What does Molycorp Inc.’s bankruptcy have to do with the price of rare earths in China? Some analysts say everything, while other experts in the field point to other weaknesses as the root cause of the American REE Goliath’s undoing.
When China put a chokehold on its exports of rare earth elements in 2010, Molycorp was already well on its way to seizing the opportunity to reopen the Mountain Pass Mine in California, an operation hailed for its ability to re-establish an American supply of these coveted high-technology minerals. As a result of this move to be a major non-Chinese source of rare earths, Molycorp stock rocketed from around US$10 per share in April 2009 to US$74 a share one year later. Five years hence, stock in the American rare earth miner has plummeted to less than US10 cents per share and in a bid to keep Mountain Pass in operation the company has filed for protection from its creditors under Chapter 11 reorganization.
While rare earth prices are only a fraction of what they were when Mountain Pass went into production, at least one rare earths expert contends that Molycorp’s troubles are largely a product of dumping too much money into restarting the California rare earth mine and not enough into the needed supply chain infrastructure.
“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,” Jack Lifton, a technologies metals consultant, wrote in a June 1 column for InvestorIntel.
Despite the plight of Molycorp, Lifton believes there is hope for other companies that are looking at building smaller rare earth mines on American soil and have invested the resources into developing the requisite downstream technologies.
“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,” Lipton wrote.
Ucore Rare Metals Inc., which is advancing the Bokan Mountain project in Southeast Alaska, Rare Element Resources Ltd., which has applied for permits to develop its Bear Lodge project in Wyoming, are two companies that fit Lifton’s description.
Bokan Mountain and Bear Lodge both have healthy percentages of the more highly sought heavy rare earth elements, and both companies have developed innovated technologies to separate the tightly interlocked rare earths.
Rollercoaster rare earth pricesWhile business strategy played a role, Molycorp’s sharp rise to notoriety and precipitous fall to bankruptcy tracks a similar rollercoaster-like curve of REE prices.
For example, europium oxide rose from US$475 per kilogram in 2008 to a peak of US$3,800/kg in 2011. Today, this mineral used as a red phosphor in televisions has fallen to about US$225/kg. Most of the rare earth oxides – including dysprosium, terbium and neodymium – followed similar tracks.
By the time Ucore completed a preliminary economic assessment for Bokan Mountain, prices for rare earth oxides had settled off their peaks but were still significantly higher than they are today.
At the time, the three-month trailing average for dysprosium oxide was US$948/kg compared with the current selling price of about US$250/kg for the highly magnetic mineral. Likewise, the three-month average price for terbium oxide was US$1,840/kg, this mineral that provides the green in trichromatic lighting is now selling for about US$535/kg; and neodymium, another highly magnetic mineral, averaged US$102/kg in 2013 and is now fetching around US$60/kg.
An August 2014 pre-feasibility study for Rare Element Resources’ Bear Lodge project reflects the lower rare earth oxide prices of the time that are still higher than today’s prices.
Coming feasibility studies for Bokan Mountain and Bear Lodge will likely take into account lower rare earth prices; many analysts, however, believe these high-tech metals are heading higher.
Middle Kingdom rules rare earthsWhether it is skyrocketing prices in 2010 or lower rates today, the global market price is largely due to how much China sells and the price the country asks for them.
This ability to control the sector results from a monopoly on world supplies of rare earths. Prior to the re-opening of Mountain Pass, China supplied roughly 95 percent of the world’s rare earths. Today, even with the California mine in operation, the Middle Kingdom continues to control 86 percent of the market, a share that will return to around 93 percent if the Molycorp restructuring results in the shuttering of Mountain Pass.
The Middle Kingdom gained this dominant position by flooding the market with rare earths in the 1980s. By offering these elements at a fraction of the going rate, mines outside of China, including a previous iteration of Mountain Pass, were uneconomical and forced to close.
Over the ensuing two decades, China has reigned as the global low-cost supplier of rare earths, and these elements have become increasingly important ingredients in a wide range of modern products such as terabyte hard-drives that fit in the palm of your hand, high-efficiency power generation and guided missiles.
