EDITOR: | December 17th, 2012

What Will It Take to Make Molycorp Profitable at the Mine?

| December 17, 2012 | No Comments
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421084_300756499982558_169467679778108_853607_1524639484_nConsultants in my area, business development, sell an informed and expanded global perspective to CEOs and Institutional Investors who can only hope to be successful by narrowing their own perspective to the job at hand. My clients come to me for two reasons, 1. My public writings and lectures make them believe, correctly, that I have a more unbiased overview of their business or industry than they do, and 2. That I have enough specific knowledge of their industry’s problems and of the best solutions to those problems for their specific company so that I can save them a lot of irreplaceable time and money when they are seeking to develop or find the best business model to follow.

I’m not an academic with a fall back salary or sinecure, and my success depends entirely on my clients’ success. I don’t therefore write specific or client specific case studies for public consumption, because, I I don’t want to give any hint of impropriety or breech any confidences, because integrity is the hallmark of a business consultant.

Most of the best of my colleagues, who are business development consultants, choose to not comment on active situations of current public interest for fear they will impede their opportunity to be hired by the company upon the operations of which they are commenting.

So, having said all of that, I would like to point out that the only time I have ever been professionally involved with the current incarnation of Molycorp was in May-June 2009 when my expenses were paid to make an invited site visit to Mountain Pass and tour both the mine site and the separation plant and to ask and answer questions on the extent of the deposit, the separation technology in use then, and the marketing plan for the actual products then being produced.

What Will It Take to Make Molycorp Profitable at the Mine?

Molycorp’s current business model, as I can understand it from public records and public pronouncements, seems to be poorly crafted and opportunistic. It has been labeled and described, self-promotionally, as “Mine to Magnet.”  Slavish and scientifically uniformed day-traders along with market savvy professionals, who themselves knew essentially nothing about the rare earth business sector,  feed the gullible investing public with the idea that simply by wanting to be a totally integrated business Molycorp could easily become a credible one. The Molycorp management rather than planning to solve their inherited problems at hand, those of re-starting both a mining operation, shut for competitive and environmental issues, and also simultaneously re-starting a necessary but unique and obsolescent  refining operation, went out and purposefully added to and compounded those problems by tacking on even more complex ones without having the management experience or the necessary skills in-house to comprehend or manage the additional manufacturing technologies  much less develop and integrate them into a comprehensive synergistic marketing scheme.

When any component of the amorphous “mine to magnet” strategy, which “strategy” itself suddenly appeared full grown from the mind of Mark Smith about two years ago, was deemed to be missing then an arbitrary purchase, or investment, would be made of a company that could be foisted on the public as having the “right stuff” to fill the ever growing gap between promise and reality. The stupundits (my shorthand for “stupid pundits”) never asked if any of the acquisitions were already profitable, when acquired, or if any of them fit into the needed volumes or specific products that were supposedly being planned . No one even asked if the acquisitions/investments  would or could continue to be, or ever be, profitable on their own. Thus, as a perfect example, the acquisition of the small American subsidiary  rare earth metal making operations of Japan’s Santoku in Phoenix, Arizona (Formerly owned by Rhodia, formerly to that by Research Chemical, and so on…) “solved” the problem of having rare earth metal making within the integrated “Molycorp” whole.  Another and a  complete waste of Molycorp’s shareholder’s money was the $35 million urinated into a Wyoming Wind Turbine “Research” company so as to be able to announce that this company’s research on  low or no dysprosium rare earth permanent magnet wind turbine generators made Molycorp’s lack of a heavy rare earth component in its ore body irrelevant. The stupundits bellowed that dysprosium no longer mattered, because Molycorp said it didn’t, so the dysprosium problem at least for Molycorp was over, they said.

I know for a fact that Molycorp continued to approach those juniors with heavy rare earth production capability non-stop even after the dysprosium problem was “solved” by blowing money into the wind, but even though I think this shows how feckless were the management and board of Molycorp they seem to have not at all understood the basic utter ridiculousness of a “mine to magnet” program without an assured supply of the heavy rare earth, dysprosium. I believe that one of the reasons that Constantine Karyannopoulos did not join Molycorp’s management at the time of the acquisition of Neo by Molycorp was that his advice on securing a supply of dysprosium and other rare earths was simply being ignored. This alone would have convinced me that Molycorp’s management had no idea how to implement a “mine to magnet” strategy.

