Replies to post #361 on The Rising Influence of Rising Affluence

[DewDiligence]

Molycorp: Challenging China in Rare-Earth Mining

http://www.nytimes.com/2010/04/22/business/energy-environment/22rare.html

›April 21, 2010
By KEITH BRADSHER

On a high plateau where burros and jackrabbits wander an hour’s drive southwest of Las Vegas, a 400-foot-deep chasm hewn from volcanic rock sits at the center of an international policy debate.

The chasm, in Mountain Pass, Calif., used to be the world’s main mine for rare earth elements — minerals crucial to military hardware and the latest wind turbines and hybrid gasoline-electric cars. Molycorp Minerals, which owns the mine, announced on Monday that it had registered with the Securities and Exchange Commission for an initial public offering to help raise the nearly $500 million needed to reopen and expand the mine.

Molycorp is making a big bet that its mine — once the world leader in production of rare earth elements, but now a rusting relic — can be made competitive again. Global demand is surging for the minerals. And customers, particularly the American military, are seeking alternatives to China, which now mines 97 percent of the world’s rare earth elements.

As part of reopening the mine, Molycorp plans to increase its capacity to mine and refine neodymium for rare earth magnets, which are extremely lightweight and are used in many high-tech applications. It will also resume bulk production of lower-value rare earth elements like cerium, used in industrial processes like polishing glass and water filtration.

But Molycorp, like other foundation stones of American industrial pre-eminence that have cracked or eroded under foreign competition, faces challenges that may prevent its bet from paying off.

Even riskier are efforts by nearly six dozen other companies in the United States, Canada, South Africa and elsewhere to open new rare earth mines in response to the surging demand.

Worldwide sales of freshly mined rare earth oxides, although growing more than 10 percent a year, were still only worth about $1.4 billion last year, limiting the potential sales of new mines. Molycorp and the other companies face a challenge to match China’s low costs, a result of low wages and China’s willingness to tolerate heavy environmental damage from rare earth element mines, which have turned some areas into moonscapes.

Low prices for rare earth elements from China contributed to cuts at the Mountain Pass mine before it closed in 2002. They also discouraged most entrants to the industry until the last two years, when prices began to climb because of strong demand.

According to the Metal Pages database, cerium prices more than doubled to $4 a pound in 2007 and have barely fallen since. Neodymium prices quintupled at the same time to $23 a pound and slumped before almost fully recovering last winter.

“The pricing of the rare earths doesn’t make sense — they’ve been way too low for way too long,” grumbled John Benfield, the square-jawed senior chemical engineer at the Mountain Pass mine. As he spoke, he watched pumps removing from the bottom of the open-pit mine a deep pond of accumulated rainwater and seepage, dyed green by mineral contamination.

Molycorp’s plan for an initial public offering, on the New York Stock Exchange, coincides with new interest in Washington on whether the United States should act to reduce its dependence on China for rare earth elements.

A Government Accountability Office report, released last week, concluded that American military hardware, including Army tank navigation systems and Navy radars, rely on rare earth elements from China. The report made no recommendations on what policy makers should do, noting that the Defense Department planned to finish its own review by the end of September.

Representative Ike Skelton, the Missouri Democrat who is the chairman of the House Armed Services Committee, announced the same day the report was released that the committee would hold a hearing soon on the American military’s dependence on imported rare earth elements.

And a bill introduced in March in the House by Representative Mike Coffman, Republican of Colorado, calls for the creation of a national security stockpile and for government loan guarantees for companies that want to mine and process rare earth elements in the United States. Similar legislation is being drafted in the Senate.

China raised concerns by reducing its export quotas for raw rare earth elements from 2005 through 2009, forcing foreign companies to buy more Chinese-made products containing or manufactured from rare earth elements. A year ago, the Chinese government caused further alarm for Western corporations and governments by proposing a ban on the export of 5 of the 17 rare earth elements, although no ban has actually been imposed.

China’s actions have ignited frenzied investor interest. Pinstriped investment bankers pack conferences, and newsletters promote shares, in rare earth mining companies. But with the exception of Molycorp and Lynas Corporation, an Australian company, most of the companies lack environmental permits and mineral processing equipment, much less the experience to handle safely the radioactive thorium and uranium that almost always contaminate rare earth ore.

