Molycorp Scores Another Rare Earths Pact (MCP, SSUMY, HTMLF, CEO, REE, QREDF)

For the second time in two weeks, Molycorp Inc. (NYSE: MCP) has announced a deal with a Japanese company to help expand Molycorp’s Mountain Pass rare earth element mine. Two weeks ago it was Sumitomo Corp. (OTC: SSUMY) contributing $130 million to a joint venture in which Molycorp would provide about 2,500 metric tons of cerium- and lanthanum-based products and 250 metric tons of neodymium and praseodymium from its current production facility. That total will rise by an additional 3,000 metric tons of the former and 250 tons of the latter for another five years following construction of a new plant.

Today, Molycorp has announced a deal with Hitachi Metals Ltd. (OTC: HTMLF) to form joint ventures for production of rare earth alloys and manufacturing of magnets in the US. The two companies did not specify an amount, but the deal is a two-step process, which requires that some conditions be met by April 2011 and that a feasibility study follow later in the same year.

The deal with Hitachi, which is the world’s largest manufacturer of rare earth magnets, adds both additional credibility and a ready market for is planned production growth. Molycorp expects to be producing some 20,000 metric tons of rare earth metals by the end of 2012, and, according to the press release, “intends to offer a range of rare earth products, including high-purity oxides, metals, alloys, and permanent magnets.”

About 97% of the world’s supply of rare earth elements have come from China, which has said that it plans to reduce production and export quotas and increase prices for the materials. The US Department of Energy recently released a document calling for diversification of supply, development of substitute materials, and better recycling of rare earth elements as ways to ensure adequate supply going forward.

Molycorp’s Mountain Pass mine was the world’s leading producer of rare earth elements until it was shut down in 2002 when prices for the minerals fell. The mine was owned by Unocal in 2005, and was nearly sold to China’s Cnooc Ltd. (NYSE: CEO) when the Chinese company bid for Unocal’s assets. Molycorp purchased the mine from Chevron Corp. (NYSE: CVX), following Chevron’s acquisition of Unocal.

Other US projects to mine rare earth elements include one in northeastern Wyoming led by Rare Elements Resources Ltd. (AMEX: REE), and another in southeastern Nebraska led by Canada’s Quantum Rare Earth Developments Corp. (OTC: QREDF). Provided the companies can obtain all required permits and funding, neither is likely to be in production until 2015.

If Molycorp can actually meet its goals, the company stands to reap some mighty rewards. The US military also relies on rare earth elements in some advanced weapons systems, and will certainly lead the charge for creating a government stockpile of the minerals. Congress has also been considering loan guarantees for companies involved in mining and processing rare earth minerals. This is good for all these companies, but Molycorp’s lead gives it an inside track.

Molycorp also received last week the last of its required permits to begin construction of its new $531 million production facility at Mountain Pass. The company expects to employ about 700 people during construction and estimates that the facility will use 200-300 permanent staff when in full operation.

Molycorp couldn’t match its hopes when it issued its IPO in July, settling for a price of $13.25/share, not the $15-$17 it had wanted. Shares even fell on the first day, closing below 12.50. Since then, the shares have shot up more than 300%.

Shares in Molycorp is setting new highs today, and the stock is still climbing, at $43.05, up nearly 10%.

Paul Ausick