I have written elsewhere about the Silmet acquisition, but I must add upon reflection, that I think now that it was even a more foolish acquisition than I thought it was at the time. It added nothing to Molycorp’s “core competency “and no one else had wanted or needed it for a very long time. The point of Silmet was to maintain the Molycorp share price by giving the appearance of expansion. Nothing more.

The Neo acquisition by Molycorp in the first quarter of 2012 was a grand slam for the Neo shareholders; they got to cash out at the very top of a fairy market. For Molycorp’s non-insider-early cash-out shareholders the Neo acquisition was probably just too much opportunism.  It apparently didn’t take too long after the deal closed for the solid competency of Constantine Karyannopoulos’ Neo to make the drab mess of Molycorp look very bad even to the Molycorp board.

Now that you have my opinion of the whole thing let’s consider that from the very beginning of the hypeothon all of the pundits quickly smothered the real question, “Why would Molycorp want to be vertically integrated?,” either because they didn’t realize the question existed or because they didn’t want to be party poopers.

The answer to the above question is: “Because operational and regulatory costs in California make impossible the profitable operation of a freestanding rare earth mine the first stage products of which are not customer specified and not of continuously reliable high purity.” In addition the separation of the mixed products from hydrometallurgical processing into individual rare earth compounds or controlled mixtures of them can only add value if the result is a competitively priced  set of products that are customer specified and in-demand or pre-sold.”

Those of you who do not understand my point need to look at an analogy: What if, for example, Cliff’s Resources, an American iron miner serving the OEM automotive supply chain as a credible, reliable, competitive supplier of iron ore to the North American steel industry for a century suddenly announced that it was reopening mines in Minnesota that had been closed due to being non-competitive and was also going to integrate downstream to make not only steel but automotive components based on the output of that group of mines.   Not only would you and I laugh, but institutional investors would recommend an immediate management change. Just for laughs let me hypothesize that the new Cliff’s business model also stated that all of the alloying elements necessary to make high temperature steels and iron alloys for OEM Automotive component use had been “found’ in the Minnesota deposits.  The new model would also state that any of the alloying elements necessary that were not present were not important. This would be labeled as “stupid,” and the management would be dismissed by an irate board.

Now I come to the real question:

“Can there be a vertically integrated rare earth business model from “mine to magnet” if the mine is not profitable as a freestanding business?”  The non-simple answer is “only if a downstream process can add enough margin on enough gross revenue so that the combined costs are less than the combined revenues!”  Now add together the individual steps from mining to the making and selling of rare earth permanent magnets into an already highly competitive market, and you see that each step must be profitable enough so as not to require the next step to carry its costs as well as its own.  This is a complex business model that, in the case of the rare earth permanent magnet, has, so far never been accomplished.

It is critically important to note here that economy of scale does NOT apply to raw material mining. Mining itself has steadily been growing in cost due to the regulatory environment, the cost of machinery, and the costs of labor. American mining productivity is probably the highest in the world. Thus the only hope of mining more cheaply in America than in a low labor cost country is based on the costs in that competing country rising more rapidly than those in America. This is not the case in the comparison of mining OPEX between China and the USA, although it may occur in the next 10-20 years.

However even if the OPEX of a rare earth mine in the USA and China were equivalent the primary impediment to a “mine to magnet” business model is the very high CAPEX (capital expense) of building a rare earth separation facility large enough to produce enough material to generate enough cash flow in a timely and economically competitive manner . Thus it is very important to note that the world’s currently largest  rare earth separation plant the newly completed 22,000 metric ton a year operation of Lynas in the Gebang Province of Malaysia will at full operation produce just 400 metric tons a week of customer specified end products. Half of its production will be of cerium carbonate mostly used in a relatively low grade version for chemico-mechanical glass polishing. Some 4,000 tons of the remaining material will be delivered as a proprietary mixture of predominantly lanthanum, with the balance being cerium, carbonates for the automotive exhaust emission wash coat and, perhaps, the fluid cracking catalyst (oilfield catalyst) markets. The third product from the Gebang facility will be an ore body determined mixture of more than 4,000 metric tons per year of neodymium and praseodymium in the carbonate form, which will go to an existing metals and alloys supplier to the rare earth permanent magnet alloy market.  This mixture is known by the stupundits as “didymium,” although this is not a well-defined product at all.

