The Domestic Rare Earths Market Gets a Vote of Confidence

For all its faults, Molycorp represents the biggest, best hope for breaking China's stranglehold on these key minerals.

Aug 12, 2014 at 1:46PM

The world really has China to thank for waking it up again to the value and ubiquitous nature of rare earths elements. By cutting quotas on their export and sending pricing for the minerals skyward a few years back, China has helped lay bare for all to see the strategic nature of the elements and the risk to national security by allowing just one country to virtually monopolize their availability.

Screen Shot

China gave the world a wake-up call spurring production globally like here at Molycorp's Mountain Pass facility. Source: Molycorp.

Now countries around the globe are in a mad scramble to seek them out, and China will soon find itself as but one of just many suppliers. North Korea claims it's found the world's largest rare-earth minerals deposit; Japan says the ocean floor holds more such minerals than all the world's land-based deposits; Africa and central Asia are though to be rich in rare-earth minerals as well; and Mexico is now pursuing its own domestic deposits. Earlier this year, Germany's Federal Institute for Geosciences and Natural Resources said that since the export quota incident, some 440 new rare earths deposits have been discovered worldwide.

And there are a handful of active mines operating now that have been spurred into high gear by the opportunity as well. Lynas ramped up production at its Mt. Weld mine in Australia and went live with a processing facility in Malaysia, Great Western Minerals rehabilitated its Steenkampskraal project in South Africa, and of course, U.S.-based Molycorp (NYSE:MCP) is pumping out REEs from its Mountain Pass, Calif., facility.

Yet despite being just one of a very few select companies actually producing such minerals outside of China, Molycorp is stumbling forward financially, burning through cash at an alarming rate. The problem is that after skyrocketing higher following the quota cut, pricing on rare earth elements has crashed. They're still elevated relative to where they were before, but it's just not all that economical at current prices to produce.

Molycorp has said it believes there's really just room for maybe three players outside of China, but as the rush to make new discoveries shows, the industry will likely face a lot more pain in the future before it stabilizes, and a healthy, robust domestic market for REEs makes sense, particularly in terms of our national security interests. Fortunately, Molycorp -- and in essence, the domestic market -- received a vote of confidence when private equity firm Oaktree Capital Management secured for it a commitment for $400 million in financing that will be available through credit facilities and the sale and leaseback of certain equipment at Mountain Pass.

Losses have been mounting at the miner, so the influx of cash, some $250 million when the agreement finalizes and the remaining available through the end of April 2016, ensures Molycorp need not worry about cash as it ramps up operations.

Which is fortunate, because just as the industry was starting to see higher prices again -- the miner recorded average selling prices rose 16% sequentially to $39.02 per kilogram in the second quarter --  volumes fell 15% to 2,996 metric tons.

The 17 elements that comprise rare earths are used in everything from high-tech goods like smartphones and computer memory to catalytic converters, electric motors for hybrid cars, powerful magnets, and perhaps most importantly, various components of defense weapon systems. For example, the National Defense Authorization Act for 2012 says that each SSN-774 Virginia-class submarine would require approximately 9,200 pounds of rare earth materials, each DDG-51 Aegis destroyer would require approximately 5,200 pounds, and each F-35 Lightning II aircraft would require approximately 920 pounds.


The USS Virginia runs silent and deep with nearly five tons of rare earth materials. Source: Wikimedia Commons.

That's jump-started the search for alternatives, such as a new start-up called Infinium that holds out the promise of creating the minerals in the lab cheaply and cleanly, initially producing a half ton of rare-earth metals annually before switching over to a machine later this fall that can produce up to 10 metric tons annually. 

What this all points to is not so much which company will be most successful in meeting the needs of industry and the nation, but that there will be a healthy market in general for them. Right now, Molycorp is suffering because of the competition glut. It is estimated there's sufficient supply to meet demand, but the presence of too many players is hampering the opportunity for everyone to prosper. The financing Molycorp received is then just as much a thumbs-up to the future growth of the overall market as it is giving the miner the wherewithal to lead the U.S. rare earths market.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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