Rare Earth Bull (Part II): China, Molycorp, and the Attempt to return to 1984

1984 was a very significant year for the original Molycorp. In 1984 it had its largest production run ever (so far) of rare earth ore concentrates,  which were recorded as sufficient to contain as much as 24,000 tons of total rare earths. If that was indeed the case then according to the USGS historical data Molycorp produced 60% of the world’s total output of rare earths in that year and accounted for the supply of 100% of the USA’s domestic demand for 1984. It is not at all clear where so much material was actually processed, since Molycorp’s solvent exchange operations at that time had an annual capacity of far less than 10,000 tons per year. It is, however, true that the USA’s total demand for rare earths in 1984 was far less than 10,000 tons, so I assume that Molycorp’s ore concentrates were sold to places such as China and Estonia to be refined there and marketed by those refiners for their own accounts. Molycorp then as now was not equipped to separate, analytically, i.e., completely, the rare earths beyond cerium so then as now it had a product known in the trade as didymium, which was and is a mix of the oxides of praseodymium and neodymium.

Commercial production of rare earth permanent magnets of the type called neodymium-iron-boron was in its early stages in the 1980s and alloys made from didymium were used to save the costs of further separation of the neodymium from the praseodymium as well as to enlarge the amount of usable magnet alloy. This is today still done for commodity type magnets where variations in their properties from the variations in the didymium mix proportions are not important. Magnets for high-tech uses, such as for the military today, are not usually made from didymium if they are required to have specific reproducible properties.

1984, I should note, was also the title of one of the most famous novels ever written. The post-apocalyptic story of a future world was penned in 1946 and depicted a future (1984) in which three power blocks fought a perpetual war over the world’s remaining resources. In the fictional 1984 governments told everyone what to think and constantly monitored even the daily use of language to make sure that no one said or thought anything not approved by the government’s censors.

The following essay has not been approved by anyone other than me nor does it involve any tricks of semantics or grammar. It does require your careful attention to detail.

Let me first repeat what I have pointed out before:

  1. The production of all of the rare earths by the mining and concentrating of their principal ores and deposits is a virtual-almost complete- geographic monopoly of the People’s Republic of China (PRC). 
  2. The extraction of the mixed rare earths from the ore concentrates and the separation and purification of chemical forms of all of the rare earths is also the same type of a geographic monopoly of the PRC. 
  3. The preparation of pure metals and alloys of all of the rare earths  is also the same type of a geographic monopoly of the PRC, but
  4. Only the vast majority of the manufacturing of all types of rare earth permanent magnets and of nickel metal hydride rechargeable batteries (based on the properties of the light rare earths) is a geographic monopoly of  the PRC;
  5. It shares the production of such magnets and batteries with Japan. Together they produce more than 95% of devices and products of this type.

China’s virtual geographic monopoly is not currently a monolithic monopoly of ownership, because if it were the then the logical and probably natural result of an unrestrained (unregulated) capitalism would be that prices were eventually set by such a monopoly supplier.  This is a result of human nature in conjunction with the free market. This is why government has a role in moderating capitalism, which does not in of itself produce the greatest good for the greatest number whenever that is, in fact, the goal of an economy. A true monopoly will set prices arbitrarily without regard to supply or demand, because it is the sole supplier.

Up until the last year the production of rare earths and their processing into industrially useful materials was fiercely competitive and this had kept the prices of the rare earths down too low until the Chinese government set out to establish a legally regulated market for them at all levels within China. The process for doing this chosen by the PRC government is consolidation of their production and (as announced recently) of their refining and fabricating under the control of just a few, 3 or, at most 4, state owned major commodity producers. Each one of the consolidators will be given a geographic area in which it is responsible to see that all rare earth mining and refining is done according to the environmental and energy usage laws and regulations of the central government of the PRC.  The central government is determined to stop these practices through the consolidation; the responsible consolidators will not be giving any capital to those mines in their jurisdiction which cannot be profitable if they obey the regulations for health, safety, and the environment. Such entities will also no longer be eligible for bank loans and private loans to them will be unenforceable contracts at law.

