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Molycorp (NYSE: MCP ) has made its biggest move yet, announcing that it is acquiring Neo Material Technologies, a processor of rare earth minerals, for $1.3 billion. The deal will be paid for with 71.2% cash and 28.8% newly issued Molycorp stock, and the market has cheered the deal today, pushing Molycorp shares up 19%.
The company said that the deal will give it more exposure to China, the world's largest consumer of rare earth minerals, and capture even more of the company's production in finished-goods processing. Molycorp has a history of similar moves, buying Santoku America, AS Silmet, and a stake in Boulder Wind Power in 2011. What these moves do is allow Molycorp to reduce dependence on raw rare-earth minerals prices and get exposure to the end-market demand. In the end, however, the prices for these end products will be driven by the underlying mineral price -- and prices have been falling fast.
Since February 24, the average composition of Lynas Corp.'s Mount Weld composition pricing of rare earth minerals has fallen, from $91.05 then to $82.72 now. That's a 9.1% drop in two weeks, all before production really ramps up for either company. This drop in prices may show that this is an extremely wise move for Molycorp, but it's also what's kept me cautious since prices peaked in the middle of 2011.
What Molycorp has also done is show how irrelevant junior miners have become in the current environment. Rare Element Resources (AMEX: REE ) and Avalon Rare Metals (AMEX: AVL ) don't even have shovels in the ground or downstream demand lined up, and with prices falling and new capacity coming online, they look to be in a tough position. Unless rare-earth mineral demand increases significantly and potential mines around the world don't begin production, these companies will be left in the dust.
Based on falling rare-earth prices I'm going to keep my underperform CAPScall on Molycorp, despite the fact that it's currently losing to the market. I'm less confident in this pick than I was a few months ago, but until prices start rising, I'll hang on. I am also adding underperform calls on both Avalon Rare Metals and Rare Element Resources even after their bounces higher today. I just don't think they're in a strong position compared to Molycorp and Lynas right now.
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