How an American company is trying to break China’s monopoly on high-tech minerals.
Few weekenders making the four-hour run from L.A. to Vegas notice the big mill works overlooking Interstate 15 at Mountain Pass Summit in California, near the Nevada line. Even fewer realize that the pale-pink buildings, gone patchy with age, are the focus of an extraordinary business drama that involves national security, China’s monopolizing the strategic market in rare-earth metals, and one company’s attempt to restore American preeminence in a crucial mining sector it once dominated.
Those sprawling buildings are owned by a Denver mining company called Molycorp MCP , which is now spending nearly $1 billion to restart rare-earth-mineral production at Mountain Pass Summit and in the process revive a moribund U.S. industry. It won’t be easy. A decade ago the U.S. was the world’s biggest supplier of lanthanides, scandium, and other rare earths, and the Mountain Pass mine was the world’s largest producer of the minerals. Rare-earth elements enable the creation of super-magnets, which operate at high temperatures and are also used for a range of high-tech applications, from missile-guidance systems to compact fluorescent light bulbs to wind power turbines to motors in electric vehicles. Ironically, rare-earth minerals aren’t really rare; they get their name because they are spread widely throughout the earth’s crust in small concentrations that in most cases can’t be mined economically. In all, there are 17 rare-earth elements, which are typically found in varying proportions in the same ore deposits. China, with the world’s largest supply, has been ramping up production over the past two decades, leading to steep price drops that eventually forced the Mountain Pass mine to shut down operations in 2002. China now controls 97% of the market.
Over the last year, however, the Chinese government, which views rare earths as a key element in its move from a low-cost producer of cheap manufactured goods to a high-tech powerhouse, has drastically reduced its export quotas, particularly for the heavy rare earths, like terbium and dysprosium. That sent prices through the roof last summer: At one point the price of dysprosium, used in the manufacture of advanced lasers, more than doubled in a week, and overall rare-earth prices shot up 1,500% from 2009 to 2010, to an all-time high.
Wanting to capitalize on the rare-earth shortage, Molycorp, backed by $1 billion in private equity from Resource Capital Funds in Denver, began selling rare earths at its California mine in October and soon after announced third-quarter net income of $43.7 million, vs. a loss of $10.1 million a year earlier.
Running such an operation is not cheap, so CEO Mark Smith, a mining veteran who has spent nearly a quarter-century working on Mountain Pass, took the Denver-based company public last year, raising $379 million. When Molycorp stock reached its peak of $77 a share in early May, it was the most successful IPO of 2010 as measured by share-price increase since going public.
Since then the stock, which has a $3 billion market cap, has suffered a cave-in, dropping some 56%. Why? The rare-earth “crisis” has generated an old-fashioned gold rush, as miners in ore-rich countries like Australia, Kazakhstan, Mongolia, and even Afghanistan announced plans to bring new supplies to market. Influential minerals forecaster Dudley Kingsnorth of Industrial Minerals of Australia, reduced his prediction for 2015 demand by nearly 13%. Stock-trading blogs now talk of a “rare earths bubble.” Manufacturers in Japan and elsewhere, hesitant to trust their future raw materials supply to China, have embarked on an aggressive R&D search for rare-earth substitutes. That search could pay off in a few years.
With all the bad news piling up, Molycorp, a once highly touted company, now looks increasingly like a billion-dollar roll of the dice.
A customer for every bucketful
Standing on the edge of the open pit into which his company is pouring all that cash, Smith appears unfazed by recent developments. Yes, more suppliers are coming online, but he argues, “Look, we just do not see any way that the market for rare earths is going to reach equilibrium between now and 2015.”
Ruggedly built, with steel-gray hair that matches the frames of his fashionably narrow eyeglasses, Smith looks as if he could be an NFL head coach. He was, in fact, a promising defensive back, planning on playing for the Colorado School of Mines until a knee injury ended his football career. He wound up graduating from Colorado State and getting his law degree from Western State University in California, and has worked as an attorney for the mining industry ever since.
Five hundred feet below him, ground water at the bottom of the mine shines a vivid green. Along the terraced sides, rare-earth deposits appear in gray bands amid the reddish brown of the rock. A pair of uranium prospectors found the Mountain Pass lode in 1948 and formed the Molybdenum Corp. of America. The rare-earth elements had little value until the advent of color TV in the late 1950s, when they became prized as phosphors to brighten the screens. By the early 1980s U.S. production had reached almost 40,000 metric tons a year, but already Chinese mines — mostly in the country’s far west, in Inner Mongolia — were catching up. “The Middle East has oil,” Chinese leader Deng Xiao Peng reportedly remarked in 1987. “China has rare earth.”
