In June, Molycorp, Inc., a rare earths miner, filed for Chapter 11 bankruptcy.
The situation did not seem as dire, until recently. In 2011, Molycorp was one of the favorites of many equity investors, which prompted a dramatic rise in its share price after China, the world’s largest producer of rare earths, had introduced export restrictions which caused end users in the United States, Europe, and Japan to panic.
Indeed, rare earth metals are elements essential for the production of magnets, batteries, and high-strength alloys used in anything from cellular phones to optics. They are also necessary to make modern weapon systems, especially missile guidance systems, making these minerals a national security priority.
The Second Bull Market in Rare Earth Metals is Just Beginning
Investors and market experts were certain that companies like Molycorp would give end users a viable alternative to sourcing rare earths from China, ensuring a sustainability of supply. Unfortunately, the Chinese export restrictions scared many manufacturers to look for rare earth alternatives rather than waiting for Molycorp and others like it to reach full capacity.
This, combined with delays and inefficiencies at the company’s Mountain Pass mine in California, and a daring $1.0 billion acquisition of magnet manufacturer Neo Technologies in 2012, dealt Molycorp a financial breach that ultimately sunk the company, taking down optimistic investors with it.
Moreover, easing rare earths export restrictions in China, starting in 2013, as a partial response to a World Trade Organization (WTO) edict which put pressure on Beijing to act made Molycorp look pointless in the context of the market. Still, Molycorp is not entirely out of the rare earths game.
Geoff Bedford, Molycorp’s current president and CEO, replaced Mark Smith. Smith’s exuberance and optimistic forecasts helped inflate the company’s stock bubble in the 2010-2012 heyday. That said that Molycorp’s units in Estonia and China will continue to operate and play a key role in many key sectors worldwide. As part of the bankruptcy procedures, Molycorp has agreed to a $1.7 billion financial restructuring plan to provide up to $225 million in proceeds to support operations while the company deals with creditors.
Today, Molycorp’s shares stand at 11 cents—a galaxy very far away from its highs of over $74.00. Indeed, for the past three months or so, since Molycorp failed to meet minimum NYSE requirements, the company had to stop using its former NYSE:MCP ticker symbol.
So, if Molycorp failed so egregiously, is there still a market for rare earths? The answer to that question is best explained by another question: Is there a market for smartphones?
Indeed, rare earths are 17 chemical elements in the periodic table whose atomic composition makes them ideal conductors of electricity. Some, like dysprosium or neodymium, make for very powerful magnets. Therefore, these materials are used to make electronic equipment, special alloys, batteries, magnets, and glass varieties.
Molycorp’s investors received a very expensive and quick lesson in mining economics that the term “rare metals” does not actually mean these minerals are rare. They are actually rather abundant. The expense comes in finding the right ones in the right grade while devising the ideal processing method.
This is because rare elements are found in such common minerals as xenotime, mingling with many other elements, often including uranium and or thorium, which make separating them very complex. The latter two metals, prized for their radioactivity, generate environmental concerns, which the West is all too happy to leave to China to confront. That’s why so much of rare earth technology and mining shifted to China about 30 years ago.
Today, China is the 800lb. gorilla—or panda—in the rare earth space. It dominates and dictates the market, producing more than 95,000 tons a year, accounting for 95% of world demand while having 60% of world reserves. It should be noted that not all rare metals are the same. There are two general categories: heavy rare earth elements (or heavy rare earths HREE), and light rare earth elements (LREE). They are divided according to their atomic number on the periodic table.
For basic investment purposes, those mining companies producing a high percentage of HREE are the ones that have value. The LREEs are not as rare and do not have such sexy applications. And what kind of rare metals was Molycorp producing at its Mountain Pass mine in California? Yes, the light and cheap stuff featuring such elements as cerium and lanthanum.
The kinds of metals that are in demand are dysprosium and neodymium, which are still almost entirely produced in China. This has alarmed Western countries where much of the innovation requiring rare metals for manufacturers was based, leaving companies dependent on Beijing’s whims for supply.
As it happens, even while Molycorp is crumbling, rare earth demand is higher than ever. Some of the rare metals used in high-tech products, from PCs to mobile phones in the coming decades are actually becoming harder to source according to a study by the Yale School of Forestry & Environmental Studies.
Triple Your Money in Rare Earth Metals
Chinese producers are complaining about what they perceive as oversupply in the rare earths market now. But, with electric cars becoming more popular and electronic devices, from phones to guidance systems for drones, demand for these minerals in the longer term can only expand.
New prospective miners in the United States, Canada, and Australia—some in Europe as well—have learned the lesson from Molycorp’s experience. Thus, they are basing their projects on the premise of developing HREEs, the kind that have demand and that command the highest prices. While analysts will surely study Molycorp’s bankruptcy to determine its causes, they will surely not blame a lack of demand or need for rare earths.