With each start-up typically raising $10 million to $30 million and signing up one or two long-term customers, the ventures are fragmenting the market’s search for reliable supply sources beyond China. A result could be that few mines actually open outside China, which would remain the dominant supplier.

“The customers and the industry are not being discerning enough, and we’re going to end up with 70 rare earth companies employing geologists and rare earth directors and no more than five new mines by 2020,” predicted Dudley J. Kingsnorth, the best-known consultant in the industry and an adviser to some of the start-ups.

The Kaiser Bottom-Fish Online Index of share prices of rare earth companies soared eightfold last year, and has kept most of its gains. That has encouraged worries about a possible bubble.

“Most of them will get nice share prices for a while and then what goes up, comes down,” said Judith Chegwidden, a managing director and longtime rare earth specialist at Roskill Consulting Group in London.

Canadian and Australian producers like the idea that the United States government might buy rare earth elements for a stockpile, supporting prices. But they hate the prospect that Congress might use government-backed loan guarantees to help American producers.

Nicholas Curtis, the executive chairman of Sydney-based Lynas, said that Australia should be considered as reliable a supplier as if it were the 51st state.

Meanwhile, Molycorp hopes to turn the various business, geologic and political forces to its advantage. The company’s Mountain Pass mine, discovered in 1949 by uranium prospectors who noticed radioactivity, dominated rare earth element production through the 1980s. Europium from the mine made the world’s first color televisions possible.

But a reporter who recently visited the mine site saw that everything, including the processing equipment and the buildings’ door frames, was rusty. Molycorp plans to replace most of the gear, by raising up to $350 million through the sale of a minority stake in an initial public offering and borrowing the rest, using government-backed loans if they are available.

The Mountain Pass mine shut down in 2002, even as researchers elsewhere were perfecting a welter of green energy applications for rare earth elements. The mine closed because China’s production costs were lower, because a mine pipeline leaked faintly radioactive water in a nearby desert and because state regulators delayed renewal of its operating permit.

China ramped up production in the 1980s, initially hiring American advisers who formerly worked at Mountain Pass. Cnooc, a government-controlled Chinese oil company, tried to buy the mine in 2005 as part of Unocal, which owned Molycorp then. But Congress effectively blocked the Unocal transaction by raising objections.

Mark A. Smith, the longtime chief executive of Molycorp, said that after Chevron bought Unocal, Chinese companies were rebuffed in two attempts to buy the mine from Chevron. A group of private equity firms and Mr. Smith bought Molycorp from Chevron in 2008. Goldman Sachs was one of the investors but sold its stake to the others last month.
Molycorp hopes to improve safety and environmental protection at the Mountain Pass mine while using new technologies to drive operating costs below the level of Chinese mines. The Mountain Pass mine plans to recycle more of the costly acid used in ore processing, use a separate recycling system to reduce the need for fresh water to 30 gallons a minute from 850 and install a natural gas power plant to reduce its need to buy costlier and less reliable electricity from distant cities.

At the same time, Chinese costs may be about to rise if the Chinese government follows through on recent pledges to start requiring the rare earth industry to reduce pollution. [LOL—I’ll believe that when I see it.]

Whatever efficiencies Molycorp achieves, many specialists say that an American renaissance in rare earth elements may be a long time coming.

The G.A.O. said that even if the Mountain Pass mine reopened, the United States has already lost much of its technical capacity to use rare earth elements in manufacturing.

Molycorp has trimmed its staff of industrial chemists to six, from 30 before the mine closed eight years ago. Chinese rare earth institutes in Beijing and Baotou have hundreds of researchers.

“They have more employees in rare earth research,” Mr. Benfield said, “than we’ll ever have.”‹

[DewDiligence]

Pentagon Seeks to Upgrade Rare-Earth Stockpiles

http://online.wsj.com/article/SB20001424052748704608104575220112898707130.html

›Stockpiling Minerals Takes on Greater Urgency as Global Supply Gets Squeezed

By LIAM PLEVEN
MAY 3, 2010

The U.S. military is gearing up to become a more active player in the global scramble for raw materials, as competition from China and other countries raises concerns about the cost and availability of resources deemed vital to national security.

