EDITOR: | July 2nd, 2015 | 35 Comments

Lifton leaves Oaktree to Molycorp

| July 02, 2015 | 35 Comments
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oaktree-capitalI have never met anyone from Oaktree Capital nor have I ever spoken with anyone from that company. So either they read my rare earth industry analysis or, as it is said, “great minds think alike.”

In a classically Freudian outcome, the thing acquired (Neo Material Technologies Inc.) has consumed the acquirer (Molycorp Inc.).

Since I learned of the complete failure of Project Phoenix to meet any deadline at all for production, quality, or profitability I have been saying that the Mountain Pass Project Phoenix was a failure. The acquisition of Neo in early 2012 was, at the time, an expensive flailing for credibility. There certainly at that time was no plan for Neo to take over or supplant the original Molycorp, but time and the professionalism of Neo’s management simply overwhelmed the completely unprofessional and unqualified original Molycorp management.

The result is that an unprofitable and un-fixable Mountain Pass mine has again been put on “care and maintenance.” I doubt that it, or the feeble Project Phoenix will rise again from the ashes. The great bird is dead.

The skilled workers who tried to follow the antagonistic orders of company management and outside contractors will now go into the wind. I am sorry for them, because it is unlikely that employment at Project Phoenix will be a good thing to have on a resume. However it will be a better reference than saying you had been a manager at Molycorp, Mountain Pass.

Oaktree’s proposal to provide debtor in possession financing is contingent upon Mountain Pass’ operations being “mothballed” and Neo being offered for sale. This has got to be good news for Constantine Karyannoupoulis who will now get a chance to buy back his original company at what will most likely be a fair, if distressed, value. I will bet that Oaktree is already arranging the financing for that.

So, all that having been said, heres my advice to Constantine Karyannoupoulis:

  1. Form a strategic alliance with Rare Element Resources with Neo constructing a right-size solvent extraction separation facility using RER’s patented technology near the RER mining site in Wyoming,
  2. Give an off-take to RER for enough of the market critical rare earths they will produce to allow the company, RER, to finance the project,
  3. Commit to using the high purity rare earths produced by RER to support an American domestic supply chain wherever and when ever possible, and
  4. Give off-takes for heavy rare earths to both TRER and Ucore produced by whichever technology either company uses with the possibility of toll refining the rare earths from any or all of these off-take agreements with the best technology.

Completing line items 1-4 above would mean that the three American companies would have off-takes with a profitable existing Globally savvy rare earth company to supply not only an American domestic market but an Asian market where their particular raw materials are much in demand right now.

I believe that global capital would support such moves and it would be difficult for the US Federal Government to avoid involvement.

I suspect that Oaktree Capital in fact has this scenario in mind.


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

  • Michael Schuss

    What about the environmental liabilities of an abandoned mine in California?

    July 2, 2015 - 2:53 PM

  • Jack Lifton

    Michael,

    You bring up a very good point. The mine will go to “care and maintenance,” which means technically that it is dormant not shut down, but even so the site has to be maintained according to all environmental permits. As recently as March Molycorp paid nearly 4million dollars to haul waste water to the Utah depository with which it has a contract. It has a zero discharge “permit” from California, so the site will have to cleaned up and kept clean with no possibility of water or ground contamination. This is costing millions and will continue to be a liability. Note that when the liquids are drained from the Project Phoenix system they will have to be discarded or stored with strict adherence to environmental regulations. This could be a nightmare of costs. This is one of the reasons that Molycorp had not already shut down Project Phoenix.
    Decommissioning contractors will make a fortune. If I knew who they are going to be and if they were public I would buy their stock right now. The last shutdown from 1998 through 2004 was a walk in the park compared to what this one is going to be.
    There is quite a bit of corroded pipe and tankage on the property, which will now no longer be able to be called work-in-progress (the repair fantasy). It will have to be decontaminated and removed. More wet dreams for the decommissioning contractor and nightmares for whomever is financially responsible.
    Stay tuned.

    July 2, 2015 - 3:43 PM

  • JOE O

    Jack,
    My lord did I get destroyed on moly.
    I should have listened to you 3 years ago LOL
    I do own UCORE, TRER and REE
    So I agree with you re: neo

    July 2, 2015 - 6:52 PM

  • Investor

    jack, as always a pleasure to read your articles but I have major problem with this one.
    Constantine is an experienced campaigner and at heart a true chemical engineer, the one who understands the most important trait of a rare earth project -mineralogy. He also has experienced geologists working for him. He knows that advice you are providing is hype journalism.

    RER, TRER and Ucore have no hope whatsoever, geology and mineralogy 101 is a simple explanation.
    Neo needs to go for heavy rare earth project or projects which are shovel ready and real. You should know at least one such a project but in a true “objective journalism spirit” have decided not to mention it!

