Molycorp secures offtake agreements for 78% of REE production

In early January, Molycorp (MCP-N) announced that it had found a home for more than three quarters of its first phase of production, ahead of starting up a rare earth production facility at its Mountain Pass rare earths mine in California.

The company says it signed written agreements covering 78% of its phase-one, rare earth production from the new manufacturing facility at Mountain Pass, which comes online later this year. Some of the production is committed to its proprietary, cerium-based Xsorbx water treatment products. 

Molycorp has agreements with customers covering 58% of its phase-one production and has allocated 20% more to Xsorbx production from the 19,050 tonnes of rare earth oxide equivalent it plans to produce each year under phase one at Mountain Pass. 

Molycorp expects to sell its Xsorbx products across four markets: municipal water treatment; recreational, pool, spa and water; industrial waste water; and drinking water purification. 

Molycorp says it is in final-stage discussions with customers for another 6% of phase-one production.

The exact terms, prices, duration and products covered by the agreements will vary among customers. 

“In an industry that traditionally has been driven by spot sales, Molycorp continues to break ground by moving customers to stable, secure, long-term supply contracts,” states Mark Smith, Molycorp’s president and chief executive.

Analysts Anthony Young, Anthony Rizzuto Jr. and Joseph Giordano of New York-based Dahlman Rose have a price target for Molycorp of US$70 per share – nearly three times higher than its trading price of US$24.73 per share.

“We note that a significant portion [twenty percent] of these sales is directed towards the company’s Xsorbx business line, where we believe the margins are somewhat lower,” they say. “Nevertheless, we would tend to view this announcement as a positive for the stock and a positive for the broader rare earth industry.”

The analysts also note that the offtake agreements will mean there will be less rare earth material hitting the spot market. Molycorp will only have to place 4,200 tonnes of its initial production on the spot market, the analysts say, rather than the full 19,050 tonnes. And the company could sign additional off-contracts, which would  whittle down the amount of material on the spot market.

“Given the relatively small size of the rare earth market – 130,000 to 135,000 tonnes – this will still likely have a dampening effect on prices, in our opinion, but should not have the crushing impact that the company’s full production of 19,050 tonnes would have on the spot market,” they reason. “With Lynas pursuing a similar strategy of securing offtake agreements, we remain cautiously optimistic on the long-term outlook for rare earth prices.”

Molycorp – the largest producer of rare earth oxides outside of China, and the biggest in the Western Hemisphere – says it expects to produce rare earth oxides at its phase-one run rate of 19,050 tonnes per year by Sept. 30, 2012, and will be capable of a phase-two run rate of 40,000 tonnes per year as early as mid-2013, based on customer demand.

Mountain Pass has proven and probable reserves of 2.2 billion lbs. rare earth oxides and total resources of 4.6 billion lbs., which equates to a mine life of more than 30 years.

Reserves at Mountain Pass can be broken down into different rare earth elements: cerium makes up 48.8% of the known deposit; lanthanum, 34%; samarium, 0.8%; praseodymium, 4.2%; neodymium, 11.7%; and others, 0.5%.