China Tightens Rare-Earth Mining -- Will It Help Molycorp?

China is tightening control on its rare-earth-mining market in a move to consolidate control of the industry. For more than two years now China has been trying to restrict its exports of rare earths but illegal exports have thwarted some of that effort. The country has reduced the number of mining licenses to 67 from 113.

This can be seen as an incremental positive for miners, but it doesn't appear to be changing the fundamental downward pressure on the industry. Earlier this month, Australian miner Lynas Corp was given approval to open its Malaysian processing plant, which will increase the amount of supply of rare earths on the market. This is on top of Molycorp's (NYSE: MCP  ) mine and processing plant, which is opening in phases.

Just the anticipation of the increased capacity has had a shocking effect on rare-earth-mineral prices. Below is the price of Lynas' product, which has declined rapidly from last year.

  2010 2011 Q2 2012 Sept. 17, 2012
Lanthanum Oxide $22.40 $104.10 $24.64 $19.00
Cerium Oxide $21.60 $102.00 $24.79 $19.00
Neodymium Oxide $49.50 $234.40 $122.14 $100.00
Av. Mt Weld Composition $31.35 $147.96 $63.00 $50.87

Source: Lynas Corp

The decline in prices is having a major impact on Molycorp's results and balance sheet. The company had to sell debt to finance its expansion and the outlook isn't good. But there are companies in even worse shape. Avalon Rare Metals (NYSE: AVL  ) and Rare Element Resources (NYSE: REE  ) don't even have revenue from their rare-earth assets; they just hope that prices will rise eventually.

The prospects for rare-earth miners, whether they're big or small, are declining as prices fall. This hasn't been a high margin business over the long term, and the hope of it being a high margin business beyond the spike in prices over the past two years is evaporating.

Rare-earth miners may play a role in supplying high-tech industries but they aren't worth owning right now. For three stocks that are worth owning, in what our analysts are calling the "new industrial revolution," you need to check out our free report on a disruptive technology that could end "Made in China." Find out which stocks I'm talking about by clicking here; it's free.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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10/24/2014 4:02 PM
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