I only urge those of you who are still rational to note that the issue for the rare earth industry, as with every other “smokestack” industry in the People’s Republic of China, is to operate in such a way as to ensure that energy intensity – the amount of energy used per unit of production – goes down, not up, as it has been doing lately in the reversal of a long term trend. The lessening of efficiency and productivity indicated by the rise in energy intensity has embarrassed the Chinese government, which pledged to reduce carbon emissions per capita through raising energy use efficiency and thus lowering energy intensity by the end of the 2006-2010 five year plan to a level at or below those in 2005. Note that the source of 87% of China’s energy is coal.

This “embarrassment” is the driver for the State Council’s fury at the rare earth mining industry, which allowed Western reporters to see the devastation from environmental disregard and rogue (illegal) mining and smuggling of goods.

NOTE: The Chinese government can only insure that it gets reliable data on such topics as energy intensity, from closely monitored large state owned and run operations. So figure out for yourself why this might cause a “restructuring” of a notoriously opaque industry.

The so-called emphasis on the Sichuan rare earth production from the “ionic clays” is a direct result of China’s governmental worries about pollution impacting efficiency, health, and safety.

You won’t have seen many photos of Sichuan located rare earth “mining operations” that were taken in the last 20 years or so. Why? These operations were of the open above ground acid leach type and are said to have had devastating effects on the local ecology and ruined actual or potential farmland in a country where agriculture is a critical industry.

Remember that China imported grain from the USA as recently as last month (May) due to the drought and “other conditions” in China.

Rare earths are nowhere near as important to the China State Council as they are to Western stock promoters, trying their P.T. Barnum Best to get us alarmed over a non-existent direct threat, from a battered industry in a country trying to raise its standard of living and meet stated national economic goals.

China is not the USA. China’s central government is embarrassed when its planned economic advances are not on track; it doesn’t seem to blame its shortfalls on a US conspiracy to deprive China of domestic economic progress.

China, like the USA today, apparently, believes in strong central government ensuring the health, safety, and well being of its citizens. The difference is that China’s one party rule allows decisions to be made for any and all industry, which, “private” or public, must follow the rules and attain the goals set by the State Council. China’s state councilors are notably better educated and informed than their American counterparts, and clearly do not seem to simply follow industry advice given at lavish dinners and on expensive fact finding missions to beautiful beaches, to discuss mining issues.

I wonder if any of the punditry on rare earths can even imagine a Western government that asks reasonable questions of a natural resource industry, and then having received answers, makes decisions on the allowable operations of that industry based on a pre-determined set of national economic and political goals.

This bulls*** about the threat from China or the sinister machinations of the China State Council is of the same type as the commentary by those who read defense contingency plans, and write headlines shouting “US has Plan to Attack Canada!”

It is clear that China is trying to minimize environmental damage where it can without disrupting the general economy.

The Chinese rare earth industry is part of a larger supply chain that ends, in China, in a large number of end use technology products for both domestic use and export. Thus the production of rare earths cannot be slowed down, much less stopped, without negatively impacting the general economy.

It is because of its, the rare earth production industries’ critical spot in the supply chain for so many goods, that China is regulating it rather than just shutting it down for environmental remediation.

China’s government believes in direct central control of the economy; that is in fact its central philosophy of the correct path to the betterment of mankind. Therefore the Chinese government will do whatever it can to minimize a negative effect on the central economy by a rogue or misguided industry.

This is accomplished by putting direct control of that industry into the hands of state corporations reporting to officials in Beijing who are directly responsible for meeting goals and who, in Beijing, have the power and authority to shut down state industries or to change managers.

Any capitalist would agree that this is the best way to manage a business: by setting goals and judging managers by performance to objective. It is also obviously a test of the goals themselves, but that is a political not wholly an economic issue.

As for prices: I have said before, and I will say it again. “Private” industry in China has been keeping the prices of the rare earths low by fierce competition without regard for environmental or efficiency standards. The central government has two fears:

1. INFLATION of commodity prices,
2. CURRENCY APPRECIATION without government sanction.

The rare earths are clearly due for a price correction.

