EDITOR: | January 6th, 2016 | 18 Comments

Molycorp, (The Last) Chapter 11 Exit

| January 06, 2016 | 18 Comments
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Lifton_JackThere is now a good chance that Molycorp will finally exit the scene with a last act that was unfortunately very foreseeable. The latest, probably ultimate, chapter of the Molycorp drama has it that the state-owned-enterprise, Chalco, or, as it is sometimes called, Chinalco, China’s largest producer of aluminum and one of the six SOEs tasked by the central government to reign in, restructure, and manage a section of the Chinese domestic total rare earth supply chain, is thought to have made a substantial bid, far above the company’s self-assessed valuation, to buy ALL of the non-US assets of Molycorp. In other words, Chalco is bidding to buy the former Neo Materials and, perhaps, the former Silmet in Estonia.

I am not really surprised by this action as it has been a year now since Chalco’s now subsidiary, Shenghe Resources, which operates a total rare earth supply chain in China, bought an off-take and a participation in the Madagascar deposits of Germany’s Tantalus, AG. After that I personally knew of Shenghe approaching two North American juniors. I noted at the time of this activity that it had become apparent that Chalco-Shenghe was operating under the new outreach/outsource paradigm for sourcing critical materials put forward as part of the 5-year plan for 2016-20 by China’s President Xi. This is at least a partial break with China’s past practice, but I do not think that Shenghe (Chalco) has ever been doing more than testing the waters, so to speak, with regard to buying or joint venturing with North American mining ventures. North America is perceived in Chinese business circles to be a hostile environment politically, and this perception is correct at least with regard to natural resources. After all the only reason that the Chinese petroleum industry did not acquire Molycorp in the first place was the hostility to its offer to buy Unocal in the early 2000s. At that time China was after Unocal’s deep sea drilling expertise and technology and Molycorp was just baggage.

I am therefore not surprised that Chalco has specified non-USA assets. It does not want nor does it need any more high cost sources of light rare earths, and the now closed rare earth magnet alloy plant in Tolleson, Arizona has not been profitable since 2012 due to the low cost of Chinese competition. It does however want Neo’s expertise in magnets and alloys, and with that acquisition Chalco would be the world leader in bonded rare earth magnets and would acquire the Singapore and, I believe, Thai R&D operations of the former Neo Material. I suspect also that Chinese engineers could improve Silimae’s SX operations, and since feed stock, would no longer be a problem it could use it as a base to aggressively enter the European markets. This would not be welcome by Solvay.

As I’ve said before China may now move to acquire Lynas, if for no other reason, than to cut Japan off from its currently best non-Chinese source of light rare earths. But the growth of Viet Nam and India in the rare earth space may lessen the value of Lynas to China.

In order to succeed in meeting, the targets for the current 5-year plan China will need not only more lithium than it can produce domestically, much more, but also better technology for battery graphite, and foreign (to China) sources of cobalt.

I predict that China will now look even more to Australia, and Africa, and add both South America, and The South Pacific for the additional critical raw materials it needs to achieve its goals in pollution reduction and the replacement of fossil fuels by alternate energy sources.

All I know is what I see and hear myself, and what I read in the (Chinese translated to English) newspapers, journals, and books. I sometimes wonder if US government planners even do that…


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

  • JJBeswick

    Seems to me any Chinese acquisition of Lynas would be a very expensive exercise.
    There are NO major investors in the company. The Chinese would need to buy shares on market to achieve the magic 20% equity at which point a takeover attempt becomes “official”. They can then make a formal takeover offer to the (mostly small) shareholders.
    They will need to hope the Japanese, who see Lynas as a strategic resource, won’t make a counter offer. I’m sure the Japanese would.
    In the meantime the SP would be spiraling up to a level I may well be willing to accept.

    January 6, 2016 - 11:08 AM

  • Janet

    What a saga this has been, thanks for your insight on this.

    January 6, 2016 - 3:07 PM

  • Jeff Thompson

    Very interesting that China made inquiries into two North American rare earth juniors, even if it was just to test the waters. In retrospect those testing of the waters are often seen as the icebreaker that made the unexpected happen. Just like the girl you asked to the junior high school dance on a whim and then ended up marrying her. America needs to decide, and decide soon, if there is any real interest in funding a primary source rare earth mine and/or cleaner separation techniques, before the rest of the world decides for us that they value our assets more highly than we ourselves do.

    January 6, 2016 - 3:17 PM

  • Ben

    Great article, Jack. Thanks for that. Possibly your explanations could have been the cause (speculation) of the mysterious rise of Lynas stock last year.

