China has a virtual monopoly on rare earth metals. These 17 chemical elements are key components in today's technology, including everything from LCD screens to batteries. However, environmental issues in China could open an opportunity for Molycorp (NYSE: MCP) to compete.
So rare that Ford's conserving
Rare earth metals and related products, such as the neodymium-iron-boron and samarium-cobalt alloys that Molycorp produces, are the driving force behind much of the technology we use every day; this includes the cell phone in your pocket and the batteries that power electric and hybrid cars. You'd think, then, that this would be a growing sector... but it's not.
For example, Molycorp's shares have fallen into the low single digits after running up to over $70 a share in 2011. The problem is China. This giant nation controls roughly 90% of the rare earth's market. On top of that, the World Trade Organization (WTO) says that the country isn't playing fair, using tariffs and quotas to limit exports and boost prices.
China's efforts to keep control of its rare earth metals has led at least one user to openly discuss conservation. Ford (F 0.47%) states, "The growing demand for rare earths has called into question future supply and material costs. They are also a concern due to the geographic concentration of supply and environmentally unsustainable mining practices." Those last two points speak, indirectly, to China.
Ford has good reason to be concerned. It just reported a year-over-year sales advance of 3% in May, with record monthly sales of the Ford Fusion, Ford Escape, and the Lincoln MKZ. The company's business is clearly coming back after the brutal 2007 to 2009 recession. Since more and more technology is appearing in autos, this means Ford is increasingly reliant on rare earth metals.
To help offset that risk, Ford has reduced the amount of dysprosium in "the electric machine permanent motor magnets used in our hybrid system" by around 50%. That's good from a cost standpoint, reducing the cost of its hybrid systems by 30%. Not only that, but the new system is also "50% lighter and 25 to 30% smaller than previous-generation hybrid batteries." That's a win-win.
China's problems
China claims that its tax and export efforts were put in place because the price of rare earth metals wasn't high enough to pay for the environmental impact of mining. The WTO rebuke doesn't change those problems. Illegal production and environmentally unfriendly mining practices are still prevalent. Now the country is said to be considering environmental certificates for exports and a value tax on producers.
(Source: CIA)
That's where Molycorp's opening may come from. China is openly trying to boost the price of rare earth metals to help solve some of its own environmental problems. Molycorp mines for rare earth metals in California. According to Molycorp, "Rare earth economics derive from production costs, and we will have one of the lowest cost producing plants in the world." That's because it is upgrading its Cali mine. It also happens to be one of the most environmentally friendly mines.
Molycorp's opportunity
As China tries to get customers to pay for its environmental cleanup, Molycorp has already spent the money to upgrade. That means higher prices will simply allow the miner to earn more from every ounce of rare earth metal it sells. That said, Molycorp has lost money over the last two years, which helps explain the precipitous share price drop. The first step is for the company to get back into the black.
That's why Molycorp is not an investment for the faint of heart. The WTO ruling shows that China's efforts at fixing its own rare earth metal problems are ruffling a few feathers, so it's hard to tell what the outcome will be in China. What is certain, though, is that China controls virtually all of the market and it wants to raise prices; if it doesn't succeed this time then it will likely try again. That's what makes Molycorp an interesting rare earth metal play for aggressive investors.