The Defense Department holds in government warehouses a limited number of critical materials—such as cobalt, tin and zinc—worth about $1.6 billion as of late 2008. In the coming weeks, the Pentagon is likely to present a plan for Congress to overhaul its stockpiling program.

The new plan, dubbed the Strategic Materials Security Program by the Pentagon, would give the military greater power to decide what it stockpiles and how it goes about buying the materials. It would also speed up decision making at a time when military technology evolves rapidly, commodity markets swing widely and countries around the world fight to secure access to natural resources.

"It's a risk-management program," said Paula Stead, who oversees the effort for the Defense National Stockpile Center at Fort Belvoir, in Virginia. The goal is to be able to obtain "a much broader" array of materials in "a much shorter time," she said.

Right now, the military can't add to the stockpile list without congressional approval, a process that can take as long as two years. The military wants to remove that restriction. It also wants the authority to strike long-term deals with companies or allied nations to provide emergency supplies of materials that the military says are irreplaceable for making weapons, jet engines, high-powered magnets and other gear.

U.S. allies are also increasingly alert to possible supply threats. Last year, Australia blocked a Chinese firm's bid for control of a company that was developing a mine for rare-earth elements, which are used in products such as alloys, electronics and computer monitors.

China controls more than 90% of global production of rare-earth elements [#msg-41917016], which the U.S. military uses in lasers and high-powered magnets. The U.S. in October added several of these elements to its list of materials that it might warehouse.

The proposed changes to the stockpile system are part of a broader overhaul of the way the Pentagon buys raw materials. The military currently uses hundreds of millions of dollars worth of raw materials annually, for building weapons and equipment, among other things.

The military has recently tested a system of bulk-buying commodities, which could cut purchasing costs. The military also wants the latitude to have private companies stockpile materials in "buffer stocks" that the military can tap if other supplies dry up.

Critics argue the current stockpiling system—set up in 1939 for World War II and shaped by the Cold War—is outdated and leaves the U.S. vulnerable to a shortage of critical supplies. That could weaken the military's negotiating position or leave it at the mercy of wild price swings in the market, or unable to get the material it needs for key weapons.

The huge purchasing power of other nations such as China and India makes this even more critical, according to a Department of Defense report given to Congress last year. Worries about potential shortages of strategic materials escalated in 2007 and 2008, as commodity prices jumped and demand from emerging economies soared.

At a hearing on the stockpile last July, a Defense Department official told Congress that the price of rhenium, whose heat-resistant qualities help jet engines operate at higher speeds, at one point shot up 1,000%. Rhenium is one of many materials the department already screens for stockpiling.

China looms large in the debate. In addition to dominating production of rare-earth elements, China is an aggressive dealmaker with countries and companies that produce raw materials.

The rising competition for raw materials has sparked fears in the U.S. military that some materials that once seemed abundant could suddenly become hard to get at any price. In 2008 the military suspended or limited sales of 13 commodities it had previously considered excess. Last year it added 14 materials to its list of resources it considers for stockpiling, including specialty steels, lithium and some rare-earth elements, taking the total to 68. More additions are expected, said Ms. Stead of the Defense National Stockpile Center.

The stockpiling system evolved over the past few decades into a network of warehouses containing material that, after the Cold War, the military largely concluded it no longer needed. Much of what was stored has since been sold off, shrinking the hoard and netting about $7 billion.

In 1995, the stockpile held 90 different commodities at 85 different locations. Today, it holds 20 commodities in 10 locations, Ms. Stead said.

The system amounted to "putting stuff into big piles," said Robert Latiff, a retired Air Force major general and lead author of a recent study on managing raw materials for the National Academies.

The military has been caught flat-footed in the past. A special type of steel was needed early in the Iraq war to reinforce Humvees to protect soldiers from powerful explosives used by insurgents. The Defense Department didn't have the steel in its stockpile, and couldn't find a domestic firm to produce all it needed. The rules were changed to allow the military to use material from Mexico, according to testimony to Congress last year.‹