While Molycorp’s mine in the Mojave Desertonce met almost all the world’s demand, it has yet to turn a profit anddoesn’t have substantial amounts of the “heavy” rare-earth metals thatcommand the highest prices. Photographer: Jacob Kepler/Bloomberg
March 7 (Bloomberg) -- China’s controlof rare-earth metals is providing Molycorp Inc., owner of the largestU.S. deposit of the minerals, with the most-valuable currency in theindustry to pursue acquisitions. Bloomberg's Deirdre Bolton reports.(Source: Bloomberg)
China’s control of rare-earth metalsis providing Molycorp Inc. (MCP), owner of the largest U.S. deposit ofthe minerals, with the most-valuable currency in the industry topursue acquisitions.
Great Western Minerals Group Ltd. (GWG) and Ucore Rare MetalsInc. (UCU) may become targets after shares of Greenwood Village,Colorado-based Molycorp tripled since its U.S. initial publicoffering in July as China curbed exports, Byron Capital Markets’Jon Hykawy said. Molycorp is now valued at 117 times earningsbefore interest, taxes, depreciation and amortization this year,according to data compiled by Bloomberg that includes net debt,the highest of any diversified metals producer.
The surge in Molycorp’s market value to $4 billion makestakeovers cheaper as it tries to compete with Chinese producersthat control 95 percent of the world’s supply of elements usedto make magnets for Raytheon Co. (RTN)’s Tomahawk cruise missiles and Toyota Motor Corp. (7203)’s Prius sedans. While Molycorp’s mine in theMojave Desert once met almost all the world’s demand, it has yetto turn a profit and doesn’t have substantial amounts of the“heavy” rare-earth metals that command the highest prices.
“Time is not on their hands,” said Brian Hennessey, aPurchase, New York-based analyst for Alpine Mutual Funds, whichoversees $6 billion. “Molycorp would do themselves a service bydiversifying into heavy rare earth. There are a number ofcompanies with much lower valuations in the marketplace. Theycan use their currency to do fairly accretive acquisitions.”
Periodic Table
Great Western, which plans to start production at a SouthAfrican mine in 2013, and Canada’s Quest Rare Minerals Ltd. (QRM) and Avalon Rare Metals Inc. (AVL), which control heavy rare-earthdeposits, may be possible takeover targets for Molycorp,Hennessey said.
Ucore of Halifax, Nova Scotia, may also attract suitors forits Alaska mine that contains both heavy and light rare-earthmaterials, according to Byron Capital’s Hykawy and Jack Lifton,an independent commodities consultant and strategic metalsexpert who has studied mining for almost 50 years.
Ross Bhappu, Molycorp’s chairman, declined to comment aboutpotential acquisitions.
The rare-earth elements are 17 chemically similar metals,such as lanthanum, neodymium and dysprosium. They are used inmagnets for everything from cell phones and electric cars towind turbines, guided missiles and targeting systems for tanks.
BlackBerrys made by Research In Motion Ltd. (RIM) of Waterloo,Ontario; Cupertino, California-based Apple Inc. (AAPL)’s iPods; GeneralMotors Co. (GM) of Detroit’s plug-in Volt; and Toyota City, Japan-based Toyota’s Prius all use rare-earth metals.
Radioactive Elements
While rare-earth materials are relatively abundant in theearth’s crust, finding deposits large enough to mine is lesscommon, the U.S. Geological Survey said. Global demand for theelements may more than double by 2020 from 125,000 metric tonslast year, according to Molycorp’s filing last month with theSecurities and Exchange Commission.
Rare-earth metals are expensive for producers to extractand are often laced with radioactive elements. China has come todominate the market because it has been able to produce themetals more cheaply and with fewer environmental restrictionsthan its competitors.
Prices for rare-earth metals and shares of the companiesthat produce them have jumped since China said on July 8 that itwould reduce export quotas for the second half of 2010 by 72percent as it attempts to meet domestic needs while closingpolluting and inefficient mines.
‘Light’ Versus ‘Heavy’
Prices of many “light” rare-earth elements, includinglanthanum and cerium, rose 600 percent to 700 percent on averagelast year, Matt Gowing, a Toronto-based analyst at MackieResearch Capital Corp., said in a report to clients dated Feb.8. The price of dysprosium, a “heavy” rare-earth element usedin magnets for car motors, almost tripled to $305 a kilogram.
The Bloomberg Rare Earth Mineral Resources Index of 14companies has surged 273 percent since July 8, seven times morethan the 39 percent gain for the MSCI World Materials Index of161 commodities producers over the same period.
Molycorp, which was formed in 2008, has climbed 252 percentsince raising $394 million in its July 29 IPO to start its minenear Mountain Pass, California. The Standard & Poor’s 500 Indexhas advanced 19 percent in the same period, Bloomberg data show.
The 2,222-acre site, an open-pit mine located 60 milessouthwest of Las Vegas, produced a majority of rare-earthmaterials from 1965 to 1985, a report from the GovernmentAccountability Office in April showed.
Scarcity Value
While U.S. deposits also exist in several states such asIdaho, Wyoming and Utah, they are still being explored and couldtake as many as 15 years before becoming fully operational,according the GAO report.
The rally in Molycorp’s shares has left the company amarket capitalization of almost $4.1 billion. Molycorp also had$346 million more cash than debt as of Sept. 30, giving it anenterprise value of about $3.71 billion. That’s 117 times itsabout $32 million in Ebitda that analysts estimate Molycorp willgenerate this year, higher than the 42 other diversified metalproducers globally that are forecast to have earnings this year.
The median multiple is 6.3 times Ebitda, the data show.