Competition is the life blood of free market capitalism I am told by Larry Kudlow and lesser lights in the firmament of punditry on that topic.

So, I recommend to all of the institutional investors reading this that they take a hard look at the non-Chinese rare earth mining opportunities, and to use whatever fantasy price increases come out of learned reports and surveys in the near term to assess their risk of making/losing money by investing in a rare earth mining venture.

Then they need to take a hard look with a laser up the you-know-what of the management, of their choices from the above to weed out the grossly incompetent from the just plain incompetent. Then the institutional investors can place financial MANAGEMENT SUPERINTENDING PERSONNEL WHEREVER THEY INVEST.

Then they need to GO TO China and Japan to round up end use customers for the short term as well as the long term.

Then they can securitize the off-takes from the chosen mines and sell them to the end use customers, or speculators, or stockpile agents, everywhere to distribute the risk of non-performance.

And then… the world can go on to the next rare metals supply crisis.

By Jack Lifton

The Chinese rare earth mining and refining industry is growing up. Recognizing the critical importance of the rare earth elements to modern high tech and cleantech, the Chinese government has decided to finally end the era of free-for-all mining for these critical materials. The announcement came in a news story entitled “MIIT Releases Draft Entry Standards for Rare Earth Industry.”

The announcement is a typical administrative request for comment by the affected industry, on standards for the creation and maintenance of ventures in that industry. In other words, the Chinese government is going to “regulate” rare earth mining and refining, and in particular is raising the bar for entry into or for remaining in the rare earth production and refining industry.

The article commented that the notice ”outlines several detailed regulations concerning the industry”, including:

• Production scale
• Technological equipment
• Energy consumption
• Resource utilization
• Environmental protection
• Product quality
• Supervision and management.

The article went on to note that the notice proposes minimum annual production capacities of:

• 300,000 tons for light earth enterprises
• 3,000 tons for “red earth” enterprises

In addition:

“The size of rare earth smelting projects should be no less than 1,500 tons per year. The capital ratio of fixed asset investment projects in the industry would be set at a minimum of 40% under proposals included in the notice. Energy consumption would also be tightened under the notice, which stipulates that energy consumption in rare earth smelting should have an efficiency of at least 85%, and energy consumption for each ton of product produced should be less than 1.6 tons standard coal equivalent.”

The article went on to say that

[t]he analyst said that as Baotou Steel Rare-Earth Hi-Tech Co. Ltd. (600111.SH), the largest rare earth enterprise by revenue in China, has largely integrated the rare earth resources in North China, the new wave of restructuring will focus on South China, in particular Sichuan, Jiangxi and Guangdong provinces.”

I have encountered the term “red earth” enterprises before, as part of an inquiry on translating documents such as this from a Washington, D.C.-based colleague who is fluent in the Chinese language. We decided that “red” or sometimes the word “colored” is used in such descriptions to mean “the other lesser available kind of metal in a category.” It means non-ferrous metal when applied to base metals and “heavy” rare earths when applied to rare earths.

But even if that is a correct interpretation, 3,000 tons seems rather small unless you decide that included in this figure are only results for dysprosium, terbium, and europium, which I think likely. Yttrium, which is traditionally group with the heavy rare earths, may have been eliminated from that category for the purposes of this regulation.

It is also difficult to decide whether or not the 300,000 tons and 3,000 tons refers to ore concentrates or to refined oxides or metals. But in any case, the figure set for allowed production by the industry as a whole, explains why Baotou is announcing its stockpiling as an inventory build. The company is proposing to unofficially cover the needs of the entire Chinese rare earth utilization industry for at least a year, probably more, in the case of a total shutdown, for whatever reason. This is equivalent to saying to the government regulators: “We agree with your plan and with your goals as set.”

The Chinese mining industry does not originate or make economic or political decisions for the state; it follows directives in those categories from the state.

I have written before of the Chinese government’s overriding economic concerns being primarily to hold down inflation and maintain a stable currency.