    July 2, 2015 - 10:54 PM

  • Joe o

    Why would ree,ucore and Trer have no hope?

    July 3, 2015 - 1:48 AM

  • irishrover

    One question Jack. What happens to Sikmet? They totally relied on Mt. Pass for feed as did the Northern Neo plant in China. RER and Ucore are years away from production. How can they access feed in the interim?

    July 3, 2015 - 2:13 AM

  • Steve Mackowski

    Jack – your solution is pretty close to what I have been saying for a while without being specific on who the players are. Their technologies and ore bodies are not the critical factors. The ability of their management to put such a deal together is the key. Partnerships are not a populist model in my experience, but is seen as essential to make the US model work.
    For my model I kept Mountain Pass as a central processing facility. It is licenced, operating at break even once it can get its volume fixed, and has the workforce.
    As a reminder, the Molycorp debt position is a result of paying too much for Neo, and being unable to meet its start up projection.

    July 3, 2015 - 2:18 AM

  • charles.1

    While I agree with plenty of your comments Jack, today isn’t one. To attach the success of Neo v2 to and un-permitted light rare earth project with early stage “technology” sends the whole US REE story down the same road as GWG. Half stories that never match and a business plan build on crazy risk. Neo needs real supply contracts from real suppliers – all internal Chinese deals, but that is the industry we have bred.

    July 3, 2015 - 2:25 AM

  • Tim Ainsworth

    Jack, I’ve been right thru the list of Material Safety Datasheets from Molycorp Magnequench nee Neo “Composition / Information on ingredients” http://www.mqitechnology.com/isotropic.jsp and the only rare earths employed are Nd, Pr, Ce & La.
    Shouldn’t think Con K. will have a great deal of difficulty negotiating attractive LT supply contracts from alternate suppliers, in & out of China, for those materials, with zero CapEx/execution risk.
    Last time I looked there was one older composition using a small percentage of Dy but that now appears to have been superseded.

    Why would Neo/Con K. want to go anywhere near the mining/primary processing of RE again? Particularly when the loss of patent last year has resulted in downstream customers becoming competitors with a resulting loss of pricing power? Neo will need to source their Nd, Pr, Ce & La as competitively/securely as possible, without launching off into any fresh upstream adventures.

    July 3, 2015 - 3:32 AM

  • Investor

    Tim and Charles you have my vote this weekend. Steve and Jack you obviously have Greek’s vote!
    Steve is still not getting it and Jack is pretending that he is not getting it.
    To say that ore bodies and technologies are not critical factors, I have to ask if this is the same Steve M who has written all these articles?
    I do not buy into the US model talk. The correct model is the one which makes money. To make money upstream the key is to have right deposit (grade + mineralogy) along with scale and technology.

    July 3, 2015 - 3:45 AM

  • Jack Lifton

    Tim,

    I first met CK when we were both speakers at a Research Capital event in Toronto showcasing rare earth juniors in 2007. I asked him why he did not seem interested in buying or being associated with a rare earth junior miner. His answer was that rare earths were volatile commodities and the revival of their mining outside of China would be hugely expensive and there was no guaranty that prices would support such ventures. He further said that his business was a service business that added value to rare earths and that his customers bore the risk of price volatility not Neo.
    I was therefore surprised when Neo was suddenly sold to Molcorp in 2012, but my surprise was tempered by the enormous premium Molycorp paid for Neo.
    The acquisition of Neo by Molycorp in 2012 for a fair price would have still resulted in a 1 billion dollar debt burden at bankruptcy. The premium paid for Neo removed any cushion of cash or time that CK had to right the sinking ship after he was given control.
    Neo on its own seems to still be, as it was before, a “going concern.” CK’s task if he regains control of an independent Neo will be to keep it that way in a very different environment in China than when he sold it originally.

    Jack

    July 3, 2015 - 3:49 AM

  • Tim Ainsworth

    Exactly my point Jack, following Moly’s QR’s by segment you could make a case Neo is back roughly where they were in 2009, the last full year’s earnings prior price spike, with USD19,684,000 net profit. http://quote.morningstar.com/stock-filing/Annual-Report/2009/12/31/t.aspx?t=:NEMFF&ft=&d=6e3375aca8123840894234bae260561b

    This is the company that Moly paid $1.2B for at the height of speculation, virtually 60x “normalised” earnings. Largely financed by debt & SH equity, totally beyond me how anybody could have realistically expected a $20M company, loaded up with debt, to bale out the almost non existent mktg plan & marginal assets of Molycorp. “Mine to magnets” indeed.

