News for 'MCP' - (DJ Molycorp Struggles to Survive Rare-Earths Bubble)
By John W. Miller
MOUNTAIN PASS, Calif.--In the dusty mountains of the California-Nevada border, 4,800 feet above sea level, the U.S.'s only miner and processor of rare-earths elements is struggling to squeeze a profit out of its small open-pit mine and plant.
On Monday, Molycorp Inc. is expected to announce it will skip a $32.5 million loan payment, triggering a 30-day grace period that could lead to a bankruptcy filing before the end of June, according to people familiar with the matter.
The company is trying to survive one of the biggest commodity bubbles in economic history. Five years ago, export restrictions by China, the world's dominant supplier, and a global political spat inflated the value of rare earths--15 elements used as niche ingredients in magnets, batteries, catalytic converters and other high-tech products--and propelled Molycorp's stock-market value to over $6 billion.
Since then, rare-earths prices have been on a long slide downward. Now with a market capitalization of around $150 million, Molycorp is indebted and unprofitable. Customers are putting in orders, but the company hasn't met production targets at Mountain Pass, and is in restructuring talks with firms representing its creditors.
The rise and fall of rare earths, and that of Molycorp, illustrate the fragility of betting on materials, which, unlike the core industrial materials--copper, iron ore and aluminum--are essential but required in minuscule quantities and can often be replaced. It also echoes risks for investors that have lurked beneath any buildup of artificial demand, from tulips in the 1630s to railways in the 1840s to Internet firms in the 1990s.
In 2010, shortly after Molycorp--formerly a unit of Chevron Corp. sold to private-equity firms in 2008 for $80 million--raised $394 million in a public offering. Around that time, China tightened existing quotas on rare-earths exports in a bid to rein in overproduction and keep more supply available for domestic manufacturers. An unrelated political spat with Japan, China's biggest rare-earths customer, and U.S. lawmakers casting rare-earths supply as a matter of national security poured more fuel on the fire.
Prices soared. "The Japanese were buying everything in sight," said Constantine Karayannopoulos, current chairman and former interim CEO. "It was a bubble." Investors piled into Molycorp, the only major rare-earths producer outside China.
Mark Smith, who was CEO at the time, was treated like a rock star at investor roadshows. "I was used to there being a dozen people at these events," he said in a recent interview. "And suddenly there were hundreds and hundreds." Mr. Smith said he knew it was a bubble at the time, but there was nothing he could do about it.
Molycorp rode the wave. It committed to an expansion at the mine in California, which cost $1.6 billion after overruns, and bought Neo Material Technologies Inc., a Toronto-based rare-earths processing firm, for $1.3 billion.
Then, in late 2011, the bubble popped, along with Molycorp's share price.
China relaxed restrictions on exports, oversupplying a market of only up to 140,000 tons a year. The iron-ore market, by comparison, is two billion tons a year. Molycorp says the problem has been exacerbated by illegal mining in China, which has further stoked production, artificially dropping prices. Chinese officials have made no secret of the fact that the industry has long been plagued by illegal production and trade.
Rare earths are used in tiny quantities. Molycorp's open pit in California is the mining equivalent of a kiddie pool. One-ton bags are stacked outside a warehouse near the mine. Each bag contains enough rare-earths elements to make over five million magnets.
It doesn't take much movement in supply or demand for prices to swing wildly. Since 2011, prices for the rare earths lanthanum and cerium, for example, have fallen to under $4 a kilo (2.2 pounds) from over $150 a kilo; and prices for neodymium have declined to under $60 a kilo from over $330 a kilo. Overall, the rare-earths market has shrunk to a billion-dollar market from one worth over $15 billion.
Even as scarcity fueled by Chinese quotas on rare-earths exports drove up Molycorp shares, engineers went to work finding substitute ingredients. "And the high prices back then encouraged more mining," says Dudley Kingsnorth, an Australian academic who has advised the U.S. Department of Defense on rare earths. "All together, it killed the market."
Ford Motor Corp., for example, cut use of Dysprosium, which as an alloy can increase the heat resistance of a magnet, by 50%. The new system, says a spokesman, "is also 50% lighter and 25% to 30% smaller than previous-generation hybrid batteries."
Even Pentagon officials say the panic was overblown. The U.S. Department of Defense only buys between 5% and 8% of all the rare earths consumed in the U.S. Many of the magnets it purchases contain rare-earths elements that may be mined and produced in China, according to a U.S. military official. It has stockpiles and contingency plans in case China cuts off exports, the official says.
In late 2012, Mr. Smith was dismissed without a statement from the company. The U.S. Securities and Exchange Commission investigated whether statements Mr. Smith and other executives had made during the boom were misleading or overly bullish. Angry shareholders have filed a cluster of lawsuits, which have been consolidated into four suits. Three have been dismissed.
Mr. Smith defends his record as CEO, arguing that he was focused on simply building a profitable mining company, and noting that the government's investigation indicated no wrongdoing. "The SEC looked at every internal email since 2008 and found nothing," says Mr. Smith. The SEC declined to comment.
Molycorp has suffered three straight years of quarterly losses. It has $1.7 billion in debt. It had aimed to produce 20,000 metric tons a year at Mountain Pass. Instead, it has been able to generate only slightly more than half that amount. The stock price has fallen to under a dollar per share. The company warned investors in April that if prices and profits don't improve, it will have to "cease operations as a going concern."
The popping of the rare-earths bubble has also harmed the fortunes of hundreds of small prospecting companies trying to exploit new deposits all over the world, and Australia's Lynas Corp., the other big rare-earths producer outside China, which has struggled to turn a profit.
Geoff Bedford, who took over as Molycorp's chief executive in 2013, insisted in a recent interview that the company's deposit was "very good" but said the company has had problems with processing.
On a recent tour of the company's processing plant, manager Rocky Smith showed off buildings packed with pipes and large tubs where the rare-earth ore is crushed, floated and leached. "You have to get the acidity and temperature right," he says. "It's a tricky, delicate balance."
The company's big sellers are neodymium and praseodymium, used to make magnets in cellphones, cars and computers, and lanthanum, used to refine petroleum.
Molycorp hopes new contracts can save it. In April, it announced a 10-year deal with Siemens AG. "We also buy from China, but for us it's important to diversity the sourcing of our magnet material," said Bernd Eilitz, a Siemens spokesman.