MIIT is merely doing its part to implement those core economic policies in the rare earth mining industry by, for the first time, closely regulating it. This will eliminate “artisanal,” i.e., illegal, mining, and allow a metric for evaluating the efficiency of a mining company to be used, by creating fixed operating parameters and targets under which regime individual enterprises can be judged, along with whether or not to issue a license for a new enterprise or an expansion of an existing one.

How will this affect the USA? First of all, the numbers tell us exactly what China will produce at a maximum for all types of rare earths. Second, it will make every aspect of dealing with “artisanal” miners a crime, so that foreign as well as Chinese buyers of “smuggled’ goods will have much to think about in the way of consequences,  before encouraging such behavior. Positively, this will mean that when a target is missed within the Chinese rare earths industry, there will be an immediate opportunity for a non-Chinese supplier to step in to fill the gap, and it will encourage Chinese export customers to plan for such “shortages,” which will probably drive China, when and if they occur, to restrict exports.

For the moment, Baotou’s creation of a strategic inventory should be a red flag (excuse the pun) for those who think the rare earth security of supply issue is losing traction. China’s rare earth industry is already preparing for the consequences of restructuring. This will include a possible shutdown for environmental remediation. This will mean conservation by China of critical resources.

I say again: We need to get some non-Chinese resources of the rare earths into production as rapidly as possible. Baotou is saying we have just 3 years left to get our act together.

What do you think?

By Jack Lifton

It basically states that China’s largest producer of rare earths, which is identified as Baotou Rare Earths, is going to build a stockpile of 300,000 tonnes of rare earth ore concentrates over the next three years.

The story denies that this is a government mandated but does say that Chinese “experts’ are divided among themselves on the value and the meaning of this move. Some think it reflects a government interest in building a strategic stockpile and others say it is to make sure that prices of the rare earths continue to be set by China even if foreign production should occur.

I want to contribute for my readers a third even more plausible explanation. I think that the rare earth mining industry in China is now facing a large environmental cleanup program; the Chinese government has decreed a halt to new mining projects including expansion of existing operations until 2015 or until environmental pollution due to a history of mining for volume without regard to environmental consequences has been “remediated.” This can take years and huge amounts of money. But, in any case, there is already too much dependence on this mining at many stages in the supply chain for components and finished goods, and simply stopping mining during the “clean up” and restructuring, which would be normal at some point, could well be an economic disaster for China.

I think that Baotou is building a large stockpile in anticipation of a supply interruption to be caused by the clean up and restructuring of the mining industry in general and the rare earth mining sector in particular.

I therefore repeat my admonition to those who are impeding the startup and restarting of the non-Chinese rare earth mining industry: hurry up, you’re running out of time. If Baotou reaches its goal of a 300,000 tonne reserve of ore concentrate by 2013 then the Chinese rare earth mining industry could shut down for as long as two years to give itself a window for remediation. This, of course, would mandate a cessation of exports of rare earths during that period in order to be able to provide for the demand of the domestic Chinese market.

I think that my theory of why Baotou wants to create a large stockpile of ore concentrates is the right one.

By Jack Lifton

Readers of The Jack Lifton Report who have been with me since launching the site in the fall of 2009, will recall that I published an article on October 15, 2009, available for download to subscribers only, called “The Rare Earth Crisis of 2009″. In this article, on the subject of the alleged existence of a report in China on restricting exports of rare earths, I said the following:

“The problem that has been exposed by the “discovery” of the memorandum on rare earth export allocations is that it proves the conjecture highlighted by well-known Australian rare earth specialist, Dudley Kingsnorth, that Chinese domestic demand for rare earths is rapidly catching up to Chinese supply output. Mr. Kingsnorth has predicted that before the expiration of China’s next five year plan in 2015 Chinese domestic demand will exceed its domestic production.”

I made the statement in the last sentence based on a chart that Mr. Kingsnorth presented at the 2008 SME Annual Meeting, and which was widely circulating at the time that I wrote my October 2009 article. A version of it is reproduced below:

One can see that this chart indicates that by 2012, the supply in China for rare earths is forecasted to be equalled by the demand for these materials, and given the trends of both factors, it would be reasonable to suggest that past 2012, demand would exceed supply. This is even more clearly illustrated in the following chart from the 2007 Roskill report on Rare Earths, authored by Mr. Kingsnorth:

Yet another variation of these two charts appears in the presentation made by Molycorp Mineral’s Mark Smith at the China Magnetics 2009 conference at the end of October 2009 – AFTER the publication of my original article –  again indicating that Chinese demand would meet Chinese supply by 2012.