    January 6, 2016 - 8:16 PM

  • Lok Chong

    Who is to say that China has not been using proxies to get over the 20% mark before it makes a move to corner the last lady standing? Lyons share will fall back to the low digits before being swallowed. The Japanese has their hands tied, and then the Diaoyuthai sage really begins….

    January 7, 2016 - 2:58 AM

  • JJBeswick

    Still chasing the SMSL dream Doc?
    Interesting take you have on the Diaoyutai/Senkaku Island Issue.
    Last round the Japanese did indeed have their hands tied; a freeze of Chinese RE exports was all it took to get their fisherman freed in Sept 2010. By November that year Sojitz and Lynas had signed their strategic alliance to “secure additional supply of Rare Earths
    products for the Japanese market …” and by the next June JOGMEC and Sojitz delivered the funds to double the LAMP’s capacity.
    The Japanese hands are no longer tied and there’s no way they’ll let that situation recur.

    January 7, 2016 - 7:49 AM

  • Alastair Neill

    Jack,
    As always a thought provoking article. Just wondering how Shenghe can help Silt’s RE process as Silmet uses a nitric process which is not used in China due to historic lack of good stainless steel and the cost of nitric acid. Also with the closure of Mt. Pass Silmet has lost its source of raw material which Shenghe cannot replace as it cannot ship concentrate from China. Maybe they will send monazite from other sources. They still have the Ta and Nb business which is restarting.
    Do you think this will add impetus to other non-Chinese projects as Lynas currently would be the last one standing?

    January 7, 2016 - 7:00 PM

  • Jack Lifton

    Alastair,

    I am speculating, and I admit that I never thought about the SX system used at Silmet, but you are, of course, right about the Chinese use of chloride feeds for SX rather than the Solvay, Europe, nitrates system. I think that the primary target of Chalco is the former Neo operations, and I don’t know how Silmet fits into the structure of Molycorp’s non American assets. Silmet was acquired separately in time from Neo, and as I recall it was before Neo.
    Chalco-Shenghe would become the world’s leading producer of bonded rare earth permanent magnets at the stroke of a pen, and it would pick up the Magnequench Singapore Lab, which has an excellent reputation. I also heard today that more than one Chinese Gang of Six SOEs is interested in bidding. I think that the Molycorp insiders who hoped to finance a re-structuring under their management are about to go out on their “ears.”
    I think that this will all be resolved shortly.

    Jack

    January 7, 2016 - 8:33 PM

  • Alex

    May be Chinese will sale Silmet back to Russian SMZ owner ?
    I was told that Silmet was sold to Estonian former prime minester for 12 milions USD, then he sold it to Molycorp for 80 milions USD.

    January 8, 2016 - 2:31 AM

  • Jack Lifton

    Alex,

    I hadn’t heard that story, but it makes me interested in the valuation given to Silmet in the bankruptcy and reorganization proposals of the company. As I recall Molycorp paid 90 million dollars to a “Russian” group in Zurich and 10 million to Treibacher for the acquisition. Is that correct?

    Jack

    January 8, 2016 - 10:58 AM

  • Alex

    Tiyt Viahe first sold control (51% or so) to Russian at 2006 for 12 millions and then bought it the same price back . and then sold to Molycorp most of part shares and keep himself 10 % as I know. Treibaher had 5% of shares as I know and also sold it and get Brasilian shares

    January 8, 2016 - 1:28 PM

  • Jack Lifton

    Alex,
    So are there any other owners NOW except Molycorp??

    And was SILMET profitable before the sale or, if you know, afterwards when Molycorp owned ir-or owned most of it?

    This is a very interesting story

    Jack

    January 8, 2016 - 4:06 PM

  • Alastair Neill

    Jack
    To my knowledge Silmet Nb/Ta business carried Silmet during the low prices for RE around the start of the millennium. The consistent supply from Mt Pass and spike in prices around 2010-2012 I am sure the RE business was very profitable but it is impossible to know as the Silmet RE business was in the RE part of Molycorp while the Nb/Ta business was in the special metals business of Molycorp. No idea how one would value Silmet without a consistent RE raw material supply.
    If I remember correctly the total business was sold to Molycorp for $100M so there should be no other owners involved.

