Molycorp, the art of spin and why investors should look under the hood before buying

Where to start? Let’s take the high road for a minute and commend Molycorp for being a first-mover in the rare earth space (ex-China, of course), for pressing forward with the debt- and equity-financed expansion and modernization of its Mountain Pass, California mine-to-magnets facility.

Molycorp may indeed end up being to rare earths what Apple is to iMacs and iPads.

“We remain on track to emerge as the world’s lowest-cost manufacturer of rare earth oxides, which will be a particularly powerful growth-driver for our downstream manufacturing operations.”

Words to live by.

Of course, Friday’s announcement that Molycorp and Sumitomo had “mutually agreed” to shelve a proposed investment deal that could have sealed a seven-year rare earth supply contract in exchange for an equity investment in and a low-interest loan to Molycorp is simply a hiccup on the road to prosperity.

The press release says it all: Molycorp said the financing was no longer needed, because the company is now fully funded. Still, Molycorp felt it necessary to quote Chief Executive Mark A. Smith as saying: “The conditions under which the original deal was structured shifted substantially, and in a way that did not offer sufficient value to both Molycorp and Sumitomo’s shareholders.”

Interesting.

There’s no sign of a Sumitomo press release yet but the Japanese conglomerate told Reuters recently that it has struggled since June “to find customers for Molycorp’s rare earth products as Japanese demand for light rare earths has plunged and prices were seen as too high.”

These things happen, of course. Like last month, when Molycorp ended talks to form a joint venture with Hitachi Metals, one that would’ve processed rare earth raw material and produced magnets.

Molycorp simply said the two companies were unable to reach agreement on certain key matters affecting the value of the joint venture to each party.

This is what Hitachi said: “Incidentally, Hitachi Metals has decided not to set up a previously contemplated joint venture to manufacture alloys for neodymium magnets and neodymium magnet products with Molycorp, Inc. of the United States. The decision was made after reevaluating its business strategy.”

As said before, this could be looked upon as just another negotiating bump along the way.

But let’s revisit June 15, 2009, when Molycorp terminated takeover discussions with Great Western Minerals.

Molycorp said this: “After several failed attempts to structure a deal with Great Western, it became clear that we would not be able to reach agreement on terms acceptable to both parties.”

Great Western Minerals: “Management and the Board determined that the structure proposed by Molycorp would not accomplish the original goals of the Proposed Transaction.”

This reminds me of Elizabeth Taylor. After seven husbands, she must’ve asked herself at least once: “Is it me?”

Molycorp’s press releases should perhaps be taken for what they are: public information.

It’s difficult to say what’s going on in the various board rooms, but one should be aware that the rare earth business is first-and-foremost a specialty chemical-based business that requires a well-established amount of intellectual property, capital, capacity – you know, the brainy, know-how stuff.

 Moving rare earth elements to separation to an extremely pure alloy is no mean feat – it’s complex, technical and, well, highly problematic. There’s a reason why Dysprosium is derived from a Greek word for “hard to get.”

 Could it be that Molycorp is encountering problems on the purity side of the equation, meaning Chinese, Japanese, Korean end-users aren’t satisfied with what’s being offered?

People talk a lot about 4Nines gold being wonderfully pure; this is all about 4Nines rare earth.

Now, Sumitomo is a bell-weather supplier in the rare earth space and just walked away from a seven-year supply agreement with Molycorp.

As one analyst said: “As investors, we must remain focused on who will buy the produced material. More importantly, we must also focus on the quality of this material.”

 At the moment, the market knows that the Chinese remain the custodians of the best separation processes, with, say, a Neo Material Technologies warming up on the sidelines.

What isn’t being readily talked about within earshot of, say, a Bloomberg or Reuters correspondent is the quality of the purity coming out of the Molycorp camp.

“This could, in fact, be the next very big shoe to drop,” the analyst said.

This brings us back to the-little-company-that-can Great Western Minerals, which owns Less Common Metals, a leader in the manufacture and supply of rare earth-based alloys and high-purity metals.

It’s also a GWG asset that Molycorp coveted just a few years ago during a time when the credit crunch had hit balance sheets and financing particularly hard. As noted above, a proposed deal didn’t close.

But here’s the thing: While Molycorp has yet to move from processing tailings to moving hard rock that possibly contains radioactive thorium, GWG continues humming along, working well with end-users and advancing its technological know-how. First-mover, indeed.

GWG also has rigs on site at its Steenkampskraal rare earth mine in South Africa, where the once-producing mine is being heavily refurbished. GWG even has a thorium storage permit in place as well as the prospect of government funding as it derisks the project.

So, while Molycorp issues press releases about why this or that negotiation failed but in no way affects its robust business plans, investors should step back and do some fairly diligent due diligence here.

While GWG should be considered valuable for its quality-based abilities and processing, it could be argued that some troubling processing cracks are beginning to appear under the Molycorp hood.