility such as Molycorp has, and in a more ethical manner does come with costs and sometimes those are very high.

    September 2, 2015 - 3:18 PM

  • Fatfretter

    Building the right sized non-Chinese rare earth company, where have I heard that before?
    Using other peoples money seem to be mantra of Billingsley,Engdahl, Levier and associates formerly of gwmg. Pity any, sucker born every minute, who invests in Star minerals or Platinum, they are at it again!
    Hard to find any Data on Douglas Trust, the new Owner of the Steenkampskrall mine and LCM formerly gwmgs’ assets, which they are acquiring for a paltry sum, holding it in trust until the market returns and gwmg re-purchases it with new financing. More Huxterism I’m afraid!!

    September 2, 2015 - 3:45 PM

  • Jack Lifton

    Basset,

    The LAMP is an extremely clean operation, and its continuing operations have been and are scrutinized and are being monitored in detail by the Malaysian government’s environmental authorities who are politically under the gun and so are quite diligent.
    Lynas chose Malaysia because its costs of power, water, and labor are FAR LESS than those same costs in Australia.
    The LAMP is not just a solvent extraction based separation operation it is also an ore processing plant. Very little processing of the ore is done in Australia, and since it is far richer in rare earths than the ore at Mountain Pass less of it has to be shipped than you might imagine. It is my understanding that there is between one and two years of ore already in Malaysia and that the mine is to be operated in campaigns so that the LAMP inventory is kept up at that level.
    The managers who designed, built, and operate the LAMP were far more practical, skilled, and experienced than those who tried to create Project Phoenix.

    Jack

    September 2, 2015 - 4:00 PM

  • Jeff Thompson

    If Lynas is successful in their plans to ramp up sales outside of Japan (such as to Europe and the U.S.), do they have meaningful amounts of the heavy rare earths they can sell, or are do they primarily supply light rare earths such as neodymium and praseodymium? Would this still leave room for the development of one or several of the North American juniors who are heavy-rare-earth-focused?

    September 2, 2015 - 7:23 PM

  • Jack Lifton

    Lynas deposit is 95% LREEs and 5% SEG + HREEs. So, if they produce 22,000 tons a year they will produce just 1100 tons of SEG +HREE.

    Today the SEG+HREE concentrates are sent to France for separation.

    There is plenty of opportunity for producers of SEGs and HREEs in North America, Europe, South Africa, and Australasia.

    September 2, 2015 - 9:21 PM

  • Jeff Thompson

    Thanks, Jack, good to hear the potential overlap is small. My hope is that with many of the emerging market economies and some of the developed economies showing weak or reducing GDP growth, and the U.S. economy looking stronger relatively speaking (if not in an absolute or historical sense), that perhaps the North American juniors may be in an improved position to attract the capital needed to finance pilot plants and/or full mine construction. I think there will be a macroeconomic tailwind for those North American juniors in the next year (particularly if the Federal Reserve bank finally begins raising interest rates at a time when most other countries are just beginning their money-printing phases), of course somewhat offset by the depressed commodity prices, but there could be an opportunity for them to shine soon.

    September 2, 2015 - 11:02 PM

  • RareEarthKing

    Go TRER! Go UCORE! HREE + CREE rich deposits! Smart business model!

    September 3, 2015 - 12:48 AM

  • Hannibal

    This afternoon I had the opportunity to visit the Molycorp Mountain Pass mine, fifty-four miles south of my home in Las Vegas. The lack of mining activities would have have been the focus of my observation had it not been for a more notable and touching sight, that of an American flag flying prominently at the facility entrance. I wish Jack had the opportunity to view what I viewed. There’s little doubt it would have left a lasting impression, knowing his patriotism and patriotic support for the American REE mining industry. Let us hope that Molycorp in one form or another is eventually successful.

    December 19, 2015 - 7:49 PM

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  • bassett

    yes Hannibal, it certainly will be a shame if all that was accomplished, and the money spent recently at Mountain Pass, was all for not.

    I’m not sure why, but Jack has really never had anything good to say about Molycorp going back many many years. In some instances, his articles almost read as though he was once wronged by one or more of the executives and it comes across as very personal, and that he, almost, seems vindicated by the failure at the Mountain Pass mine.

    That’s a real shame because I personally know of the immense effort and intelligence put forth by hundreds of professionals that worked at that mine. I will tell you that he is correct is saying that the pre-Neo executive team completely failed the company and Project Phoenix. They took their eye off the ball when RE prices were skyrocketing, greed and financials took over, and critical design elements were overlooked. However, even with all those roadblocks, the sustained production rate before the shut down hit levels much higher than you’ll hear Jack or most other analysts speak of, and honestly they probably weren’t aware of. Unfortunately, no production rate could offset the loses due to price of RE’s. This is exemplified in the recent Lynas 6 month report ending Dec. 31, in which they grew revenue by 43%, but still faced a $66.1MM loss.

    Yes, Molycorp was the first to the finish line, but if nothing changes throughout 2016, unfortunately, Lynas will be facing a very uncertain future as well.

    March 14, 2016 - 4:13 PM

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