    January 8, 2016 - 10:24 PM

  • Tim Ainsworth

    Moly 2014 AR

    Page 51:

    Chemicals and Oxides
    The Chemicals and Oxides segment includes: production of rare earths at Molycorp Silmet; production of separated heavy rare earth oxides and other custom engineered materials from our Molycorp Jiangyin facility; and production of rare earths, salts of REEs, zirconium-based engineered materials and mixed rare earth/zirconium oxides from our Molycorp Zibo facility.
    Rare earths and zirconium applications from products made in this segment include catalytic converters, computers, television display panels, optical lenses, mobile phones, electronic chips, and many others.
    At our Chemicals and Oxides segment, we develop and sell rare earth-based oxides for all the major emission catalysts manufactures. Several factors are driving an increasing demand for emission catalysts, including the accelerating shift of vehicle production to the BRIC countries (Brazil, India, Russia and China), the continuous development of new emission
    catalytic solutions and an overall tightening of environmental regulations around the world.

    Page 59:

    2013 Operating loss > $88M
    2014 > $220M

    ASP $34.49kg > $27.42kg

    “due to the decline in rare earth prices and the resulting reduction in profit margins, our Chemicals and Oxides segment recognized an impairment charge of $125.2 million as of December 31, 2014 to write-off the carrying amount of its goodwill related to the Molycorp Canada acquisition. As of the same date, we recognized an impairment charge of approximately $90.3 million related to certain customer relationships and other intangible assets resulting primarily from the lowering of long-term growth estimates related to shifts in technology affecting certain end market applications.”

    January 8, 2016 - 10:58 PM

  • Alex

    Jack I had answered you by e-mail.
    SILMET was working from 1980 s and also was the Defence Stock Rare-Earth Center of USSR, so after 1990 the Estonian got a lot of Rare-Earth stocks. Then was difficult period to find Buyers at world market of rare earth.
    As for SILMET it was not publick company and it was part of chain with the same owners. Lavozero Mining-SMZ-Silmet , so it were owners decision which company will be profitable.
    It was monopoly and monopsonick buyer and supplyer at that time.
    Molycorp-Silmet-NEO – I don’t know was they profitable or not because NEO able to buy alloy at China and in SILMET.
    Now SILMET may be interesting for Mining-processing company which want to get buyer of rare-earth carbonate and producer of rare-earth with existing brand of quality. Because when you produce new product you need 2-3 year to check your quality at supply chain of Buyer.
    So, those juniors mining which plan to produce carbonate and going to alive may be interesting SILMET, too.

    January 9, 2016 - 3:07 AM

  • springer

    Alex, happy to see true experts talking about Silmet. What is your view on Silmet buying REE carbonates from Russia and possible Russian interest on buying Silmet from Oaktree & co.? Your statements indicate that integrated mining&processing set-up in the past could be a great template today. Regarding juniors and tolling – are there any juniors around today (!) with stable non-radioactive feedstock. It takes also time to adjust existing SX to new feedstock.

    January 9, 2016 - 3:53 AM

  • Alex

    Your questions need to answer by owners of SMZ, I have no relation to them.
    Generally, the second supply chain need beneficiar of magnet patents and producers of Wind turbines and cars. To keep this profit in supply chain Mining-Carbonate-Separation-Alloy-Magnet-Wind Turbine or Cars need beneficiars of final products. The Chinese wanted to get their part of profit rising prices on alloys for magnets. But instead of give some part of profit back to Chinese , beneficiars prefer to ask ROW for second supply chain for security of their supply. The second supply chain means additional suggestion on the market of rare earth and possibility to buy rare-earth goods with low prices for beneficiars of final products. But the problem that beneficiars of Final Magnets goods and Investors of second supply chain which invest in rare earth mining-processing are different.
    So, one need to invest in CAPEX and other keep their profits and buy goods with low prices.
    As for SILMET , the Indian or Brasilian or Lynas carbonate (if radioactivity level is according European standart ) plus transportation expenses can give estimated price . Russian supply also possible but now the price are on the bottom and I belive that Russian producer not need long term supplying contract with SILMET, may be contract for each three month only. I belive that supplyers can not donate their buyers too long time, they will died or rise prices.

    January 9, 2016 - 12:48 PM

  • Alastair Neill

    Based on my understanding Silmet can only separate La, Ce, Nd and Pr so this rules out any heavy feedstocks. Unless a buyer invests in additional separation. They would either have to do this with high CAPEX as they would need to use stainless steel and nitric acid to tie into the existing process. Russian sources presently are sporadic at best and historically were not reliable given the long supply chain and each part now trying to make a profit. Not sure of the costs at Silmet but the drop in Nd/Pr will put a crunch on the RE component of their operation.

    January 12, 2016 - 12:49 AM

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