EDITOR: | June 1st, 2015 | 10 Comments

Lifton says forget the Wall Street Journal on rare earths.

| June 01, 2015 | 10 Comments
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WSJ-2Yesterday’s (May 31’s) Wall Street Journal had a really poor article about the impending fate of Molycorp, from bankruptcy to failure to meet payment on debts, as it reflects, in the WSJ’s opinion, the rare earth market(s).

The rare earth share market “mania” that began in the USA in 2007 when a group of funds and an entrepreneur bought the defunct, moribund, and on “care and maintenance” Molycorp from Chevron with the stated purpose of bringing it back into production was an attempt to “get ahead” of the “market” as then perceived by this group. This original core group of Molycorp investors had noted that a rapidly growing demand for the rare earths in high tech consumer goods was going to have to depend on the tumultuous but unpredictable (with regard to the impact of governance by the state as well as private interests), Chinese domestic economy, because at that time (as it remains today), China was the overwhelmingly largest producer of rare earths.

Today Molycorp has failed as a business even though it has raised and spent between 2 and 3 billion dollars to re-start its California mine and base-level separation facility. The fundamental reason for the failure of Molycorp has been its business model’s lack of recognition of the fact that China’s success in monopolizing the rare earth space is due entirely to its constructing a total domestic rare earth supply chain feeding into the huge Chinese domestic end user manufacturing industry, which was growing yearly and demanding more and more rare earth enabled components for consumer products and thus driving not only the mining, but also the extraction and separation of the individual rare earths; their transformation into alloys and fine chemicals; and the transformation of these materials into magnets, lasers, catalysts, and medicinal chemicals in turn to be utilized mainly in the mass produced consumer devices, but also to be used in the global petroleum refining industry and to a small but important extent in the manufacture of military equipment and munitions.

It was apparently only this last use of rare earths that was picked up upon by Molycorp’s re-founders and then advertised way out of proportion to its sector’s actual revenues as the driver for the re-starting of a domestic American mining industry for rare earths. How the transformation of the crudely separated rare earths in California into high tech “smart” weapons was to be actualized did not seem to be of much interest to Molycorp’s re-founders. The global exploration “industry” rapidly picked up on the Molycorp Rare Earths’ story and by 2010 hundreds of deposits had been found or re-found and given birth to more than 200 “junior (exploration) mining ventures.”

Market and pricing studies widely available by 2010 clearly showed the limited extent of the demand for rare earths. These same studies also clearly showed that the most value was added to individual rare earths only when they reached a form from which they could be fabricated into end-use products.

Chinese speculators noted and caught the fever in late 2010 and by manipulating the Chinese market they drove spot prices up to unsustainable heights. This in turn drove the share prices of all of the juniors (defined as non-producing exploration companies) into the stratosphere as Wall Street and Bay Street analysts fell all over each other to “cover’ these poorly managed and business-model plan-less ventures and predict share prices based on nothing but a few spot prices in a very opaque market in which no one seemed to notice that supplies continued to flow.

Molycorp alone skyrocketed to a market capitalization of perhaps 25 times the total market value of its rare earth sector position even while admitting that its cost of goods sold was much higher than the costs then believed to be prevalent in the secretive Chinese rare earth industry. Clearly stock brokers were very poor mathematicians but excellent salesmen.

Between 2007 and today there has still not been one single venture begun in North America to produce rare earth alloys or rare earth permanent magnets from them — not one! Therefore the best that any North American junior can hope for is to sell its mixed concentrate either to the between 5 and 10% of global rare earth refining capacity that exists outside of China. Of course that capacity in France, India, Viet Nam, and Japan is already mostly dedicated in-house or is only buying material when it needs make-up. This is not a seller’s market, except for those who produce clean low or non-cerium containing MCRE rich concentrates. And even then the best market remains the domestic Chinese one.

There is some light at the end of this tunnel. A very few juniors are attempting to build in-house capacity to separate the rare earths from clean concentrates, and as Chinese costs move sharply upward along with Chinese demand for consumer goods there is an opportunity for a domestic North American total rare earth supply chain of the right size.