After the Chinese flooded the market with cheap rare-earth minerals, forcing Molycorp to close its mine, Chevron CVX acquired the property in its takeover of Unocal in 2005. Three years later Resource Capital Funds, led by Ross Bhappu, the former head of business development at mining giant Newmont NEM , bought the mine, invested $1 billion, and hired Smith to lead the re-formed Molycorp. Their foresight was admirable: By 2009 plenty of people who months earlier wouldn’t have known a lanthanide from a Land Rover were sounding alarms about the rare-earth shortage as the Chinese tightened exports. In July the World Trade Organization ruled that China’s export quotas violated international trade law. But the Chinese government, saying that it’s cleaning up dirty mines and eliminating black-market ones, has publicly said it will continue to tighten exports.
China will export around 24,000 metric tons this year, down from 38,000 a year ago, Smith explains. The rest of the world needs about 57,000 metric tons. Working from stockpiled ore alone, Molycorp will produce 5,500 to 6,600 tons this year. That leaves a gap of around 27,000 tons, a hole big enough, Smith believes, to keep prices inflated for the next several years.
Smith’s confidence in part is that of a seller with a guaranteed customer base. “Every bucketful we pull out already has a customer,” he says. What’s more, if China follows through on its declared intentions, it will soon devote all of its rare-earth production to the domestic market, which accounts for close to 60% of world demand. That leaves a still-healthy $500 million market to be satisfied in the rest of the world.
In August, Molycorp opened an office in Tokyo, where most of its biggest customers have their headquarters. And the company has moved quickly to shore up what many industry observers say is its biggest weakness: While most of the ore at the Mountain Pass mine is rich in lighter rare earths, the real worldwide shortage (along with the highest prices) is in the heavies: terbium, dysprosium, europium, and a few others. In September — not long after a J.P. Morgan analyst downgraded Molycorp shares — the company said it had found a new deposit a few miles from Mountain Pass, on federal land where Molycorp owns mining permits, that is rich in the heavy rare earths.
Smith also says he is banking on new, environmentally sound mining technology that promises to lower prices. When Molycorp is finished replacing its milling and refining facilities at Mountain Pass, it claims it will not only be the cleanest producer of rare earths in the world (the original mine was dogged by environmental violations stemming mostly from its wastewater, which was radioactive because of small amounts of thorium and uranium found in the ore), but also the world’s lowest-cost producer. Since adding environmental safeguards usually adds to the cost of any extraction process, that would be a remarkable feat.
John Burba, Molycorp’s chief technologist, explains it this way: Rather than using expensive, trucked-in chemicals to separate the rare earths from the ore, the company will use recycled saltwater, a byproduct of mining. And instead of buying expensive electricity off the grid, Molycorp is going to produce its own energy: Vanderweil Engineers is building on the mining site a 49-megawatt power plant, fired with cheap natural gas from a nearby pipeline. The old Molycorp used to dump its tailings in a slurry behind a dam. Now it will use a high-pressure system to squeeze out most of the water, leaving behind a “paste” that will be reburied in what’s essentially a 90-acre landfill just west of the pit mine. All told, the company claims it will produce rare earths for $1.25 a pound. China’s cost is $2.53 a pound, while some experts believe that production from Australian mines, owned by Molycorp rival Lynas, will cost a whopping $4.59. “We’ve been through the situation before where we weren’t the low-cost producer in the world,” says Smith, referring to the 1990s, when Mountain Pass was undercut by Chinese rivals. “We didn’t like it.”
Meanwhile, Congress has taken up the issue of China’s rare-earth monopoly. No fewer than nine bills that would support the resurgence of the U.S. rare-earth industry are pending or awaiting introduction. Counting on the currently gridlocked Congress to take action — even on an issue of national economic competitiveness — is like believing you can beat the house at a Vegas casino. So there sits Molycorp, pushing ahead, placing that billion-dollar bet on its own.
–Richard Martin is the editorial director for Pike Research. His book on thorium power will be published by Macmillan Science in April 2012.
This article is from the December 12, 2011 issue of Fortune.