One week after the original publication date of the aforementioned article, Mr. Kingsnorth presented an updated set of data and forecasts for the rare earths space at the Critical & Strategic Metals meeting in Washington DC, during October 20-22, 2009, for which I was the conference Chairman and Mr. Kingsnorth was a featured presenter by my invitation. He also distributed hard copies of a comprehensive document titled “An Overview of the Rare Earths Market”, published in October 2009, which also contained the updated chart, which is reproduced below.

From this chart, we can see that, based on updated information and data, Mr. Kingsnorth is now forecasting that China will be self-sufficent in rare earths at least until 2014, and probably beyond. It is my understanding that an additional version of the Overview document was published in November 2009, though I am not sure if the chart was updated in this document or not.

We fast forward now to December of last year. In response to requests to publish my original article to a wider audience, I reproduced the October 15, 2009 article as a posting at the Seeking Alpha web site, specifically on December 15, 2009. What I did not do, was include the publication date of the original article here at The Jack Lifton Report, and no doubt this is a contributing factor to the confusion on this matter. What I was also not aware of at the time, was that Mr. Kingsnorth had updated the earliest charts above, presumably at some point in 2008, and presented new data at the PDAC meeting in Toronto in March 2009, which I did not attend.  A version of that chart is reproduced below:

We can see then from this chart, and the chart above it, that from at least some point in 2008 onwards, Mr. Kingsnorth has actually been forecasting a surplus of rare earth supplies in China in future years.

Very shortly after publishing the article at Seeking Alpha, I was contacted by Mr. Kingsnorth, asking me to withdraw the comments detailed above, in the Seeking Alpha article, claiming that they were “totally incorrect, without foundation and misleading.”

Based on the lack of an original publication date on the Seeking Alpha article, it would be reasonable for Mr. Kingsnorth to have thought that I had originally written my comments after the publication of not one but two revisions of his chart, and that on the basis of these latest charts alone, comments that Chinese demand was about to exceed supply would indeed be inaccurate. However, given that Mr. Kingsnorth did publish charts in the recent past, still in wide circulation at the time of my original article, indicating that future Chinese demand would meet or exceed supply in the relatively near future, I would have to disagree that the comments were without foundation, albeit based on information from Mr. Kingsnorth that, at the time of the original publication of the article, had been superseded by more up to date forecasts. There was certainly no intent to mislead. I would also point out that the 2008 and 2009 charts have had very little circulation and were difficult to obtain even for the purposes of the present article.

I regret not being aware of the 2008 chart, presented at the PDAC meeting in March 2009, and I regret not including the original publication date of my article when reproducing it at the Seeking Alpha site, as it might have alleviated the subsequent confusion as to the origin of my commentary. Whenever I  re-post articles via various channels I usually do so within a relatively short time period; that was not the case for the article being discussed here. Going forward, I will look to include the original publication date on any such articles.

I of course take no issue with Mr. Kingsnorth or anyone else revising their forecasts on a periodic basis; such actions are of course natural and expected, in the face of new data that individuals obtain, I do the same thing myself and it is sensible to publish such updates as soon as is practicably possible.

As it happens though, and separate from the issue above, I respectfully disagree with Mr. Kingsnorth’s current projections on this matter. The latest annual production target figures from China, seem to me to show a significant reduction in the targeted annual output of antimony, tungsten, and the rare earths – three resources for which China is the world’s principal supplier – compared to Western estimates (e.g. by the USGS) of what those numbers were and should be. Issues of environmental management and productivity may now be intervening to cause me to re-assert my original belief that Chinese demand and Chinese supply could cross even earlier than thought, so that Mr. Kingsnorth’s original prediction may now have more validity than it did even when it was first made. Other commentaters and analysts would seem to share this viewpoint.  I am looking to further validate my own predictions by investigating the situation in China itself, on my planned trips to China later this year.

