Editorial: What’s next for REEs?

Over the past few years we’ve seen booms and busts for niche-market metals like uranium and molybdenum. Now it’s time for the rare earth elements (REE) subsector to endure a similar correction.

The pain for REE investors kicked off on Sept. 20, when J.P. Morgan Chase & Co. lowered its outlook on one of the REE world’s most prominent companies, Molycorp, to “neutral” from “overweight,” and chopped its 2012 year-end price target to US$66 from US$105. 

Based in the Denver suburb of Greenwood Village, Molycorp started construction in January on a US$781-million upgrade of its decades-old Mountain Pass light REE-focused mine and processing facility in southern California, about a hour’s drive west of Las Vegas.

Dubbed “Project Phoenix,” the first phase of the upgrade is slated to be completed by the end of next year, at which time Molycorp expects to produce 19,050 tonnes of rare earth oxide (REO) equivalent per year at Mountain Pass. The next phase, due for completion by the end of 2013, will see production of up to 40,000 tonnes of REO equivalent per year. The company is expected to produce more than 4,500 tonnes of REO equivalent this year from its three facilities.

On the J.P. Morgan downgrade, Molycorp shares promptly dropped US$11.56, or 22%, in a day to US$41.45 on the New York Stock Exchange. At presstime, shares traded at US$37.21, less than half the 52-week high of US$79.16 achieved on May 3.

With REE prices pulling back since August after an historic second-quarter surge, J.P. Morgan’s mining analyst Michael Gambardella looks to have gotten a case of cold feet about continuing to use a highly inflated REE basket price of US$85 per kg in his modelling that reflected overheated free-on-board numbers, instead of figures more in-line with far lower Chinese domestic REE prices.

By newly inputting a lower basket price of US$48 per kg for Mountain Pass REE production, Gambardella had to reduce his target price for Molycorp to US$66 from US$106, noting a “lack of clarity” on REE prices. 

And the downgrade came from a key supporter: J.P. Morgan and Morgan Stanley were Molycorp’s lead underwriters when Molycorp went public last year at $12.50, and ranked as the best-performing initial public offering in the U.S.

In early October, Molycorp punched back against the bearish sentiment with an announcement of the “rediscovery” of a nearby REE deposit that is enriched with the more-valuable heavy REEs. The timing had many observers thinking cynical thoughts, but it is good news for the company nonetheless.

Another great advantage for Molycorp is its first-mover status as a source of REEs outside of China, which still controls about 95% of the world’s supply — and the stranglehold comes not because of any particularly sinister plot to corner the market on supply, but rather a willingness in past years by Chinese producers to flood the market with cheap supply that put most Western competitors out of business.

The use of REEs in critical U.S. defence technologies has piqued the interest of U.S. military planners, who see the advantage of securing domestic REE supply and restarting stockpile programs that were common during the Cold War, but wound down in recent years.

If Molycorp can strike such a U.S. defence-themed offtake agreement at Mountain Pass, that would do wonders in bringing more confidence into REE price projections, and put a firmer floor under Molycorp’s share price.

The Molycorp downgrade also sideswiped its chief competitor, Australia’s Lynas Corp., which fell 14% on the news. Lynas is poised to become the first new source of REEs outside of China this year by mining its Mount Weld REE deposit in Western Australia, and processing the ore at a state-of-the-art rare earths processing plant under construction near Kuantan in Pahang, Malaysia.

Molycorp’s travails had a predictably awful effect on the slew of Canadian-based REE juniors that have cropped up in the past couple of years. Leaders such as Don Bubar’s Avalon Rare Metals and Peter Cashin’s Quest Rare Minerals saw their share prices pull back 8% to 10% in the past month on the downgrade news and renewed bearish sentiment about the mid-term prospects of the global economy.

Beyond that, questions remain regarding how many REE mines can be put into production outside China in the next few years, before the market is oversupplied and REE prices nosedive again.