Analysis of MolyCorp's "Letter of Intent" to purchase Great Western Minerals Group.
It was announced on April 20, 2009, by privately held MolyCorp that it had negotiated a “Letter of Intent” with Canada’s Great Western Mineral Group to buy a controlling interest in that company.
What possible advantage can there be for MolyCorp, which was privatized in 2008 by a group of venture funds, one, Resource Capital, specializing in mining, and which was underwritten by Goldman Sachs (NASDAQ:GS), in acquiring the publicly traded Great Western Minerals Group (GWMG)? It may be that GWMG's business model and operations contain something that completes MolyCorp's business model for its Mountain Pass, California, rare earth mine, so that the sum of the parts is greater than the whole.
MolyCorp was purchased and privatized from Chevron (NYSE:CVX) Mining in 2008 by a group of investors with specialized knowledge of rare earth mining, which was backed by Goldman Sachs, and included an entrepreneurial individual, who I think, must have been the driving force behind the deal.
Great Western Minerals Group has concentrated on trying to raise the money to develop a rare earths mineral body at Hoidas Lake, Saskatchewan, in Canada. In 2007, GWMG purchased, from Energy Conversion Devices Inc. (NASDAQ: ENER), the facilities of Ovonic Materials in Troy, Mich., and in 2008 it purchased the operations, facilities and business book of Less Common Metals Ltd. of Birkenhead, U.K., near Liverpool. Ovonic Materials was renamed Great Western Technologies Inc. (GWTI), and the plan was to merge the two operations under a common management as a wholly owned subsidiary of GWMG with the purpose of manufacturing specialty alloys based on rare earth metals. Less Common Metals was already a major producer of the powdered magnet alloys, neodymium-iron-boron and samarium-cobalt. GWTI was equipped to make the electrode alloy for nickel metal hydride batteries and other hydrogen storage alloys as well as rare earth containing aircraft alloys.
The GWMG business model devised by its founder, Gary Billingsley, was called "mine to magnet," which meant that the rare earths from Hoidas Lake first, and other properties later, would go directly to the GWTI locations for manufacturing rare earth magnet alloys and, perhaps, battery electrode materials, so that GWMG would be the only vertically integrated producer of rare earth based magnets and alloys in the world outside of China.
The problem for GWMG was, as with all “exploration” companies, undercapitalization. The mining properties were not developed as of yet, so that GWTI could only process rare earths bought from China. Apparently, without its own mining operations, GWMG was not competitive as a magnet alloy producer. The investment climate was not inclined to fund the development of the mining properties, and finding itself challenged to maintain working capital GWMG succumbed to MolyCorp, which could buy all of the shares of GWMG on the day before this announcement for under $10 million, so that control of the company could be had for just over $5 million.
Why did MolyCorp, which has its own production startup problems, do this? The announcement speaks of a MolyCorp "mine to magnet" strategy, but MolyCorp has just now come up with this strategy, at least publicly, so it would have had to acquire or build and validate a facility and find a market for the output of the facility in order to make the "mine to magnet" model work. It was far cheaper to buy GWMG and acquire what most people in the magnet business consider to be a first-class magnet alloy producer run by a first-rate technical manager, Mr. David Kennedy.
Even though MolyCorp will now have to assume the liability of paying the remaining indebtedness incurred by GWMG when it bought LCM as well as any other debts it probably got a bargain if, and only if, MolyCorp can begin processing ores at Mountain Pass to feed the magnet alloy production.
It is not clear whether or not Mountain Pass will be allowed by California regulators to reopen its mining operation due to environmentalist resistance. But the rare earth ore processing plant is in operation, although at a low level, and even now produces neodymium-praseodymium materials for magnet use.
One solution for Mountain Pass would be to upgrade the size and capacity of its ore refinery and process concentrates for other miners, outside of China, and take its payment in kind so as to feed its new magnet alloy division. The problem with this approach is that it may be putting the cart before the horse.
There is today almost no non-Chinese rare earth ore production. And even if MolyCorp were to find the money to invest in the other rare earth properties in North America, Australia or Africa to bring them into production there are two problems:
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No two ore bodies have the same process chemistry, so that each ore body would have to be studied to develop a process compatible with MolyCorp's facilities and processes in California, this would be very expensive and time consuming; and
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All non-Chinese rare earth ores that could be produced today contain radioactive thorium and probably uranium, so that if these were not removed at the mine site they probably could not be shipped to California.
When Goldman Sachs withdrew the funds it had raised for Australia's rare earth startup, Lynas, (ASX: LYN) last month, it caused Lynas to cancel the construction of what would have been the largest rare earth ore processing plant in the world outside of China. Today, the only possible existing site for processing large quantities, reasonably soon, of rare earth ores outside of China would be at Mountain Pass. If Goldman Sachs decides that the risk of being stopped by California's regulators can be overcome it may now be shifting that capital formerly at Lynas to MolyCorp for the ramping up of the refinery there.
There is an active movement in Washington, D.C., to reconsider the mining of strategic and critical metals within the U.S. as a security issue for the armed services. This is on top of the realization on Wall Street, Bay Street, Washington and Ottawa that there will be no development of wind-generated energy without the guarantee of a large supply of neodymium. These may be the hooks that MolyCorp is using to get Goldman Sachs to finance Mountain Pass, and the vertical integration of MolyCorp through the acquisition of GWMG's magnet alloys production capabilities may be key to this strategy.
Watch for MolyCorp to now try to buy or finance the development of the rare earth properties of publicly traded Canadian junior Avalon Rare Metals (AVL:TSX), the other Canadian, and even of privately held Thorium Energy Inc., the large rare earth deposits of which are in Idaho and Montana.
Even Lynas may now be looking for a home for rare earth ores from its Mt. Weld operations until it can refinance its aborted refinery in Malaysia.
This is the most action in rare earth mining in North America in a long time. Now if only someone would put a shovelful of ore into the hopper.
Jack Lifton is a featured contributor to the new Resource Investor. With 47 years experience in the OEM electronics and automotive supply industries, he is today a metals sourcing consultant for OEM heavy industry and offers due diligence analysis for institutional investors. Lifton is a prominent speaker, globally, on the market fundamentals of minor metals and their end-uses. He has traveled the world on behalf of clients including Fortune 500 and Global 1000 corporations. Reach him directly at JackLifton@aol.com.