    Should that 2009 $20M net profit represent the approx scale of a re-emergent Neo Con K (presumably) will have his hands full just stabilising the business in the face of fresh competition.

    Let’s not beat about the bush, DIP finance is NOT an investment in the RE industry, simply financiers trying to salvage something from the mess they aided & abetted.

    July 3, 2015 - 4:49 AM

  • Tim Ainsworth

    Re your effort to put a constructive spin on immediate prospects I’ll make the observation from a mug punters POV that the US will not develop a RE MSC of any consequence while the big end of town, GE, GM, Ford, APPL, et al, seem more than content sourcing their RE enabled componentry from China, with some effort to engineer out the expensive stuff.
    Apart from their apparent reluctance to move anywhere upstream to create a market where on rare earth will they CapEx come from without their involvement?
    Best of luck to anyone wanting to tap mug punters & insto’s anytime soon. German & Japanese companies seem light years in front from what I can determine.

    July 3, 2015 - 5:03 AM

  • Jack Lifton

    Tim,

    Unfortunately you are most likely right about a “US owned” RE MSC, but do not discount the idea of a European or Asian Global1000 player setting up a US sited RE MSC. So long as American manufacturers are continuing to outsource their is no domestic demand associated with manufacturing or, to be accurate, not enough domestic demand to justify an American owned RE MSC, but European costs, lack of innovation, and lack of investment opportunities may well lead in the near term for some European companies to consider outsourcing to the USA even for REPMs and REPMMs as Chinese costs and political reliability continue to be challenging.

    Jack

    July 3, 2015 - 9:12 AM

  • Tim Ainsworth

    Like this: http://www.chemicals-technology.com/projects/lanxess-neodymium-polybutadiene-rubber-singapore/

    “The decision to construct the plant on the existing site at the Jurong Island Chemical Park was announced in June 2011. The location was chosen because of its easy access to raw materials, the availability of skilled work force, and existing infrastructure facilities in the region. The site’s proximity to a seaport and customers in Asia further gave impetus to the decision.”

    The Kuantan curry laksa didn’t rate a mention.

    July 3, 2015 - 9:42 AM

  • Jim

    If big companies want non-chinese….then Lynas is ready and waiting for their order.

    July 3, 2015 - 9:43 AM

  • Sluggo

    It was my understanding from all of the collective intelligence garnered from this site over the years, that China was all but totally depleted of some of the most critical HREE & were searching the planet near & far to purchase those deficiencies. Is my understanding incorrect? Thanks.

    July 3, 2015 - 4:48 PM

  • irishrover

    Sluggo
    Yes the Chinese claim to be running out but since they do not drill like Western companies to JORC or 43-101 no one really knows how much HREE is in China.. Until consolidation mining was done by small operators. 10 years ago it was announced there were decades if not a century of deposits and over ten years this has dropped (officially nudge, nudge) to critical levels. They have looked outside China. I believe in a move to diversify and escape the unknown future direction of policies inside China

    July 4, 2015 - 12:55 AM

  • fatfretter
    July 4, 2015 - 1:40 AM

  • Tim Ainsworth

    Sluggo, Table 1 gives you an estimate of RE reserves by country as at 2000, Table 2 provides a distribution by Chinese region, not quantified.

    Some interesting commentary on the complexities of the Bayan Obo polymetallic deposit as a bonus, little wonder they are pushing downstream.

    http://www.eurare.eu/docs/eres2014/firstSession/XiaoshengYang.pdf

    July 4, 2015 - 4:43 AM

  • Sluggo

    irishrover & Tim: Many thanks & happy 4th.

    July 4, 2015 - 12:27 PM

  • Tim Ainsworth

    Should have added from Steve’s excellent tech pieces here:

    “As an example, the Baotou REO mineral is bastnasite. The grade of the mineral concentrate entering the chemical processing plant is approximately 50% total rare earth oxide (TREO). However, the recovery of TREO from the ore after beneficiation is less than 25%. Why is the recovery so low? Most REO projects are reporting beneficiation recoveries of >80%! The reason is the mineralogy. If a higher recovery of TREO is attempted, the process also pulls significant iron bearing minerals. In fact so much iron that the impact on the downstream processing plant does not warrant the additional CAPEX and OPEX to “manage” that excess iron. The Baotou people have been investigating how to improve the TREO recovery whilst keeping the impurities down for many years, obviously without success.”

    July 4, 2015 - 12:44 PM

  • charles.1

    Some great contributions and thinking in the above. I think you have hit the nail Jack – “So long as American manufacturers are continuing to outsource there is no domestic demand associated with manufacturing or, to be accurate, not enough domestic demand to justify an American owned RE MSC”.

