Molycorp proposes key deal to buy Neo Material

News of Molycorp’s (MCP-N) proposed acquisition of Neo Material Technologies (NEM-T) in a cash and stock deal worth $1.3 billion sent the shares of both companies soaring.

In New York Molycorp shares closed 19%, or US$4.93 per share higher at US$30.91, while shares of Neo Material in Toronto climbed $2.87, or 36%, to end at $10.84.

The deal combines Molycorp’s rare earth open-pit mine in California with Neo Material’s advanced rare earth processing capabilities. Neo Material has patented the Magnequench range of metal powders that are used to make neodymium-iron-boron magnets, and owns facilities in China, Thailand, Germany and North America that produce rare earth oxides, alloys and magnetic powders. The company also processes other metals such as gallium, rhenium and indium.

The companies’ boards unanimously back the deal. If approved by shareholders, Molycorp will pay $8.05 in cash and 0.122 of a share for each share of Neo Material. The offer is a 42% premium to Neo Materials’ closing share price on March 8, and is equal to $11.30 a share based on Molycorp’s 20-day, volume-weighted average price of US$26.66. 

Jon Hykawy, head of Global Research, Clean Technologies and Materials at Byron Capital Markets in Toronto, describes the deal as a “no-brainer” for Molycorp that increases its breadth of offerings. But in an email to the Northern Miner he notes the real advantages are that Molycorp can increase Neo Materials’ profitability by selling surplus neodymium cheaper than the material Neo Material is receiving from its Chinese suppliers, and have Neo Material turn that material into higher-value powder magnet alloys, with a margin increase that is “substantial and meaningful.”

The deal brings other synergies too, including one Hykawy refers to as “global margin optimization.” 

“If Neo Material was using export quota to send neodymium to their magnet alloy plant in Thailand, and if Molycorp sends neodymium from California to Thailand, that quota is now available for something else,” he explains. “Specifically, Neo Material could send material from China to California   — material like dysprosium — to allow the construction of high-value sintered magnets that could otherwise not be built. Both these synergies add significant value to Molycorp with this acquisition.”

Hykawy says that the deal probably gives Neo Material more than it gives Molycorp, but adds that “Neo Material didn’t have to sell,” and says he doesn’t “have a horse in the argument about whether Neo Material is undervalued or overvalued.”

“I will say that my biggest strategic concern regarding Neo Material was always their dependence on Chinese concentrate allocation. If the Chinese decided that Neo Material’s Chinese joint ventures should not receive material, for whatever reason, then things become difficult. If those same authorities were to decide that the export quota should be placed elsewhere, the company would also have had a problem.”

He also points out that Neo Material previously tried to develop its own source of rare earths in Brazil but was unsuccessful and needed a reliable source of rare earths, which they will have in the new business combination. “Neo Material shareholders are now getting paid $11.30 a share for their stock, when the all-time high on the stock was $10.67. And they are receiving a historically high valuation in a much poorer environment for rare earth names.”

Kaiser Research Online editor John Kaiser, who follows the rare earth industry closely, also likes the deal. “On their own, Molycorp and Neo are walking dead men,” he writes. Kaiser argues that while Molycorp will succeed in bringing its Mountain Pass mine back into production, “it does not have the talent pool needed to realize its downstream ambitions.” He speculates that the management team at Neo Material “will eventually take the helm” at Molycorp.

As for Neo Material, Kaiser says, while it has “developed enormous in-house talent in the processing of specialty metals and their fabrication into advanced materials,” and has “used its patent for bonded magnets of the sort that go into small-scale applications, such as disk drives as the basis for establishing production capacity in China, which supplies it with nearly all its inputs,” its key patents expire in 2014 and the company “has not managed to maintain its processing operations in a manner that secures rare earth export quotas.” He also points out that Neo Material’s Chinese operations are on the “provisional” list of entities that have yet to pass environmental inspections, which he believes “is a function of political will emanating from Beijing, rather than voluntary compliance by Neo Material.”

“By limping into each other’s arms these two walking dead men become a phoenix that emerges from the ashes and becomes the foundation for the rest of the world’s supply of specialty metals sourced from all corners of the planet, except China,” Kaiser concludes, adding that the merger “has profoundly positive implications for the rare earth sector.”

While Kaiser concedes that the proposed deal “can be construed as bad news for the junior rare earth companies, because the marriage between the two most powerful entities in the rare earth sector creates a Goliath-versus-David scenario,” he maintains that “full-spectrum juniors” with “meaningful resources that include an ample proportion of heavy rare earths — such as Avalon, Quest and Tasman — become potential takeover targets,” while other companies with light deposits “will be roadkill, as MolyNeo generates all the surplus the world needs by developing projects containing the heavies, whose current Chinese source is rapidly depleting.”