Molycorp (MCP) mines and produces lanthanide and molybdenum compounds, concentrates, and oxides using open-pit mining techniques. Molycorp's top-level product is bastnasite, which is a mixture of rare earth metals in their flurocarbonate form. From this ore, mischmetal can be extracted. On the other hand, bastnasite can be used in the later purification processes of many rare earth metals. Bastnasite also serves as a high-performance polishing product for optics and sensitive equipment.

Lanthanides (which include cerium, lanthanum, and yttrium) are used in everything from cell phones and computers to X-ray film and television glass. The company is staking its future on the production of rare earth oxides (REOs). Molycorp went public in July 2010 with an initial public offering (IPO). Since its IPO, it has been making acquisitions and investing in joint ventures to further its growth. In its biggest takeover to date, Molycorp acquired rare earth processor Neo Material Technologies for about $1.3 billion in 2012.

Current Rare Earth Metals Landscape

China controls about 95% of the global rare earth metals supply, and its restriction on global access has had an interesting affect on the market. China is the biggest producer, as well as consumer, of rare earth elements. As a result of restrictions by China, manufacturers and miners are currently working on finding alternatives to Chinese supply. At the moment, companies are increasing their presence in Central and Southeast Asia. Electronics manufacturers will continue to increase demand as the demand for products increases. However, the U.S. has not been able to devise a plan to cope with the dependence on one supplier.

Japan, the biggest importer of rare earth elements, has increased its efforts to counter the restrictions by China. China's Bayo Obo mine is in close proximity to Mongolia. As a result, Mongolia is getting substantial offers from miners and manufacturers. Japan recently signed a free trade agreement with Mongolia in order to get access to rare earth metals. In addition, Germany and Kazakhstan signed a $4 billion agreement allowing German mining companies access to Kazakhstan's rare earth elements. Germany will provide technical assistance in modernizing railroads and building chemical plants in exchange for the privilege of mining in Kazakhstan.

Furthermore, Japan is also collaborating with India to decrease dependence on China. The Indian state of Orissa has deposits of rare earth elements, which the country is looking to exploit. India is looking to build facilities in Orissa and Central Asia to get a share of this lucrative market.

Importance to the U.S.

Molycorp products are extremely important for the U.S. defense applications. Rare earth elements are used in underwater mine detection equipment, radar systems, jet engine coatings, optics and scopes, lasers, electronic counter measures, and precision guided bombs. The Department of Defense highlighted the importance of rare earth elements to the country, as well as the consequences of China being the only supplier. Molycorp is the answer to the problem for the U.S. The company has suffered due to lower prices, lower product volumes, and higher transaction costs. Molycorp will benefit from its Canadian acquisition and Phoenix project. I expect the company to see more profitability in 2013. It is also expected that the hoards of rare earth metals will start to decrease, and demand will increase. In addition, stricter regulations from the Chinese government will help bring supply down. The Chinese government is trying to stop the illegal mining in order to decrease supply. Decreasing supply should bring prices up, and we should see some recovery in 2013.

Comparison With Peers

Molycorp peers include Lynas Corporation Ltd. and Avalon Rare Metals, Inc.. The table below lists some important metrics for the sake of comparison between these companies.

Companies in the rare earth metals segment are trading at low forward multiples. However, a look at margins shows that the industry has been hit hard by low prices. All three companies have negative ROE at the moment. Molycorp is the only company among the three to have debt; the other two companies do not have long-term debt.

Summary

Rare earth metals are an integral component of a lot of products. Demand for these products will remain high as the global economy recovers. The recovering global economy will increase consumers' disposable income, resulting in increased demand. Furthermore, the Phoenix project and the Canadian acquisition will help Molycorp improve its profitability.

However, Molycorp has several risks associated with it, and only investors with a high risk tolerance should consider it. The biggest risks are a slow recovery in prices and the company's failure to bring down the costs. Molycorp needs to control its costs in order to bring down its losses. Out of the two biggest risks, high cost is the company-specific risk that Molycorp can control. The company should focus on bringing down its costs and augmenting the profit margins.

There is still a lot of uncertainty about the market at the moment, despite some positive steps taken by the Chinese government. If the proposed measures do not yield expected results, the prices for rare earth elements could remain low during 2013. As a result, Molycorp could suffer and stock price may not move much. That's why I believe only investors with a high risk tolerance should consider investing in Molycorp.

