by Tony D’Altorio, Investment U Research
Wednesday, July 6, 2011
Despite the recent decline in many commodity prices, the price for most rare earths continues ratcheting higher.
Rare earths metals are a collection of 17 different elements which have very important uses in today’s modern society, being used in everything from smartphones to military equipment.
Currently, China produces 97 percent of the supplies of these vital metals. This developed into a problem over the last year or so as China slashed its exports of rare earths in order to meet booming domestic demand.
Obviously, this reduced the supply of rare earths available to the global market which led to those rising prices.
The solution to this very problem simple and it’s the solution that China has pushed forward for many years, but has fallen on deaf years…
The ONLY U.S. Producer of Rare Earth Elements
The solution is for countries, like the United States, to mine their own rare earths.
Even U.S. politicians have finally caught on…many are calling domestic rare earth production “a matter of national security.”
Fortunately, the United States does have a large deposit of rare earths. It is located in Mountain Pass, California and is owned by Molycorp (NYSE: MCP). It’s one of only two large rare earth mines outside of China.
Molycorp is rebuilding the rare earth mine, which was abandoned years ago, and hopes to recapture the industry’s hey-days of the 1960s, when the mine was in full production. Of course, Molycorp will be using vastly different production methods than what was employed at that time, using new technologies to prevent the harmful chemical spills which forced the mine to shut down in 2002.
- What makes rare earth mining so unpleasant and dangerous is the toxic solution of chemicals needed to separate the rare earth metals from the rock.
- Rather than ship this chemical solution to and from Las Vegas (Molycorp is based near there), Molycorp now plans to use a proprietary process that recycles the byproduct of the chemical separation and reuses it for subsequent batches.
Molycorp believes this method will reduce the cost of rare earth production to only $2.77 per kilogram. This is roughly half the cost of China’s production and should shield the company from losing market share to competitors.
Domestic Inquiries Into Molycorp’s Rare Earth Production
Even though it has yet to begin production of rare earths, the company already has received many inquiries from other U.S. companies.
Like the chemicals company W.R. Grace (NYSE: GRA), for example. It needs cerium and lanthanum to manufacture fluid-cracking catalysts. These catalysts are used to break down heavy crude oil into refined products such as gasoline.
The chemicals industry is one of the largest U.S. consumers of rare earths. But they are hardly alone. Other industries which are big users of rare earths are the automotive, medical technology, clean energy and technology industries.
In a sign of how important rare earths are to the technology industry, it’s believed that some Silicon Valley technology firms have offered Molycorp financing in exchange for a guaranteed percentage of the amount of rare earth metals it produces.
Molycorp’s Projected Tonnage to Exceed U.S. Demand for Rare Earth Elements
The company broke ground in January at its facility in Mountain Pass, California.
Molycorp said it would get 40,000 tons of rare earths from the mine annually by 2014. It also said that the mine would satisfy about a quarter of projected global demand and exceed U.S. demand for rare earths.
Rare earths are definitely a growth business. The market is currently valued at $2 billion in global sales annually. It is projected to increase to as much as $10 billion by 2014 and even $20 billion by 2020.
As a major producer and the only U.S. producer of rare earths, Molycorp will be perfectly positioned to reap the benefits from that bright future.