I would advise those still interested in the strategic rare earths to watch the actions of those who know what they’re doing. China’s Shenghe Resources, a vertically integrated total supply chain rare earth company that mines rare earths in China and manufactures rare earth permanent magnets has issued an off-take “contract,” not a meaningless MOU to Tantalus AG for 30 percent of its output from its Madagascar rare earth deposit. In other words Shenghe, which unlike Molycorp, is a profitable vertically integrated rare earth product producer has decided that it is now probable that Tantalus will go into production in the near term. What does Tantalus have?  The answer is a low cost of going into production and an excellent business plan. Note also that one of the world’s premier commodity trading houses, Thyssen-Krupp Metallurgical has also issued off-takes to Tantalus and to Burundi’s Rainbow Minerals for MCREs. So rather than a New York brokerage or a university professor advising you on what stock to buy you can simply follow the lead of a profitable and successful rare earth company in China, Shenghe, or of a successful and profitable global commodity trading house in Germany, Thyssen-Krupp Metallurgical.

Forget the Wall Street Journal on rare earths. Watch the actions of real rare earth producers and traders. Oh, and by the way watch carefully both the lithium and graphite junior/senior markets as they either enter into strategic alliances with vertically integrated producers; or become one themselves; or as successful global traders select them for survival and profitable production by issuing off-takes. Did I mention uranium off-takes? Oh well you already knew about that as a barometer for survival and profitability, didn’t you?


Jack Lifton

Editor:

Jack Lifton is the Sr. Editor for InvestorIntel Corp. and is the CEO for Jack Lifton, LLC. He is also a consultant, author, and lecturer ... <Read more about Jack Lifton>


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Comments

  • Jack Lifton

    Bob,

    Can you accept the fact that SRK may have been wrong? Can you accept the fact that Molycorp’s production may well be coming, and have been coming all along, mostly from ore concentrates shipped to China and Estonia? And can you accept the fact that COGS as stated in company news releases may not be an accurate representation of the situation? Do you think that Molycorp is shipping massive amounts of raw materials to China and Estonia because it is MORE EXPENSIVE to process them in those places??
    According to Mr Bedford there are still problems right now with processing at Mountain Pass. Unfortunately, for investors in MCP, that seems to be true.

    June 1, 2015 - 1:28 PM

  • Tim Ainsworth

    That’s quite obvious from the spike again last QR in water haulage costs, plus the ongoing high levels of inventory write downs.

    Moly has never quantified LREC volumes, completely masking the volumes of separated oxides each Q, let alone what’s on spec.

    June 1, 2015 - 5:59 PM

  • Jack Lifton

    Tim,

    Thank you for pointing out that some of us have taken note of what Molycorp hasn’t done.

    Jack

    June 1, 2015 - 6:46 PM

  • charles.1

    I struggle to understand the German approach in the Molycorp story, or Tantalus + Rainbow as eluded to by Jack. Siemens signed a 10 year deal with a company in its death throws. Thyssen signs contracts for supply from two of the world most corrupt countries, one of which is in “civil unrest”. There are clearly many things I don’t get.

    June 1, 2015 - 11:38 PM

  • Tim Ainsworth

    Lol VB, doubt that meets any standard of disclosure as to “quantified LREC volumes”, certainly not in the sense I intended, an open accounting of separated oxide tonnage vs LREC.
    Actually the 77% figure has been quite easy to work out each QR from the Financial Results Table 4: Segment Information where External & Inter-segment values have been reported separately but as you suggest it is not conclusive that ALL inter-segment sales are in fact LREC, although quite likely the majority.
    If you look over the various QR you will not the proportions do in fact vary quite a bit, Dec 14 Q was 52% yet the ASP shifted only marginally, not what you would expect if the inter-segment was totally LREC.
    Probably of equal importance is how much of the Mt Pass NdPr is onspec and what exactly are the “Inventory write-downs”, circa $29M last Q?

    June 2, 2015 - 8:10 AM

  • Chris Donaghue

    It will be very interesting to see who is the next rare earth producer outside of China? Might it be Tantalus, or Alkane?

    June 2, 2015 - 11:12 AM

  • Tim Ainsworth

    Q for Jack & Steve M, at what point in the process is Moly drawing the “LREC”?
    Presumably post C&L, which maybe speaks to SX?

    June 3, 2015 - 7:35 AM

  • Pedro

    Chris, it looks like it will be Chile with its BioLantanidos Project, starting production next year, as stated yesterday on bloomberg.

    June 3, 2015 - 9:25 AM

  • Caterpillar

    Since when do off-take agreements without upfront payments mean anything more than MOU’s or LOI’s? I expect an industry insider to know better.

    June 19, 2015 - 4:59 AM

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