China’s 2010 announcement that it was cutting its exports of critical rare earths to green energy, high-technology and defense by upwards of 40 percent sparked a price explosion that was fueled further by an over-exuberant market worried about a global shortage.
The Middle Kingdom’s chokehold on global supply and excessive export taxes on REEs prompted the United States, European Union and Mexico to file complaints with the World Trade Organization, charges the global commerce group upheld.
Citing environmental concerns, Beijing appealed the ruling. In 2014, WTO rejected the appeal and China lifted its rare earth quotas at the beginning of 2015. The country, however, said exports have not reached the quota cap since 2011, due to weak global demand and rampant smuggling.
The WTO decision prompted China to lift 15-25 percent export tariffs on rare earths, a move that pushed prices lower.
Beijing, however, replaced the export tariffs with a resource tax for rare earths and other metals.
Hangpo Shen, an economist focused on China’s rare earth market and editor for InvestorIntel, said the new resource tax will likely push prices higher.
“China’s rare earths prices will continue to drive north as the taxes will have to be increased as the environmental costs are factored in,” he wrote in a May InvestorIntel column.
Court weighs Molycorp’s fateNo matter the price of rare earths in China, Molycorp’s fate rests in the hands of a bankruptcy court in the United States.
Ultimately, Molycorp would like to restructure its US$1.7 billion of debt and get US$225 million in additional funds to keep Mountain Pass in operation.
“The actions we have taken today are important steps toward achieving a restructuring of our US$1.7 billion debt with our major creditor constituencies. In doing so, the company expects to exit Chapter 11 with an appropriate financing framework to support our business going forward,” explained Molycorp President and CEO Geoff Bedford.
A group of investors that already hold US$650 million in secured Molycorp bonds have agreed to front the additional funds. In return, these investors – led by JHL Capital Group, JMB Capital Partners and QVT Financial LP – would swap their debt for a majority stake of Molycorp when it emerges from Chapter 11.
Oaktree Capital Management, which provided Molycorp with a US$250 million emergency financing in 2014 and has liens on segments of the company’s operations, argues that another big financing is unjustified and would only serve to put the rare earth miner further in the hole.
U.S. Bankruptcy Judge Christopher Sontchi agreed with Oaktree’s argument and approved a smaller US$22 million interim debtor-in-financing provided by an affiliate of Oaktree. These funds will be used to pay immediate expenses such as payroll and vendor bills. This will provide Molycorp, Oaktree and the other major debtholders time to work out a longer term strategy.
Oaktree wants Molycorp to split the Mountain Pass Mine, which has been a money- losing proposition, from Neo Material Technologies, a company Molycorp bought in 2012.
Neo, which produces and develops iron-boron magnetic powders, rare earths- and zirconium-based materials, and other rare metals, has been the profitable arm of Molycorp.
Oaktree’s investments in Molycorp are largely secured by Neo assets.
The debt owed to the investors led by JHL Capital Group, however, is primarily secured by the Mountain Pass Mine.
The Mountain Pass debtors argue that a split would result in mothballing the mine they have a vested interest in, in favor of the profitable downstream metals producing business.
All sides will have an opportunity to make their case during a hearing scheduled for July 20; in the meantime Mountain Pass will continue to churn out rare earths in California’s Mojave Desert.
Once the dust settlesDespite Mountain Pass’ troubles, there is still hope for the next generation of United States rare earth mines – including Ucore’s Bokan Mountain, Rare Elements’ Bear Lodge and Texas Rare Earth Resources’ Round Top project near El Paso.
Unlike Mountain Pass, all three of these projects are rich in the more valuable heavy rare earths; and smaller mines requiring less capital are planned.
Looking ahead, Lifton believes that once Molycorp’s bankruptcy dust settles, Neo Technologies could play a role in the success of three next-generation American rare earth producers.
Through the formation of strategic alliances and off-take agreements with Rare Elements, Ucore and Texas Rare Earth, Neo could emerge as a “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,” the consultant said.
“I believe that global capital would support such moves, and it would be difficult for the U.S. federal government to avoid involvement,” he penned in a July 2 column for InvestorIntel.
The price of rare earths in China, meanwhile, will continue to factor in the profitability of mining these important materials in the United States.