The extent of the sell-off might be attributed to a variety of disconnected news items that have hit the media recently:
- The end of a financing deal with Sumitomo said to be experiencing pricing pressure from its customers. To bears this suggests that the electronics industry may be slowing and hence demand for rare earths is about to suffer. Yet, rare earths are a supply rather than a cyclical demand story.
- Mention of speculative buying in China earlier this year artificially inflating prices
- Sharp decline of some specific rare earths prices recently on expectation these might be eliminated from export quota lists (Metal Pages)
- Pala Investments Holdings recently announced it has reduced its interest in Canadian rare earths company Neo Materials Technologies (though it still owns nearly 10% of the company)
- Etc Etc…
However listening to Molycorp’s CEO Mark Smith testify before Congress today about rare earths supplies has convinced us that JP Morgan and other pessimists are mistaken. In fact we are more confident than ever that rare earths demand will remain resilient, counter cyclical and that Congress may even take a keener interest, realizing today how strategic rare earths really are for the US.
Some points from today’s hearing:
- Molycorp is the only rare earths mining company in the US.
- CEO Mark Smith really impressed the audience with the notion that Molycorp can create jobs not just in the mining but rare earths consuming industries.
- One such industry is renewable energy technologies. Molycorp has invested heavily in BWP (Boulder Wind Power) and is now the “preferred provider” of their magnets. (Interesting to hear Mark Smith describe BWP technology as a game changer–because it delivers 30% more power output in low-wind-speed environments and requires no dysposium which is always in short supply. Hence power can be produced at less than $0.04 per kW-h unsubsidized which is competitive with fossil fuel).
- The witnesses also said that many US manufacturers are going to China for access to rare earth supplies and then selling their end products back to the US. One of the biggest consumers of rare earths is the defense industry. The fact that the DOD has to buy all their rare earths for their missiles, drones, fighter jets etc from the Chinese the Congressional panel found pretty incredible.
- Molycorp produces more cheaply than the Chinese. Because of technological breakthroughs, coupled with China’s increased cost structure, Molycorp average oxide production costs (per kg) are $2.77 compared to China $5.58 and Australia’s Lynas $10.11.
On China, CEO Mark Smith was gracious when discussing its rare earth policy. He said that they saw the possibilities 20 years ago. The US didn’t.
In 1992 Deng Xiaoping said: “The Middle East has oil. China has rare earths.” and China realized that mining and production would provide 10’s of thousands of jobs. But they also realized (unlike the US) that moving into downstream manufacturing of products using rare earths could provide 100s of thousands of jobs.
- The Chinese have said publicly that their known reserves of heavy rare earths may only last 15-25 years at projected demand so it’s vital that alternative supplies be created. There could be a dramatic shift in supply where China could move from being a supplier to a net importer of rare earths. There was a sense that we should be grateful to China for trying to push US into developing a rare earths industry.
- Another witness Christine Parthemore, said that that though gallium, rhenium, niobium, and tantalum can be recovered and recycled for most rare earths very little can be recycled.
There was full house in Congress for the hearing. The panel practically begged Molycorp to take money from Congress (but Molycorp said they have enough) and begged them to find some regulation that might be hampering their development (Molycorp said none were needed). Not a bad position to be in.
Our conclusion is that Molycorp is going to be a good near and long-term fundamental investment. They are the only supplier in the US so the only game in town. After this hearing we expect the US government will do anything to make sure they succeed. They are it.
Molycorp’s Canadian peer Neo Materials Technologies is also an attractive investment. The big difference is that it produces in China.