New Competitive Pressure for Molycorp Inc

Add another name to a growing list of countries ready to undermine the rare-earth minerals miner.

May 29, 2014 at 9:01AM


Mountain Pass facility. Source: Molycorp.

That's going to leave a mark. Miner Molycorp (NYSE:MCP) is already having trouble grasping at breakeven status, and it now it may face even more competitive pressure from Mexico, which says it will finance rare-earth mineral exploration. Such a move could depress pricing and push profitability even further beyond Molycorp's grasp.

Ever since China flexed its near-monopolistic muscle and restricted export of the minerals a few years back, causing prices to go parabolic, the hunt for alternative supplies has intensified. Molycorp found new impetus in bringing its Mountain Pass, Calif. mine online; rare-earths mining peer Lynas went live in Malaysia; and Great Western Minerals rehabilitated its Steenkampskraal project in South Africa, where it recently upgraded its mineral-resource estimates.

North Korea also said it has found the world's largest rare-earth minerals deposit, which if true would more than double the known deposits of rare earth element oxides. Japan claims the ocean floor holds more than all the world's land-based deposits; Africa could be another hot spot for the elements; and the central Asian countries of Kazakhstan, Kyrgyzstan, and Tajikistan are also believed to be rich in rare-earth minerals as well.

This underscores the position of the U.S. Geological Survey that rare-earth minerals are anything but rare, with the challenge being finding them in minable concentrations. China today supplies some 86% of the world's needs for rare-earth minerals and has reserves of 55 million tonnes. The U.S. is a distant second with about 12% of the total supply. There are large known deposits in 14 states, including Molycorp's Mountain Pass in California, Bokan Mountain in Alaska, and the Bear Lodge Mountains of Wyoming. They have not been mined to the same extent as the Chinese deposits. India is an even more distant third with less than 3% of the world's supply.

Because demand for rare-earth minerals continues to rise, Mexico's decision to join the hunt shouldn't impact Molycorp's production capabilities, but it could eventually undermine pricing and further weaken the miner. While most rare-earth element prices remain above the levels they traded at prior to China's restrictive moves, cerium and lanthanum, the two most common (and therefore least valuable) minerals, continue to see pricing collapse. As they also represent the most abundant minerals at Mountain Pass, Molycorp has suffered; the first quarter found the minerals 45% and 49% below last year's price level, respectively. 

While the miner did enjoy an 18% increase in neodymium/praseodymium pricing, analysts are dramatically scaling back their estimates of how much volume will actually be sold this year. Some even suggest it could be as little as 60% of the total, compared to prior assumptions that all would be sold. 

Of course, these potential competitive pressures are still in the distant future. Declaring a willingness to fund exploration is not the same as discovering a deposit, let alone developing it and bringing the minerals to market. Even the vaunted Japanese plans to tap the undersea reserves would likely be met with stiff opposition over fear of potential environmental calamities.

As dubious as I find Molycorp's current prospects, Mexican miners suddenly leapfrogging to the fore isn't something investors should worry about anytime soon. Yet the potential for future competition must remain a noodle point for investors, along with all the other countries in hot pursuit of these resources. The miner has a limited window of opportunity to rectify its position, and despite the de-bottlenecking it is doing to clear out the flotsam and jetsam, Molycorp remains a stock that carries too much risk and volatility for my tastes.

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