The result of this consolidation has been first to reduce the total production and supply within China as mines skirting the law as well as those breaking the law have been shut down.

The price spikes in the recent past were mostly the result of the temporary reduction of supply-it will come back when the consolidation is achieved-and speculation mostly by Chinese traders taking advantage of the suddenness of these actions to western buyers who were not following events in China.

The Chinese rare earth industry applauds these measures, because it has enabled a new higher price floor to be established. This will allow the new added costs of environmental remediation and the higher internal taxes being levied on mining output to pay for the state’s part of that remediation to be covered by higher overall revenues.

The wild west type of cowboy capitalism practiced in the Chinese domestic rare earth industry until now , which kept prices artificially low, will be replaced by the less flamboyant capitalism of the Big Three Consolidators as they battle for market share among themselves./ The cowboys benefited, as will the big boys, from easy access to capital. The cowboys got it because under Deng’s original push for a ‘capitalism with Chinese characteristics” rural interests were favored for development. Today that favoritism evidenced by access to capital has passed to the urban entrepreneurs of which the Big Three Consolidators are considered to be part.

The Chinese rare earth mining and refining industry is famous for price wars. Many Japanese can attest to paying much less than the posted prices to “spot sellers” from the black market. China is trying to reign in just this type of behavior.

I actually now think that Beijing probably did bring in the legal sellers of rare earths and told them to halt shipments to Japan during the crisis. I also think that Chinese black marketers simply raised their prices while Japanese industrialists worked off of the inventories that prudence has caused them to keep. I don’t know of any instance during the “embargo” where production schedules were not met.

I’d like now to look at Neo Materials Technology, which was not the largest or smallest of the players in the cowboy period, and will now be watched over and licensed by one or more of the Big Three.

Note that Neo Materials being owned and operated by a Canadian company was considered to have foreign ownership or control and thus its allocations of material allowed to be exported were and are of a lower priority than those companies owned and operated by citizens or companies of Chinese nationality.

Jack-Lifton-molycorp

With the acquisition of Neo Materials Technology by Molycorp Neo remains as a foreign owned and operated entity. As far as I can tell the combined operations of the new combined company look something like this:
 

The above chart was created from the following public data:

References
1 Molycorp 10-K (28 February 2012), p.8

2 ZAMR is a Sino-foreign joint venture of the Performance Materials division of Neo Material Technologies, wherein Neo Materials has 95% ownership (Neo Material Technologies, Manager’s Discussion & Analysis (10 August, 2011), p. 26).

3 JAMR is a Sino-foreign joint venture of the Performance Materials division of Neo Material Technologies, wherein Neo Materials has 90% ownership (Neo Material Technologies, Manager’s Discussion & Analysis (10 August, 2011), p. 26).

4 Neo Material Technologies holds 25% ownership in Keli (Neo Material Technologies, Consolidated Financial Statements (Q3 2011), p. 17). 

5 Neo Material Technologies holds 33% ownership in Toda (Neo Material Technologies, Consolidated Financial Statements (Q3 2011), p. 17). 

6 Molycorp 10-K (28 February 2012), p.22

7 Molycorp 10-K (28 February 2012), p.22

8 Keli converts REO into metals for use in Magnequench neodymium powders.  For the nine months ended 30 September 2011, Neo Materials purchased $44.0 million in metals and services from Keli and sold $2.1 million in services to Keli. (Neo Material Technologies, Consolidated Financial Statements (Q3 2011), p. 34)

9 Toda produces rare earth magnetic compounds with neodymium powders supplied by Magnequench Tianjin (Neo Material Technologies, Consolidated Financial Statements (Q3 2011), p. 17).  Magnequench Tianjin the purchases back these compounds from Toda.  For the nine months ended 30 September 2011, Neo Materials purchased $4.7 million (CAD) of compounds from Toda and sold $3.9 million in services and neodymium powders to Toda (Neo Material Technologies, Consolidated Financial Statements (Q3 2011), p. 34).

