For years now, China has been cutting back on its exports of rare earths by about 6% or so a year. But in early July, the country, which supplies 97% of the world's rare earths, announced that this time, it was cutting its export quotas by 40% year-on-year - for the first time leaving rare earth buyers outside China scrambling for material.
Molycorp (MCP-N) CEO Mark Smith says that China is now exporting about 30,000 to 32,000 tonnes of rare earth oxides, while demand outside of China is closer to 50,000 to 55,000 tonnes.
"I don't remember a lot from my economics 101 class that I took in college, but when you have that kind of a supply and demand situation, there is a very severe impact on prices as well," Smith said.
Molycorp is preparing to step into the breach, with plans to reopen its Mountain Pass mine, in California, by 2012. Speaking at the 1st Annual Dahlman Rose & Co. Global Metals, Mining and Materials Conference yesterday, Smith outlined the case for investing in Molycorp. But it appears investors have already gotten the message: Molycorp shares have risen more than 200% since the IPO, priced at US$14 a share four months ago.
The company already produces about 3,000 tons a year of rare earth materials from stockpiles at the historic, 58-year-old operation.
But it has much bigger plans, aiming to produce 20,000 tons a year when mining begins again at its open-pit mine. The company will be the first substantial producer to come online outside of China since the country has come to dominate the sector. (With further investment, it could also double its production to 40,000 tons a year.)
It is currently building new processing facilities at Mountain Pass and Smith said that new processing technologies Molycorp has developed has increased efficiencies and reduced costs - the company now needs only have the ore it used to use to produce the same amt of product.
"That's a huge development in terms of recoverability and really distinguishes Molycorp from any other processor in the world," he said.
It's also part of what will make Molycorp a low-cost producer, with production costs estimated at US$1.26 per lb. compared with an average of US$2.54 per lb. for Chinese production and an estimated US$2.56 per lb. for Lynas Corp., which will follow Molycorp into production in 2012 at its Mount Weld project in Australia.
In 2013, its first full year of production, Mountain Pass is expected to produce 18 million lbs. of neodymium, which is used in neodymium iron boron magnets. That production will account for 57% of revenue.
It will also produce 1.7 mm lbs. samarium, used in samarium cobalt magnets, which will bring in 8%; 5.5 mm lbs. of lanthanum metal (7% of revenues), used in nickel metal hydride batteries in electronics and hybrid cars; 6.8 million lbs. lanthanum oxide 4% of revenue.
Not only will it start mining again at Mountain Pass, where the company has developed a 30-year mine plan, but it also plans to implement a "mines to magnets" strategy that would expose the company to all segments of the rare earth supply chain.
"We think the case is quite compelling for vertical integration in the rare earth industry," Smith said. He explained that at June prices, it would cost US$1 to produce 1 lb. of neodymium oxide, which would have sold for US$16 - a nice margin.
But converting the oxide to metal and then making a neodymium alloy that could be used in a permanent neodymium iron boron magnet would increase the margin by another 125%, giving the company US$32.11 for that same pound of neodymium.
The company is currently in talks with an established rare earth magnet producer to establish a downsteam joint-venture business.
While the most plentiful element at Mountain Pass is cerium, it's also the one that has historically fetched the lowest prices.
Molycorp has addressed the imbalance in a creative way - inventing a water filtration technology that uses cerium. Smith said that pricing of the technology, called XSorbx, will be based on its efficiency in water purification, not on rare earth content.
"And that puts us in a slightly different category than everyone else in the industry, because everyone else will be looking to (sell their cerium into) the glass polishing market, which is the lowest priced use of any rare earth in the world right now," Smith said.
Xsorbx can remove viruses, pathogens, gases, pesticides and pharmaceuticals. "The list of things that it doesn't remove is much shorter than the list of things that it does remove," Smith said.
The company will produce 18 million lbs. of cerium oxide in 2013, projected to bring in 18% of revenue.
Cerium and lanthanum prices have skyrocketed in recent months - 1,000% and 640% respectively over the period from March to November. The imbalance and subsequent price increase has come about because Chinese rare earth companies use their export quotas to export materials they get a higher price for - not usually cerium and lanthanum. The limitations on the amount of material that can be exported has meant that virtually no cerium and lanthanum are leaving China as exporters concentrate on rare earths that fetch higher prices.
However, Smith isn't worried about a collapse in prices for the light rare earths.
"We believe that these prices are relatively sustainable because of that supply and demand pinchpoint that is going to continue to be in existence for some time."
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