The customer specified products from Gebang are obviously not meant to be inventoried. Lynas must pre-sell them in order not to tie up all of its working capital in inventory. In order to do this Lynas must calculate its actual cost of producing each product and this cannot be done until the mine and the refinery are actually running. Pre-sold material, also known in mining as an “off-take” is normally sold for less than the prevailing market price on the day of the sale of the off-take. In the case of the rare earths the end users of the type of products produced at Gebang have recently been adding a premium over future projected competitive costs for the security of a non-Chinese supply.  Some end users will also “index’ prices to an agreed market price to be determined on the actual day the delivery is to take place, but this is very risky to the seller as Chinese market prices have not be reliable and in fact an indexed price can require a discount to the seller on the day of the sale just as easily, in a volatile, market as it may add a premium.  It also cannot be overlooked that an increasing and reliable supply of quality products from Lynas defeats the idea that a premium should be paid for a non-Chinese supply.

Rare earth mining, as is basically the case with all mining, produces little added value to the ore body. And even this in the case of the rare earths, only after the ore has been:

  1. Mechanically beneficiated (i.e. the minerals have been concentrated),
  2. The metal values have been efficiently extracted from the ore concentrate at the lowest cost (this is the so-called “metallurgy” that is overhyped as a step to profitability), and in the case of most rare earth ore bodies in      paricular
  3. Any radionucleides in excess of those allowed for processing or shipping have been removed and legally contained and disposed of

At this point you will or should have a process leach solution or process leach solids containing a mixture of as much of the valuable metal species in the ore as is possible economically.

I believe that the next step in the supply chain is the most critical of all. This is the separation and purification of the contained metal values from each other so as to maximize the value of the key components, the critical rare earth, and any non rare earth, technology metals that can be produced in commercially significant amounts.

Note that in the case of rare earths being byproducts in polymetallic ores it may be possible and desirable to charge the downstream processing of the rare earth process leach solutions/solids against the profits from the separating, refining, and sale of the principal metals and thus to have for sale very low cost rare earth concentrates. This is true for several zirconium deposits, such as Australia’s Alkane, and ironically for China’s largest rare earth production zone where the rare earths can be described as coproducts of iron mining for steelmaking purpsoes.  An advanced development in Turkey produces rare earth, zirconium, and titanium as byproducts from the production of weathered magnetite, which is in demand for thermal coal “washing.”

Molycorp’s Mountain Pass is an uncommon and very large and high grade primary light rare earth deposit, so the value of its products are entirely due to the light rare earths in its ore, bastnaesite. The iron associated with this bastnaesite deposit has no commercial value.

Molycorp’s Mountain Pass deposit, because it has overwhelmingly only the light rare earths, lanthanum, cerium, praseodymium, and neodymium is, as a freestanding operation, a poor choice as a basis for modern rare earth permanent magnets, which critically require dysprosium in addition to neodymium for their construction for their most important market, OEM automotive. The Mountain Pass mine would have been a far better choice to anchor an automotive exhaust emission catalyst wash coat and an oilfield catalyst supply chain. This is a far more limited market, however, that that for rare earth permanent magnet raw materials, and it is a market with a strong non Chinese  competitor, Rhodia, which is not tied down by the costs of mining  and concentrating ore. Rhodia’s La Rochelle, France,separation refinery has been operating continuously for more than 40 years and has most likely, for a solvent extraction based system,  the world’s most sophisticated controls and most up to date extraction technology and efficiency. Rhodia, La Rochelle is also today the world’s largest producer of automotive exhaust emission catalyst base/wash coats (24 customer specified types) and the world’s largest producer of phosphors for non incandescent lighting and display uses (multiple types).

