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.
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