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China, the world’s biggest supplier of rare-earths, set the first of two production quotas for 2013 at 46,900 metric tons of the ore that is refined for use in mobile phones, hybrid cars and missile systems.

The figure is about half the total quota set last year, according to a Ministry of Land and Resources statement posted on its website on Jan 5. The ministry didn’t make public the production quotas last year, while the figure in 2011 was 93,800 tons.

Output quotas for the rest of the year will be announced in the second quarter, according to the statement.

China also set a production quota for tungsten concentrate at 43,500 tons and antimony ore at 37,680 tons, according to the statement, which gave no comparison with previous years.

Since 2007, China has imposed production limits on rare earths and set export restrictions to preserve supply and conserve the environment. The curbs raised trade disputes with the world’s major users, including the U.S. and Japan.

Rare earths are a group of 17 chemically similar elements gaining increasing usage in the shift to cleaner energy sources, such as magnets in wind turbines, hybrid vehicle batteries and catalysts to reduce automobile exhaust emissions.

China, which provides about 95 percent of global rare earth shipments, also cut the first-lot export quota by 27 percent to 15,501 tons from that of 2012, according to a statement by the Ministry of Commerce on Dec. 28.

Demand for some China rare earths has declined as companies such as Toyota Motor Corp. and Hitachi Ltd. (6501) to recycle the metals and employ substitutes. In November, Japan, the world’s biggest importer of rare earths, signed an agreement to buy more of the metals from India to diversify supply.

Praseodymium-neodymium oxide, a light rare-earth product, traded at 285,000 yuan ($45,756) a ton on Jan. 4 in Shanghai, according to researcher Shanghai Steelhome Information. Prices have tumbled 78 percent from a record 1.28 million yuan set in June 2011.

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Australia's Lynas Corp Ltd said on Monday it expects to produce commercial rare earth products in the next few weeks from its controversial plant in Malaysia, after commissioning the plant's cracking and leaching units.

The process has achieved recovery rates of more than 90 percent of contained rare earth oxides through the cracking units, which are now ready for production of individual rare earth products, the company said.

"Lynas anticipates commercial rare earth products will be available in the next few weeks with ramp up of production to take place over the next three months," the company said in a statement.

Lynas shares jumped 8.0 percent to A$0.68 in late morning trade to a five-week high, but are still well below levels above $1.40 around a year ago.

Lynas has been embroiled in lengthy environmental and safety disputes with residents near the plant, and the Malaysian high court is due to hear an application for judicial reviews to block its operations on Feb. 5.

The $800 million plant, which opponents say is environmentally hazardous, began operations in November 2012 after long delays caused by legal challenges and safety disputes. Located in the east coast city of Kuantan, it had been ready to fire up since May 2012.

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Cold-call phone scams have switched from traditional sales staples, such as unlisted shares in obscure companies, to novel new get-rich investment options such as land, wine, and lumps of rare earth metals.

The Independent reports that the sale of rare earth elements by unregulated "boiler room" companies in England has become the latest trend in investment phone scams.

Around 25 to 30 such companies currently operate in the UK, none of which are subject to regulation or oversight by the Financial Services Authority (FSA).

One company in the Midlands offer credulous investors a "green energy bundle" of rare earth metals via cold-call phone marketing.

For 6,744 British pounds retail investors can buy one kilo of dysprosium, one kilo of yttrium and two kilos of lanthanum and neodymium, which purchasers are informed over the phone will surge in value.

Yet based on current market prices the bundle, assuming 99% purity free of oxides, is worth only 900 pounds, equivalent to a 7.5 times price mark-up.

One investor in Bradford was targeted by cold-call investment company Rare Earth Metal Exchange Ltd firm after receiving a substantial inheritance, the public details of which had been data-mined and sold.

The company convinced the investor to spend 45,000 pounds on five kilos of rare earth metal dyprosium which she was informed would surge in value over the next twelve months.

The investor received only one kilo of the metal, while the total value of her purchase was only around 3,500 pounds.

The new wave of scams capitalize upon the vital importance of rare earth metals for modern hi-tech industries, and the increasing media attention they receive due to China's stranglehold on global supply.

The FSA states, however, that there is no "convincing evidence that there is a viable market for investors to make money," with Jonathan Phelan, head of the FSA's unauthorized business department, pointing out that these kinds of industrial metals are traded between specialist firms.

The FSA has achieved modest success in returning money to investors defrauded via unregulated phone scams, yet has called for the government to introduce new legislation to prohibit such activities and protect the unwary.

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