The rebirth of a Western Rare Earth industry
Molycorp’s shares are trading at the lowest point yet; they have crossed the negative side of the ‘not so magical’ USD 6.00/share floor this week, finding bottom at USD$ 5.73/share on the last Thursday in February and started to recover a little on the first day of March. Many stocks experienced a topsy-turvy trading week and many could attribute the moody pattern to the fears about the results of the Italian elections and their impact on the Euro – and as a result on prospects for a European economic recovery. However, Molycorp has no such luxurious excuse; its stock has been feeling the impact of its decision to postpone the filing of its fourth-quarter report with the Securities and Exchange Commission.
Molycorp needs more time to calculate – or perhaps to prepare investors’ stomachs – the sum of a goodwill impairment charge that will be noted for the fourth quarter related to its USD$ 1.3 billion acquisition of Neo Materials (Molycorp Canada) last spring. This news stings all the more given how it contrasts with news that Lynas Corp (ASX: LYC) has officially launched production. Apart from Molycorp, then, Lynas is the only listed company outside of China able to supply rare earth metals, from mine to finished product, in 2013. Indeed, Lynas is producing rare earths in Malaysia, with ore from its own deposit material in Mount Weld. The level of production will soon rival Molycorp as the Company expects to produce 11,000 tons of REE in the second quarter of 2013.
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Accordingly, Lynas shares rose by at least 4.3%; Molycorp dropped by twice that percentage. Nevertheless, is Molycorp actually the one that should be blamed? Perhaps not. Demand for rare earths exists. The U.S. Department of Energy estimated in late 2011 that there was a real risk for the production of wind turbines with synchronous motors using permanent magnets treated with dysprosium. These engines are very popular because they are much more efficient than induction motors using copper, improving performance and usability – given that they can function with less wind. Then there are the heavy rare earths (europium, terbium and yttrium) powder phosphors needed in video screens and light bulbs. In 2010 China produced 81% of magnetic alloys for permanent magnets; 13% were made in Japan and North-East Asia (i.e. South Korea), 2% in the United States on foreign license and 4% in the rest of the world including Europe.
A similar pattern explains the geographic distribution for producing powder phosphors. China is not the one to blame for its dominance – and why should it? After all China was handed the rare earths industry dominance on a silver (perhaps masquerading as dysprosium) platter. Europe and the United States, in contrast, have sinned by lacking vision and strategy; they have squandered their expertise and scientific knowledge and not just in rare earths. Indeed, the technology for processing rare earths has completely American and European (mostly French) roots.
The chemistry to separate rare earths speaks was developed in France thanks to the experiments by Paul Lecoq de Boisbaudran (1838-1912) who discovered samarium and dysprosium and Georges Urbain (1872-1938) who discovered lutetium and invented fractional crystallization. Then there is the Manhattan Project, which resulted in the atom bomb while also leading to devising a hydrometallurgical process (ion exchange and later solvent in 1953) to process rare earths. The Manhattan Project first explored the separation of lanthanides before separating radioactive actinides. In Europe, there was the good sense to maintain separation and purification technology at La Rochelle. Molycorp and Lynas were supposed to help reverse the trend, also because China itself may soon to go beyond its domestic rare earths supplies. Technology is increasingly controlled by China. This is odd because the patents for separating and processing rare earths are owned in the West (and Japan). General Motors and Sumitomo announced discovering the process to make neodymium-iron-boron magnets in 1982.
Magnequench, originally a subsidiary of General Motors, was established in 1986 to produce Nd-Fe-B magnets in Anderson (Indiana). Then there was the beginning of the end of the western dominance. In 1995, Magnequench was sold to Sextant Group, an American but Chinese controlled company, which then promptly moved the production line to China in 1998, shutting down US operations. Magnequench returned to the West through Neo Material Technologies, a Canadian corporation acquired in 2012 by Molycorp, whose concentrates required for the production of permanent magnets are still exported to China.
The Molycorp woes are, in a sense, keeping the United States dependent on China for neodymium-iron-boron. Hitachi of Japan now owns the original Sumitomo patents after the 2007 merger between Sumitomo Special Metals Co. and Hitachi Metals. There are also agreements between Hitachi and cross Magnequench. Overall, the framework is favorable to the rebirth of a North American or Western rare earth industry. For Molycorp, the question now is to what extent the write-down will affect its long term business. If we assume that the mine-to-magnet business is the right approach, then the write down will have very short term impact and one probably already absorbed by the market over the past two days. Molycorp’s strategy may yet pay off; however, it will only become a winner if the West changes its attitude to technological know-how – sending it off to cheaper labor markets simply to save a buck has been a short-sighted policy and not just in rare earths.