Thursday I listened to a conference call hosted by Molycorp Inc. (NYSE:MCP), to discuss the company's Q3 2011 financial performance. The call covered the expected ground, going over the financials and milestones that the company achieved in this last period. No surprises there; Mark Smith, the company's CEO, pointed out the record revenues that the company earned in this period, which of course is great news for Molycorp shareholders.
As the call proceeded, Mr. Smith started to review what he called the company's "multi-pronged heavy rare-earth strategy" for the mid- and long-term. My ears pricked up at this point, to see if he would confirm some important information about the heavy rare earths at Mountain Pass that I had heard about for the first time earlier this week from someone else at Molycorp. Unfortunately he did not; later in this article I will share with you what I heard earlier in the week anyway, and let you come to your own conclusion.
Mr. Smith described four different parts to Molycorp's heavy rare-earth plan. These include recycling, increasing the efficient use of heavy rare earths in key applications, and deploying new cracking technologies at Mountain Pass, to enable both bastnaesite and monazite ores to be processed at the facility. In the past, Mr. Smith noted, only bastnaesite was processed, with the monazite present in the ore body going into the tailings basin. Mr. Smith noted that with this capability, the new cracking facility would be capable of processing mineral concentrates from other rare-earth resources as well, and in response to a question from an analyst, named this capability as the most important part of the overall plan.
Mr. Smith also mentioned the recently announced strategy from Molycorp, to look at additional properties known to Molycorp, which contain minerals with significant heavy-rare-earth element (HREE) content. While he gave no further detail on the make-up or location of these projects beyond that which has been previously provided, given his statement about the cracking facility at Mountain Pass, one could reasonably surmise that such deposits are likely to be dominated by monazite, since there is usually very little HREE content in bastnaesite minerals.
Molycorp has consistently stayed "on-message" with its statements that it will be producing 10 rare earths in "commercially significant quantities", from the Mountain Pass ore body. This was re-iterated once again in the company's October 2011 presentation, titled "Rare Earth Resurgence: Molycorp's Plan to Increase Global Diversity in Rare Earths through Technology Innovation" and available on its Web site. In this presentation the 10 "significant REEs" are listed as lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), and yttrium (Y). I've re-ordered the list shown on the Molycorp slide, to reflect ascending atomic number. The slide includes a statement below the list which says that "Molycorp intends to produce all 10 of these rare earth elements commercially".
Later in the slide deck, in a separate section titled "Project Phoenix Update", is a chart which shows which rare earths and metals Molycorp plans to produce during Phases 1 & 2 of their new production capabilities. The list includes oxide equivalents of Ce, La, Nd-Pr (together known as didymium), as well as La metal and "other". The first four items on the list total around 99% of production, if I read the chart right; looking at the REE distribution in the Mountain Pass ore body, that makes sense, since it matches the average content of those items in the ore body.
One might infer from my last two paragraphs above that, although the REEs Sm-Eu-Gd-Tb-Dy-Y are a small proportion of the Mountain Pass ore body, that they will still be processed into finished products in the near future, just like their more dominant Ce-La-Nd-Pr counterparts.
A reasonable inference, but, it turns out, an erroneous one.
I've wondered for a long time now, just how Molycorp intended to produce these "other" REEs in "commercially significant quantities", given the small quantities present in the ore body. Surely it wouldn't make sense, I thought, to build HREE separation circuits, given the significant costs associated with such a capability, for such a small quantity. I know others have wondered the same thing, how such capabilities could be accounted for in the $781 million budget for Project Phoenix.
Well finally all appears to have become clear, following some comments that I heard this week from a Molycorp official other than Mr. Smith. The first comment concerned the fact that the quantities of Dy and other HREEs to be produced from Mountain Pass remain to be determined, in part because there is still work to be done to quantify the distribution and quantity of Dy and the other HREEs present in the Mountain Pass ore body.
The official then mentioned that the separation of MREOs/HREOs (i.e. oxides of Sm-Eu-Gd plus the remaining HREOs) would likely form part of a "Phase 3'' for Project Phoenix, and that until then, any MREE/HREE-rich concentrates produced in the new cracking facility, would likely be stored as concentrates, for future disposition. When I asked if the official could confirm that the costs for such a Phase 3 MREE/HREE separation facility, were not included in the $781 million budget for Project Phoenix, he indicated that they probably weren't. Therefore, if I understood this official correctly, it appears that Molycorp has no plans at this time to produce separated MREOs/HREOs at Mountain Pass during the first two phases of Project Phoenix.
Now technically, to my knowledge Molycorp has never actually explicitly said that they would produce separated MREOs/HREOs as part of the ramp up to 40,000 t of product, but the company's assertion that it will produce such elements in "commercially significant quantities," made in the same "breath" as reference to the others that we know are going to be produced, certainly implied otherwise, and obviously could well have given many in the market the wrong impression, if what the aforementioned official said, is accurate.
One other comment on the call yesterday caught my attention, because I believe it is also misleading. This relates to the assertion that the 30,000 t of rare-earth export quota issued by the Chinese authorities for 2011, is actually equivalent to only 21,000 t of REOs, because of the inclusion of ferroalloys on the list of compounds covered by the quotas. This was the same assertion made by Molycorp in a New York Times article at the end of July 2011.
The article stated:
"Everybody seems to be relaxed because the year-on-year number for 2011 versus 2010 is basically the same amount of materials, roughly 30,000 tons of export quotas," Molycorp Inc. CEO Mark Smith said in an interview. "The discrepancy is created because China continues to add more products that are covered by the quotas, but we never seem to want to take that into account."
So far, so good.
Doing an apples-to-apples comparison, Smith says, China's export quota is really closer to around 20,000 tons. Meanwhile, he predicts the global demand to be much higher.
And here's the problem - that was not an "apples-to-apples comparison". Apples-to-apples would be directly comparing the 20-22,000 t REO equivalent in 2011 with the 22-24,000 t REO equivalent in 2010 that IMCOA and others estimated on the same basis - the difference being accounted for by the inclusion of ferroalloys this year. The same applies to previous years too, of course.
In the original NYT article, the comparison was instead made between the 30,000 t figure for 2010, and the equivalent of a figure of 21,000 t for 2011. The same (in my mind flawed) logic is contained in the summary comments on the conference call yesterday. In the absence of the fuller comparison described above, using this 21,000 t figure in this way is in my mind potentially misleading, and should be discouraged.
Anyway - that's it for now. Check out the TMR Web site again soon for more comments and perspective on the rare-earths sector.
UPDATE #1: Since posting the original piece above, we've received unsolicited feedback from recent visitors to the Mountain Pass project, who were apparently told that MREE/HREE-containing concentrates from Phase 1 & 2 processes, would be stockpiled for further processing at some indeterminate point in the future.
Gareth Hatch analyzes the role of rare and strategic metals in the technology supply chain and is a co-founder with Jack Lifton of Technology Metals Research LLC as well as founder of Terra Magnetica and an editor at RareMetalBlog. He will speak during the Hard Assets Rare Earths Investment Conference in San Francisco on Tuesday, Nov. 29.