If Molycorp is in someone’s sights, it’s sure not BHP’s or Rio’s

If any company is going to take a lunge at acquiring Molycorp, you can pretty well rule out BHP Billiton or Rio Tinto.

That’s a headache they don’t need.

And – I hasten to add – that is not a cheap shot at Molycorp or its merger with Neo Materials Technologies. Rather, the last thing either of these Anglo-Australian mining giants need is to have to grapple with yet another technology.

This speculated-upon BHP/Rio interest in Molycorp got a head start this week with a Bloomberg story (posted on RareMetalBlog) that Molycorp’s sales will double to $US1.2 billion in 2013 – that is less than 2 per cent of the revenue the two big miners are expected to generate next year. It quoted some analysts whose views were that Molycorp would be attractrive before the revenues started to roll from magnets.

I have no information – but will eat my hat if the BHP or Rio interest story is shown to be accurate.

The rare earths market is simply not big enough for either of these companies. Look at the sorts of projects that BHP is considering: there’s the Jansen potash project in Saskatchewan, shale oil and gas in the U.S., the Olympic Dam expansion and the Outer Harbour iron ore expansion. These four projects will mean a combined investment of $US120 billion. There was even talk at one stage that BHP would mothball Jansen because it did not tick all the boxes.

Look at Molycorp – it has a market capitalisation of $US2.9 billion. There’s a certain size differential. And a great many technology complications for global mining companies trying to keep rather larger balls in the air.

Moreover, both BHP and Rio have got plenty of issues on their plates. With Rio, there are the problems ranging from dealing with the government of Guinea, how to manage its uranium arm to introducing driver-less trains on its iron ore railway system in Australia.

Both companies have a record of disposing of projects that either don’t meet their size requirements or have technical challenges. Rio sold off (to Cameco and Mitsubishi) its large Kintyre uranium deposit in Western Australia. BHP got rid of its Ravensthorpe laterite nickel project in

Apart from size, both would probably be scared off by the technology, especially BHP which has some black sheep projects in its past (the hot-briquetted iron one that was dropped after billions were spent, Ravensthorpe itself, and so on).

Moreover, both companies have long been prepared to invest in smaller companies but usually only when the projects had the potential to complement existing operations – for example, BHP financed drilling near its Cannington mine in Australia, which is the world’s biggest silver producer, hoping it might provide additional life for its plant.

BHP has 53 million tonnes of light rare earths at Olympic Dam which is considers not to be worth processing.

Just think about it this way: you go into a meeting with BHP (or Rio) senior executives to pitch getting into the REE business. First question is how big is the world market. You reply: 131,000 tonnes. You may not get to answer a second question.

It’s no reflection on Molycorp. This not a game where you’re likely to see any of the global majors.

I think if there’s to be any corporate action regarding Molycorp, you’d better start looking elsewhere.

Disclosure: the writer owns shares in Rio Tinto.

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