10 MQTJ & MGK will process didymium feedstock from Mountain Pass (Molycorp Investor Presentation, March 2012, slide 13)

11 JAMR and ZAMR will receive Samarium-Europium-Gadolinium concentrate from Mountain Pass and Sillamäe (Molycorp Investor Presentation, March 2012, slide 12)

12 Molycorp 10-K (28 February 2012), p.4: “Molycorp Sillamäe sources rare earth feed stocks for production of its products primarily from our Mountain Pass, California rare earth mine and processing facility…[emphasis added].” By implication, some unknown quantity of rare earth feedstock comes from a third-party source.

13 Molycorp 10-K¬ (28 February 2012), p. 6

Note that Neo Materials Technology does not make magnets. It makes the powdered neodymium-iron-boron alloy from which its licensees make such magnets.

If Neo were to make magnets it would have to be only of the bonded type, for which technology it owns the original and still-in-force patents. If it were to make sintered magnets it would have to be with a Hitachi license to do so or in conjunction with Hitachi patented- technology- licensed manufacturer. In the first case, absolutely, and in the second case, probably, it, Neo would be competing with its own customers. This is a complicated decision not to be taken lightly or in short-term planning.

Bonded magnets of the Nd-Fe-B type are only 10% of the Nd-Fe-B magnet market, at most, and any growth in their use will be incremental not overall. Neo didn’t need Molycorp in order to maintain its control of this segment of the Nd-Fe-B market.

Bonded magnets do not use dysprosium because it would be wasteful of precious dysprosium. Their under the hood use, for example, is limited due to the fact that the bonding of the particles of alloy is accomplished with organic bonding agents (glue) which would fail to maintain the integrity of the magnet (i.e., fail to hold it together) at a lower temperature than dysprosium could safeguard the magnets ability to maintain its properties under the heating/cooling cycles found in modern automobile operation. The same is true for any use of Nd-Fe-B magnets in any use where extremes of temperature exceed the limit of operation of the bonding agents used.

It is not at all clear that the Chinese government will allow the export of a Chinese developed technology to a place where such technology will contribute to or be the direct cause of reducing employment in China. In fact the opposite is most likely true, and in the case of the technology for separating rare earths by solvent exchange this Chinese government attitude has been proven by the so-far single example of this prohibition being modified to allow Great Western Minerals group to partner with a Chinese refiner, which will build a solvent exchange plant in South Africa for Great Western. I asked the GW management what would keep their Chinese partner from going on a marketing campaign to sell such facilities to any and all interested non-Chinese parties. I was told that the Chinese company had answered this question with a recital of the difficulties it had with Chinese authorities getting permission to do just the one plant. The Chinese company said it took more than a year and it would not wish to do it again as this would indicate that it was too interested in creating jobs outside of China using Chinese technology.

I note here that there is an attitude in China that the USA restricts the exports of “key’ technologies to the PRC for economic as well as security reasons.

I predict that the Chinese will use the WTO rare earth issue as a pretext for beginning negotiations with the USA for a FTA, a Free Trade Agreement, between the world’s two leading economies. I further predict that this tactic by the Chinese will loosen the bonds among the USA, the EU, and Japan as it would be a good move for the USA.

At this point I want to introduce a document that Molycorp presented to the Congressional Rare Earth Caucus on Friday, March 15, 2012

Rare Earth Industry Update Today (11 a.m., March 16, 1540A Longworth) —   Please join the Congressional Rare Earth Caucus today, Friday, March 15, 2012 at 11 a.m., as U.S. rare earth producer Molycorp gives an update on its “Project Phoenix” re-start of rare earth production at its Mountain Pass, California facility.   Molycorp CEO Mark Smith also will brief Hill offices on the new, advanced rare earth technologies that Molycorp will acquire through its recently announced proposed acquisition of Canadian-based Neo Material Technologies.
 
