Molycorp Struggles to Survive Rare-Earths Bubble

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. said it would 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. The company is trying to survive one of the biggest commodity bubbles in economic history. 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.

The rise and fall of rare earths, and that of Molycorp, illustrate the fragility of betting on materials. 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 ChevronCorp. 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.

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 is two billion tons a year.

Since 2011, prices for the rare earths lanthanum and cerium, 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.

In late 2012, Mr. Smith was dismissed without a statement from the company. 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.

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.

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.


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