The Rising Influence of Rising Affluence

[DewDiligence]

Molycorp Says It Can Beat Chinese

[#msg-55194118 is a must-read companion piece.]

http://www.ft.com/cms/s/0/e7fbbaba-e1e3-11df-b18d-00144feabdc0.html

›By Ed Crooks
October 27 2010 21:40

If rare-earth mining companies are the new dotcom stocks, as one analyst has put it, then Molycorp looks the most like Amazon. [Catchy!]

With a $379m fundraising in August and an asset with a proven history of large-scale production, the Colorado-based company seems uniquely well-placed to profit from the alarm over supplies of rare earths caused by restrictions on Chinese exports.

Yet, even Molycorp, with a market capitalisation of about $2.6bn, still has several obstacles to surmount to realise its ambition of becoming the first company to open a rare-earth mine in the US for five decades.

Rare earths, minerals that are obscure if not particularly rare, are vital for the manufacturing of high-tech products from smartphones to cruise missiles, and China accounts for 97 per cent of world production.

Some security experts argue that US production of rare earths is so commercially uncertain that it needs government support.

Molycorp’s mine – Mountain Pass in the Mojave desert, eastern California – was for decades the sole source of rare earths in the US, accounting for about half of global production.

The mine was previously owned by Unocal, the US oil group that was bid for by CNOOC of China in 2005; a move that stirred up US concerns about rare earths.

Chevron, the second-biggest American oil company, bought Unocal to keep it out of CNOOC’s hands and then in 2008 sold the mine to private equity investors, including Resource Capital Funds and Goldman Sachs.

Mark Smith, who ran the business for Unocal, became chief executive.

By then, Mountain Pass had been shut for six years. It lost its licence to produce in 2002, after leaks of wastewater contaminated with metals such as cadmium and lead.

In 2004, Unocal managed to renew the licence, for 30 years, but rare-earths prices were weak – they fell more than 50 per cent between the first half of 2001 and the end of 2002 – and the company decided that production was uneconomic. However, it decided the business was still worth investing in and spent 2004-06 working on new ways to process the ore, to remove the pollution risk.

It raised $379m in the initial public offering in August, and since then the shares have risen about 160 per cent.

The money will be used to build facilities at Mountain Pass, with ground broken at the start of next year, to enable production to be started by the end of 2012.

The target is to produce about 19,000 tonnes of rare-earth products per year: about one-sixth of global production and more than the entire US demand.

However, the total cost of its project is estimated at $511m, so it has a funding gap of about $150m. There are three options for filling it: vendor finance from equipment sellers, commercial bank lending – the company has hired BNP Paribas to arrange a facility – or loans backed by US government grants.

A previous application was rejected, but Molycorp is now trying again.

The financing is complicated because rare-earths prices are so volatile. Lenders have to judge whether cerium oxide, for example, will be closer to its three-year average of $1.83 per pound or its $16.33 per pound in September.

Conspiracy theorists suggest China could raise its exports in order to drive prices back down again [#msg-55194118], potentially shutting down foreign producers.

Yaron Vorona of the Technology and Rare Earth Metals Centre, an industry group, warns that changes in environmental regulation or other policies could stifle US production.

“One of the issues here is the inability of the industry to insure itself against policy risk,” he says.

Molycorp argues that it has those issue covered. It says its new separation process, which it is using with ore mined before 2002, will both avoid environmental issues and allow it to produce at half the cost of the Chinese competitors.

In a sector that has shown huge volatility, there is likely to be more to come.‹