Rare Earth Industry Briefing from Molycorp CEO Mark Smith
11 a.m., March 16, 2012, 1540A Longworth
Hosted by the U.S. Congressional Rare Earth Caucus
=============================
 
For those unable to attend today’s briefing, the following is a brief summary of the highlights of Molycorp’s recently announced plans to acquire Canadian-based Neo Materials:

  • Buying Neo Materials gives a U.S. company access to highly advanced rare earth separations technologies that no U.S. company, and few outside of China, now possess.
  • Molycorp’s purchase of these technologies, and the intellectual property behind them, allows Molycorp to deploy these technologies in facilities anywhere in the world.
  • Acquiring these technologies significantly strengthens the technology advantage of U.S. industry in the rare earth sector and saves an estimated 5-7 years of research, development, and commercialization that would be required to replicate these technologies in the U.S.
  • The purchase allows Molycorp to send a small amount of feedstock (only 7% – 12% of its Phase 2 production capacity) for processing by Neo’s facilities into advanced, ultra-high purity materials that no U.S. company, including Molycorp, is technologically capable of producing.  
  • This acquisition will not reduce what Molycorp plans to produce at Mountain Pass, which will remain the company’s lowest cost-of-production facility.
  • Molycorp’s purchase includes Neo Materials’ Magnequench patented magnet powder technologies and facilities, which produce neodymium-iron-boron (NdFeB) bonded rare earth magnets.  This addition, along with Molycorp’s recently announced joint venture with Mitsubishi and Daido Steel to manufacture sintered NdFeB magnets, gives a U.S. company capabilities in both magnet types.
  • The acquisition will empower a U.S. company to immediately produce and export to customers outside of China high purity heavy rare earth elements and materials.

 
For more information on this or any other issues related to rare earths or Molycorp, please don’t hesitate to contact me.
 
Best regards,
 
Jim Sims
Vice President Corporate Communications
Molycorp

Based on what I said above I find many of the above statements need extensive clarification.

I am also puzzled in particular by the fact that Molycorp in its IPO filings gave little or no indication that it would need technologies not already in-house. After that I recall that it was said that one of the reasons that Molycorp bought Silmet was to get access to its proven technologies for rare earth separation and the making of high purity rare metals, which I assumed meant rare earths as well as tantalum and niobium. Now Neo is to be the source of all that is not only good but even superior technology for both separation and metals making.

I’m certain that France’s Rhodia, now a division of Belgium’s Solvay, has just as advanced separation technology as Neo. Rhodia has been in the rare earth business as long as I can remember, which is several times the corporate lifetime of Neo. Australia’s ANSTO, a publicly funded national laboratory, is currently building a separation plants in Australia for Australian rare earth miners, and I think that ANSTO’s technological background is first class. Rhodia operated a now closed separation plant as I recall in Louisiana which took feed stock from Florida mined mineral sands and I think produced some heavy rare earths. I also recall that the Europium from Molycorp’s operations in the 1960s and 70s was separated by an outside American owned and operated contractor in West Chicago, Ill. I believe that the majority of all material from Molycorp’s operations in the 1980s was separated and made into metals by outside contractors, mainly in China even then.

The pioneer laboratory for the study of the reduction of rare earth chemical compounds to their metallic sate was the Ames Laboratory, now operated under the aegis of the U.S. Department of Energy, at Iowa State University in Ames, Iowa. The currently used Schmidt-Geschneidner process for metallo-thermic reduction of the rare earths to their pure metallic forms was developed there, and its principal developer, Dr. Karl Geschneidner, is still working there as an emeritus professor. By work product and his written oeuvre Professor Geschneidner is surely the world’s leading authority on the chemistry and physics of the rare earths.

The commercialization of the rare earth permanent magnet of the neodymium-iron-boron type was pioneered in the USA by a joint venture for its development between General Motors and Japan’s Sumitomo. General Motor’s manufacturing unit for these magnets, Magnequench, was originally sited in Anderson, Indiana, where it remained until 2004 when it bought by a group led by Neo and moved lock, stock, and barrel to China by the Neo group. Nonetheless the USA still has a group of magnet manufacturers that either have made or still make REPMs today in the USA. These include Arnold Magnetics, Thomas and Skinner, and Electron Energy Corp.

The best of the above bullet points from Molycorp is the last one. It is truncated because it should say after the word “materials”…”if feed stocks can be obtained in excess of those committed to domestic customers and additional export license allocations can be gotten.

Any gains by Molycorp from the acquisition of Neo are not only in the Chinese market but under the control of the government of the PRC. How does this help America?????