Rare Earth Metals Getting Attention in China and US (CVX, CEO, SI, GE)

On April 19th, Molycorp, Inc., a privately held company, filed with the US SEC for an IPO. The company did not say how many shares would be offered nor did it indicate an IPO price range. It did say that it would use the proceeds of the offering to modernize and expand its Mountain Pass, California, mining and production facility.

In 2005, the Mountain Pass mine was owned by Unocal which was eventually bought by Chevron Corp. (NYSE:CVX), but only after China’s Cnooc Ltd. (NYSE:CEO) withdrew its offer to buy Unocal after the US Congress raised objections. Cnooc tried twice to buy the mine since then, according to a story in the New York Times. Molycorp’s CEO and private equity firms now own Mountain Pass.

It expected to cost Molycorp about $500 million to resurrect the open-pit mine and expand its operations. Before it shut down in 2002, the Mountain Pass mine was the world’s largest supplier of rare earth minerals, a collection of 17 chemical elements with names like yttrium, promethium, cerium, and ytterbium.

The current world production leader in these minerals is China, which mines 97% of the world’s rare earths for a market that was worth $1.4 billion in 2009. But demand is growing from companies that manufacture wind turbines, batteries, and military equipment. Both Siemens AG (NYSE:SI) and General Electric Co. (NYSE:GE) use the rare earth element neodymium to manufacture permanent magnets for their new direct-drive wind turbines.

The reliance on China for the US supply of rare earths to manufacture navigation and radar systems was the subject of a report by the US GAO. The GAO did not recommend a policy, but the US military is not likely to accept increased reliance on China for supplies of critical military purposes. Both Houses of Congress is considering legislation that would create a government stockpile of rare earths and offer loan guarantees to private companies that mine and process the stuff.

For its part, China has reduced its exports of rare earths, choosing instead to force foreign companies to buy Chinese-made products using the minerals. The country also proposed a ban on exporting five of the elements, but so far has not enforced such a ban.

What China is doing, though, is getting set to build one of ten proposed storage facilities for rare earth metals as the country begins building a strategic reserve of the metals. A side effect of the plan is that rare earth miners, which have been unregulated and many of which operate illegally, will finally come under some regulatory regime. The Chinese have not indicated how large the reserve will be.

Other US companies are sprouting up with plans to mine the rare earths. Most will fail because they don’t have the experience or equipment or permits to operate a mine. That, plus the fact that rare earths are always found near deposits of radioactive thorium and uranium ought to just about squelch any serious competition to Molycorp. But not before some investors get separated from their money.

Paul Ausick