Hallgarten & Co sees Molycorp winning the day

“Too many companies have long indulged in sophistry of “Heavies vs. Lights.”

That’s the word from Hallgarten & Co, which just published a report on Molycorp’s acquisition of Silmet – a key component for a global player.

Hallgarten says the April acquisition of AS Silmet launched Molycorp as a player in the REE midstream where much of the margin is captured; that the deal left a number of “brides waiting at the alter” as exploration juniors were passed over for a “real deal” by the industry’s 800-pound gorilla; and that the plant gives the company an immediate outlet for its concentrates should it start mining with seriousness before its US-based processing plant is in place.

What’s more, the deal’s $89 million price tag for a 90% stake scarcely makes a dent in the company’s cash pile.

“The company claims that this purchase, in the short-term, will greatly increase its ability to supply products into the global rare earth market. It also provides a base from which to supply European customers,” Hallgarten says. “Unspoken in all this is the fact that REE processing can be a messy business with high environmental risk and buying an operating facility was probably the easiest way for Molycorp to secure a European presence rather than struggling with permitting in a location that might be more logistically attractive in Western Europe.”

Hallgarten said the Silmet purchase can’t be faulted.

“ Many who like their mining companies to be “pure plays” have baulked at the transaction as it smacked of being too “industrial” but these people fail to understand that REE is all about the Three Cs (Chemistry, chemistry, chemistry) and that the process is where the money is made – not at the pit wall,” the report states.

What’s more, this is where Molycorp should differentiate itself from the wanna-be players in the REE space, Hallgarten says.

“The company needs to project a dialogue to the market that lays out what the strategy clearly is in the REE space and steal the heights of the conversation away from those companies that have long indulged in sophistry of “Heavies vs Lights” and instead make it an argument that “Value Added vs Raw Material” is one destined to be won by the integrated producers rather than the mere quarry-masters,” Hallgarten says.

The report suggests Silmet should only be the first acquisitive move in what will be Molycorp’s emergence as a key player in the sector. Hallgarten says Molycorp now needs to get some heavy rare earth exposure – and fast.

“The easiest fix is to take over Ucore…and promote the merged company’s HREE component as its own,” Hallgarten writes. “(Molycorp) certainly has the money to get Bokan Mountain moving swiftly to production thus stealing the thunder of other players who might have ambitions to produce HREE in the relatively near term.”

Another target? Great Western, which bring not only the Steenkampskraal project in South Africa with its “easy picking” 7% TREO in the tailings into the mix but also a substantial underground resource and Less Common Metals in the UK, a major REO manufacturer and the Troy, Michigan plant .

“This “could bolster the argument that (Molycorp) is working to make jobs in America and adding value to the REE supply chain within the USA,” it says. “All of these add to the attractions for the politicians in Washington.”

Bottom-line here? Molycorp, with the Silmet transaction, has broken the ice in the hitherto M&A-free zone of rare earths, Hallgarten says.

If Molycorp makes the UCore and Great Western bolt-on acquisitions, then “the vast bulk of other REE plays are going to be dead in the water.”

Hallgarten says that if REE prices keep rising then other “miners might be best to get their mines going and sell ore to on-processors who would bear (or have borne already) the heaviest part of the capex rather than wait around trying to build all-singing, all-dancing integrated REE complexes.  We repeat our mantra that the race in REE will go to those first in production and the vast bulk of companies will end up as fossils in the equity market equivalent of the La Brea Tar Pits.”