Anyway – I hope that the above information provides sufficient information to resolve the issues raised by my comments in December, and those by Mr. Kingsnorth last week.

By Jack Lifton

American environmentalists who have disproportionate power to their numbers, due to selective investments in elected politicians, regularly whine about the evils of extracting oil from shale (USA) or from tar sands (Canada), but this never prevents them from driving their Canadian-fueled and often -manufactured vehicles to rallies against such production.

My uncle Yale died on the beach at Anzio while disarming a German mine, so that Canadian and US forces could land. He and his brother were transported to the Anzio beach along with their fellow Canadian Rangers in a landing vessel made in the USA and under cover of US Naval aviators and US battleship artillery. But that was then. I have heard since that day that Canadians can always be counted upon to do the right thing – i.e., to do whatever is best for the USA.

Today however, with regard to the rare metals that form the brain and nerves of our technological civilization, Canada is perhaps ready to negotiate with Washington as a more than equal trading partner. America’s version of a permanent civil service, the hired employees of the various cabinet offices, which are, in particular, Defense, Interior, and Commerce, tell me that they are aware of the critical importance of Canada’s natural resources to the American way of life, and that they have always been aware. Unfortunately, as I am told over and over again, the politicians are in charge but on natural resource supply issues, other than oil, they are clueless.

Last year, there began to be a sea change in Washington with regard to at least one category of non-oil resources, the rare earth metals. Bureaucrats first at the US Department of Defense, and then at the Departments of Commerce and Interior, began to study the market fundamentals and both the military an industrial uses of the rare earth metals. I was asked to participate in roundtable discussions about rare earth metals at the Pentagon, and I was able to invite and get acceptances from Washington officials to speak at conferences, of which I was an organizer.

In late 2009, I was asked  to comment on legislative additions to the US National Defense Appropriations Act for Fiscal Year 2010 (FY210 NDAA), which required the Secretary of Defense to initiate a study of the rare earths market to be made and delivered to Congress by April 1, 2010. Warp speed for such a study in Washington time. The mandate for the study became law when President Obama signed the FY2010 NDAA. It is underway at the Government Accountability Office (GAO) with data collection being supervised by the Department of the Interior, which is in charge of both actual mining and resource data collection in the USA. I have also participated in the drafting of an Act known as RESTART that would fund the restarting of the rare earth supply chain into the USA. This is the most rare earth metals activity I have ever seen by the US Federal Government, but it still has a long way to go before it is enacted or funded. But it is actually underway.

The rare earth supply “crisis” that came to public attention last year when China hinted it might further restrict the export of rare earths and even stop completely the export of the higher atomic numbered, “heavy,” rare earths, brought Canada onto the radar screen in Washington. Canada has two rare earth mining ventures well on the way to production, Great Western Minerals Group (GWMG) and Avalon Rare Metals, as well as a myriad of others in process, all financed in Toronto or Vancouver. Canada also now has the first funded ETF venture for rare metals, including the rare earths, which will create in part an essentially private strategic stockpiling venture. I told a conference that I chaired in Washington, D.C., last October, that America’s future is dominated by the two “Cs,” China and Canada. I said that unless the US immediately recognizes that its resource base must be North American not just American, then Canada and China would become larger and larger natural trading partners in natural resources.

I believe more than ever, that unless Washington and Wall Street recognize the critical importance of developing natural resource production in Canada, there will sooner or later be a reckoning. The reckoning will be that the American standard of living declines from one generation to the next for the first time, even as that of Canada and China grows.

By Jack Lifton

Paul Volcker didn’t mention the “rare earths” specifically so don’t hit your speed dial for your broker just yet. But he did speak about “green jobs,” and I was surprised at what he said on Wednesday although it anticipated the hubbub that has occurred since as several members of Congress seem to have noticed just where the green jobs are being created.