Moreover Rhodia’s Chinese based operations are as large as or larger than those of the former Neo materials, now called Molycorp China, and have been in continuous operation much longer than those of the former Neo.

Since Rhodia does no rare earth mining it is not tethered to the costs of any one mine. It is free to buy from the lowest cost raw material provider. Molycorp on the other hand has two problems associated with owning and operating a mine:

  1. The mine may not be as low cost a provider of ore concentrates as is a competitor, and
  2. The breakeven for the mine may give the mine to magnet strategy too high an overall breakeven and thus require too high a market share to be profitable. This generates the downward spiral of having to lower the      selling price in order to have enough volume to reach breakeven, thus      raising the breakeven as a better placed competitor buys market share.

In 2009 I concluded that Molycorp’s Mountain Pass mine was just then the “right size.” The separation plant, which had been shut down in 2002 by the previous owner, had been re-started in late 2007 and by June, 2009, was producing lanthanum, cerium, and the didymium version dictated by its ore body. It was being fed from what I was told was a “70%” concentrate produced up until 2002 from ore that had been mined until 1998 when an accidental spill shut the mine down and the then owners decided not to re-open it but to work off the accumulated above ground material. By 2002 I was told even without new mining the operation was not competitive with Chinese sourced material delivered to California duty paid (There was a 5% import duty on rare earths in 2002; I do not know if it is still in effect. It would not surprise me if it were).

I was told in June 2009 that the output of the solvent extraction plant was then around 4,000 tons per year. The extractants in use and the parameters for their use (concentration, contact time, temperature. Etc…) were the same, I was told as had been in effect at the 2002 shutdown. I was introduced to the technical director as the only operational manager today (2009) who was with the company in 2002. He was clearly a very skilled chemical engineer and he was quite open and aboveboard about answering my questions.

I do not know the chemical engineering details of Project Phoenix as the upgrade in the size of the output of the Mountain Pass operation is now called, but I do know that you cannot do better than someone else (in this case a multitude of Chinese operators) unless you know exactly what they are doing, how (chemically) they are doing it, and what it costs them to do it. I never have believed that until its acquisition of Neo Materials Molycorp knew much, if anything, about Chinese operations or Chinese progress in and improvements in SX technology.

I have worked on several projects, over the last two years, with China’s leading authority on separation chemistry, Professor Chun Hua Yan of Peking University, and I recently had the pleasure of spending a day with Dr. Alain Leveque, certainly the non-Chinese world’s leading authority on rare earth separation chemistry, who designed and managed the separation chemistry for Rhodia’s La Rochelle plant. Conversations with these two outstanding rare earth separation scientists have greatly influenced my opinion of the current status of rare earth separation technology.  I have also worked recently with Dr. Richard Hammen of Intellimet. Dr. Hammen has pioneered the use of solid phase extraction to separate and purify the rare earths, and I believe that his work may well be a game changer in the costs and breakeven associated with rare earth separation.

I do not believe that Molycorp’s Mountain Pass operations can, as currently organized and as planned-from what I can glean from its sparse public announcements of chemical engineering and cost details-be a competitive basis for a magnet manufacturing or a magnetic materials manufacturing supply chain. It is also too late for Molycorp Mountain Pass to restructure itself to compete in the glass polishing, or catalyst markets.

I do believe that no one is more qualified than Mr. Constantine Karyannopoulos to restructure Molycorp. If the goal is profitability then the restructuring necessary may be dramatic. I would recommend shutting down the Mountain Pass mine and going to the purchased raw material model of Rhodia  and operating an SX plant in California as a tolling operation. I would continue Chinese operations and build upon Mr Karyannopoulos’ pre-Molycorp model to build a world class high grade technology metals supply company specializing in tolling ore tailings and residues and recycling (Such, I believe, is already Rhodia’s evolving business model).  This type of company, a tolling and recycling operation, is the future. It is already uneconomical for any light rare earth mine to build and operate a large scale SX plant. Grade and tonnage are not the keys to producing technology metals. The key is versatility both in feed stocks accepted and in products produced.


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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