Molycorp, which started its Mountain Pass mine in Decemberfor the first time since 2002 and has yet to report a profit ona net income basis, also sold $180 million of convertiblepreferred shares last month as it plans to increase productioncapacity to 40,000 metric tons a year by the end of 2013.
Cheap or Expensive
“Heavy” rare-earth metals account for only 1 percent ofMolycorp’s mine, according to Mackie Research’s Gowing.
“If I were running Molycorp, I would act as quickly as Icould to shore up what must be a light rare earth-dominatedoutput from Mountain Pass,” said Toronto-based Byron Capital’sHykawy, who covers rare-earth mining companies and is the onlyanalyst tracked by Bloomberg with a “sell” rating on Molycorp.“The longer Molycorp management waits, the greater the chancethe market switches its attention to some other criticalmaterial, and presently overvalued companies like Molycorp dropin value.”
Molycorp’s Bhappu said in an interview on March 5 that thecompany may still be undervalued. He pointed to estimates thatshowed analysts project Molycorp’s shares will reach $66.25.That implies a 34 percent gain, data compiled by Bloomberg show.
“Rare earth prices where they are today, you can make acompelling argument for Molycorp being undervalued,” he said.
Great Western
Great Western, with a market capitalization of C$300million ($308 million), and Ucore, which has a value of C$157million, would be likely targets for Molycorp, Hykawy said.
Great Western, which has posted annual losses since atleast 1991, specializes in processing rare-earth elements intoalloys used to make batteries, magnets and products for theaerospace industry. The producer said on March 2 it increasedits stake in a rare-earth exploration company that owns theshuttered Steenkampskraal mine in South Africa to 93 percent.
In January 2009, Great Western said it was working with themine’s owner to restart the mine, giving it exclusive access torare-earth metals at the site. The company’s shares haveadvanced 249 percent in the past year.
“We are not aware of anyone looking at us as a takeovertarget,” Gary Billingsley, chairman of Saskatoon, Saskatchewan-based Great Western, said in an e-mail. Partly because of theSouth African mine “we might look attractive to certaingroups,” he said.
Bokan Mountain
Ucore operates a former uranium mine at Bokan Mountain insoutheastern Alaska. The 19-mile Bokan site is estimated to beone of the largest combined heavy and light rare-earth mineraldeposits within the U.S., according to the company’s website.Ucore mines for “heavy’ rare-earth minerals such as dysprosium,which is used to make wind turbines and electric vehicles.
The company met with U.S. lawmakers in February to discussinitiatives that would allow the U.S. to recapture market sharein the rare-earth magnet manufacturing industry. Ucore’s CEO Jim McKenzie has said his goal is to become the first company toproduce dysprosium for magnets entirely on U.S. soil.
Shares of Ucore have almost tripled in the past year.
“There are players out there right now that I’m sure wouldbe interested in acquiring our deposit at these levels,”McKenzie said in a phone interview. “That doesn’t mean we wantto be acquired at these levels.”
Alpine Mutual’s Hennessey favors Quest Rare Minerals andAvalon as takeover targets for Molycorp. The companies hold twoof the largest deposits of “heavy” rare-earth elements in theworld, according to Mackie Research.
Strange Lake, Nechalacho
A portion of Quest’s Strange Lake project in northern Quebec holds about 1.15 million tons of the metals, accordingthe company’s website. About 43 percent are “heavy” rare-earthelements. Avalon controls the Nechalacho deposit near Thor Lakein the Northwest Territories of Canada, its website said.
The site holds an estimated 1.3 million tons of rare-earthelements, with “heavy” types accounting for about 20 percent,according to Mackie Research.
Avalon is forecast to start producing from Nechalacho in2015, with Quest’s Strange Lake deposit reaching production ayear later. Quest has doubled in value in the past year, whileAvalon has almost tripled, data compiled by Bloomberg show.Neither company has any reported revenue, the data show.
The weighted-average price of rare-earth metals at Avalon’sNechalacho site is estimated to be $94 per kilogram and $120 akilogram at Quest’s Strange Lake deposit, according to MackieResearch. That’s 45 percent to 85 percent higher than Molycorp’sMountain Pass mine, which is valued at $65 a kilogram.
‘Everybody’s Looking’
“There should be consolidation because of this valuationdiscrepancy,” said Alpine Mutual’s Hennessey. “It makes awhole lot of sense.”
Peter Cashin, CEO at Montreal-based Quest Rare Minerals,didn’t respond to a phone message outside normal business hours.
“We have no direct knowledge that Avalon is presently atakeover target,” said Donald Bubar, Toronto-based Avalon’sCEO. “We have heard such speculation occasionally, but to myknowledge, there is no substance to it.”
Molycorp’s Bhappu said last month rivals approached itseeking investment in their projects. The companies, which hedeclined to identify, are “all over the world, from Africa, Australia, Canada, the U.S., South America,” he said. “Thereal focus for us is, rather than acquiring, better evaluationand expansion of what we have on our own property.”
Companies that rely on rare-earth metals to make theirproducts such as Toyota may also be looking to buy assets orsecure supply agreements, according to Lifton. That may hastenconsolidation in the industry, he said.
“Our purchasing groups are leading various efforts tomitigate any potential supply disruption and ensure that we havea stable supply for our production needs,” Jeff Makarewicz, vicepresident of materials engineering at Toyota, said in an e-mail.
Rare-earth mining companies are “already talking to eachother and to companies like Molycorp and Toyota,” Lifton said.“Everybody’s looking for heavy rare earths right now.”
To contact the reporters on this story:Natalie Doss in New York atndoss@bloomberg.net;Tara Lachapelle in New York attlachapelle@bloomberg.net;Rita Nazareth in New York atrnazareth@bloomberg.net.
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