The former Federal Reserve Chairman said that although “green jobs” were desirable and perhaps necessary he wasn’t at all sure that they weren’t being created in such a way that they would benefit anyone seeking a manufacturing job in the USA. I understood him to be saying that current policies seem to insure that green manufacturing jobs will be in the low labor cost countries where the natural resources are available. He didn’t once utter the name, Obama, in his talk nor did he say anything about the current administration’s policy that I heard.

This morning (Friday, March 5) I note that some Missouri Congressman has started a fuss calling on the administration to drop out of NAFTA. Standing behind him in the photo in the paper were, of course, Nancy Pelosi and Harry Reid, the reverse Burns & Allen who now govern in America. I wonder if any of the people in that photo have ever asked Paul Volcker for advice. I doubt it.

Jobs have moved to Mexico because labor is cheaper there; Jobs have moved to Canada, because natural resources are abundant there and Canada is a nation not yet ready to give up its industrial base entirely just to create Wall Street (Bay Street) bonuses; and Canada is an immensely rich treasure house of natural resources.

If the USA wants to truly reverse the trend of offshoring and outsourcing it will have to enlarge, not diminish, its engineering education system and make it accessible to those qualified by merit alone. It will have to resume the mining of and the development of domestic resources of strategic and critical metals such as the rare earths, and it will have to support both of these agendas financially.

The Congress constantly treats the symptoms of our economic decline rather than the disease.

Can anyone in Washington hear what Paul Volcker is saying? Is their tone deafness on natural resources and technology a symptom of our disorder or is it the disease that is bringing us down?

By Jack Lifton

Subscribers to The Jack Lifton Report can read the paper that I presented (if you’re not already a subscriber, joining is free and it’s as simple as filling out the short form in the upper right of this Web page). I warn you that it’s not for the complacent. You’re going to find out some facts about the Chinese metals industry, particularly about its size and growth rate, that will make you think very hard about the position that America’s foolish concentration on not producing natural resources, has put us into.

I heard fascinating talks by Dr. Zhu Baoliang, Chief Economist of the Economic Forecasting Department of the China State Information Center, and Professor Zhao Yumin, Director of the Chinese Academy of International Trade and Economic Cooperation. Both of these speakers emphasized that China welcomes non-Chinese production of the rare earths into the world market, because China’s domestic economic growth rate means that China needs more and more of its own domestic resources of all metals for its own use. Therefore, since China does not want to impede the growth of the world economy of which it considers itself a part, it must hope, both speakers said, that its best customer and biggest competitor, Japan, will be able to find resources of metals such as the rare earths from somewhere other than China.

After my talk Dr. Zhao asked me my opinion. I told him that I believe that China wants Australian, and/or American, and Canadian and/or South African rare earth mines to come into production so that, not only can China dedicate more of its own resources to its domestic economy, but also that China has the option to buy rare earth materials from non-Chinese suppliers, should the time come when Chinese demand outstrips Chinese domestic supply.

A key issue for the Chinese economy and the Chinese mining industry is a preoccupation with preventing commodity price inflation and preventing the Chinese currency from appreciating so fast, that Chinese exports become non-competitive. These pre-occupations are keeping the prices of all commodities produced in China from rising. In the opinion of the Chinese speakers, the low prices of the rare earth metals are a result of economic forces far beyond the industry’s ability to control.

An old China “hand” (as we used to call men like him) who was at the conference, told me that the Northern rare earth mines operate at best with a 20% gross margin and the Southern ones, the so-called ionic clays from which the higher atomic numbered rare earths, europium, dysprosium, and terbium are produced, can run so that they have a 30% gross margin. These margins are too low for the amount of environmental remediation necessary to meet WTO and new stringent Chinese domestic standards for safety and health. At the same time that the Chinese rare earth industry is facing environmental challenges, it must also restructure to improve efficiency and to eliminate so-called artisanal mining entirely.

The end result is that China’s mining industry as a whole and rare earth mining industry in particular, will be producing less material in the near term than was originally planned. Chinese high tech manufacturing industry, especially the alternate energy and other green industries, are swamped with business, and they don’t care about the problems of the mining industry – just as would happen anywhere in the world.