    The US had the opportunity to secure a supply chain, but made a mess of it. But it was a supply chain based on mining in the US and selling into China – doomed from the outset. Major US companies were silent – happy to continue to outsource as there were too many missing links in the US, and they had greater problems than REE’s.

    Japan and Germany have a lot more collective thinking that the US. Not easy – but better able to be coordinated. Japan is sorted – Lynas+India+Vietnam and that is enough. To consider German companies being involved in any meaningful way in the US is a bridge or 5 too far. Mining in US and sending to Germany? Mining in US and sending to China? No a chance IMHO.

    July 5, 2015 - 6:56 AM

  • Steve Frazer

    @Jack – For many years I have been an avid reader of your articles; a voice of reason in the Internet wasteland.

    On the surface, you have this one right of course, but there is a new bird being hatched. Do not write off Mt. Pass quite yet. Regards

    July 15, 2015 - 8:05 PM

  • Alex

    I was at Molycorp during excursion for Conference delegates. They are working well, but can not sale goods. They have in stock too much Nd-Pr oxide, La2O3 and CeO2. They thought they can be supplyer for ROW rare earth Buyers but REE world has monopsonick buyer – Japan. So, for security of supply US goverment (or who need this security) have to donate Molycorp to keep them at the market. Other variant to be included to Japanese sapply chain (for japanese security but I don’t think they will give them profit, just pay expenses for not died). But they already have Lynes – to keep them for Japanese security supply.
    Third variand to minimize yeld only for demand of Neomaterials supply chain, if this case price of materials will be competetive or Neomaterials will donate Molycorp supply for sefety resons

    July 16, 2015 - 3:06 AM

  • Tim Ainsworth

    Alex, why would Moly have stockpiles of La when global sales are running around 2008 levels at 14ktpa and the US is importing 4ktpa from China for FCC? Particularly when Moly has an offtake agreement with WR Grace?

    Perhaps the same reason somewhere around half “production” appears to be “LREC”, mixed concentrate, sent halfway around the planet for final separation.

    July 16, 2015 - 11:49 AM

  • Jack Lifton

    Tim,

    I wonder about exactly the same thing. BTW, Is not the material imported from China for Grace produced as an ore concentrate at Mountain Pass??

    Jack

    July 16, 2015 - 11:55 AM

  • Alex

    They have La2O3 in stock so much that they keep it at open square , (it means they have no place at warehouse) , so if it’ll be rain the goods will be damage because La2O3 keep water.

    July 17, 2015 - 2:13 AM

  • Alex

    I don’t know are they ready to sale La2O3 for 2 USD per kg ?
    I belive that they hope to sale it expansive but Chinese price is lower.

    July 17, 2015 - 2:16 AM

  • Alex

    And for FCC it is possible to use La-95-90 – Ce(5-10) mixeches of Nitrates not nessasery to produce La2O3 as pure oxide. More tecknologycally to produce nitrates in production then produce it from oxide

    July 17, 2015 - 2:22 AM

  • Tim Ainsworth

    Alex, quite convinced precipitation will make it expansive, but rain in Ca & RE prices are like two flies climbing a wall ATM.

    Point is, why does Moly have stockpiles while China is shipping 4ktpa into the US? As you suggest, certainly don’t need 5N La into FCC, any old crap will do.

    July 18, 2015 - 9:04 AM

  • Alex

    Tim it is better to ask US Buyers then me why USA companies buy from China instead of Molycorp. I guess because of price or competition. (may be Molycorp want to be supplyer BP, EXXON or other oil companies directly not as a part of supply chain via WR Grace.

    July 18, 2015 - 9:23 AM

  • Tim Ainsworth

    Alex,if you look at WR Grace’s history back to 2007 you’ll understand why they were a foundation offtake for Mt Pass, if not THE foundation offtake.

    Details, along with 2010, 11 & 12 AR have been deleted from Moly’s website, but is it unrealistic to expect WR Grace demand to run < the 300t per Q that Mt Pass may have been producing, less tariff, less shipping?

    July 18, 2015 - 9:46 AM

  • Alex

    Molycorp produced 1500 t at Q1 – it means they can produce 6000 t per year – 800 t Nd-Pr (40 USD per kg), and 2000 t La2O3 (2-3 USD per kg) per year
    May be I was mistake that they can not sale La2O3 – it were at open square just because fast delivery .
    But why they need chapter 11 this case.

    July 19, 2015 - 4:29 AM

  • Tim Ainsworth

    Alex, of the 1269t “sold” what proportion was non separated mixed concentrate transferred in-house, on spec & off spec separated oxides?

    With an ASP of $8.56 there was not a great deal of on spec NdPr in that mix.

    LREC has been unquantified since inception, why?

    July 19, 2015 - 5:25 AM

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