This in my opinion is a fantastic opportunity for those rare earth ventures outside of China that can be brought into production as soon as possible. There will be a sorting out later in the decade, when the Chinese light rare earth mining industry has remediated its environmental and productivity issues, but until then there will be strong markets in both Japan and China for rare earths.

I will report on my views of the future of the rare earth industry both inside and outside of China next week, when I return from China to attend the APS workshop on critical materials at MIT. I will have another chance there to speak with Dr. Karl Gschneidner, the dean of rare earth scientists, and Dr. Anthony Mariano, the world’s best known rare earth geologist. I want to get for you their opinions on what I heard in China.

Stay tuned and hold on to your money until we know a little more.

By Jack Lifton

The filing, as I read it, answers one question that has been out there for nearly three years: How much did the buying group, Goldman-Sachs, Resource Capital, Pegasus Capital, Traxys, and a small management contingent pay for what they bought from Chevron? The answer seems to be $80 million, which I was told by a bidder in the 2007 auction for the company, was less than that particular bidder had offered at that time.

I believe the losing bidder who told me the story, and I think I understand what happened. It is likely that Chevron decided to take cash from a buyer rather than accept bids from other buyers, who would then most likely have had to go to the markets to raise the money. This, I am told by a friend who had a similar experience with the auction of an oil and gas property by Chevron, is fairly routine with Chevron in these situations.

In any case a further reading of the SEC filing caused a very savvy securities lawyer I know to say:

“At this stage it’s real difficult to tell what the post-money valuation will be for Molycorp. We know they want to raise $350 million, unless the offering size is increased, and we know that IPOs typically sell 20% to 30% of a company. So depending on their final structure the market capitalization could easily start out in the $1.5 billion range. With proven and probable reserves in the 2 billion pound range and average values of a few bucks per pound, it may be fairly easy to maintain a market capitalization ….”

My friend further pointed out:

“To date, [the original buyout group's] investments at Mountain Pass are less than $200 million, but they’re likely to sell about 25% to 35% of the company to the street for $350 million which would value the original buyer’s residual interest at something on the order of $500 to $600 million when the dust settles.”

It is my opinion that the interest in the rare earths sector by the investing public is still “hot,” so that this is a good time for a Molycorp IPO.

I think that institutional investors are holding back on long term investments in the rare earth sector until someone outside of China starts producing rare earth metals and alloys, or at least, separated rare earth oxides. Molycorp, by going public to raise capital, is doing the whole sector a favor in regard to others getting longer term investments.

By Jack Lifton

By Jack Lifton

The abstract for the article states that:

In recent decades, rare earth elements (REEs)—lanthanum (element 57) through lutetium (element 71) along with scandium and yttrium—have become vital to a host of novel electronics and green-energy technologies. But while researchers are steadily inventing new applications for rare earths, the supply isn’t keeping up—and users of REEs are feeling the pinch. Today, China supplies more than 97% of all REEs, and increasingly the products from which they are made. But because its domestic demand for the elements has been growing even faster than its production, the country’s REE exports have dropped from 75% of the total produced to 25%. For a handful of elements, China is expected to use all it can produce sometime between 2012 and 2014, leaving the rest of the world out in the cold unless manufacturers and mining companies develop more sources soon.

I was interviewed for this article, along with a number of other people from within the industry. My key point was that the potential new mining companies have not been able to secure all of the funds that will be needed to start operations. The article goes on to say,

“[n]ew mining efforts are just the first step. Numerous rare earth oxides are invariably mixed together in ores. They must be separated and purified, reduced to metallic form, and then alloyed, cast, and shaped. All the Western businesses that used to do these extra jobs are gone and will need to be restarted.”

As I’ve said before, getting all of this done will cost hundreds of millions of dollars, and will take anything from 8-10 years to accomplish, from start to finish - a time frame that scares away a lot of investors, who are interested in shorter term payoff. It’s a real dilemma – however, other countries are not resting on their laurels, in particular Japan. Western companies and governments need to act decisively, or they will find themselves frozen out of the market. We have 3 to 5 years to get this done but we haven’t even started yet.

You can obtain a copy of the article [for a fee], from the Science Web site here.

By Jack Lifton