Apologies, some articles are pay-walled, others not. ------------ SHANGHAI—Molycorp Inc.'s $1.3 billion deal to acquire a key processor of rare-earth minerals has sparked a warning from industry officials that it could reinforce China as the main source for specialized magnets used in consumer electronics and sophisticated weapons.
Molycorp said Thursday it plans to buy Toronto-listed Neo Material Technologies Inc., one of the world's leading experts in chemistry needed to transform rare earths—minerals used in applications that range from car batteries to advanced weaponry—into specialized magnets. Molycorp said the deal creates the most diversified rare-earth company outside of China, which dominates the industry.
The transaction, said Mark A. Smith, president and chief executive of Greenwood Village, Colo.-based Molycorp, links a world-class miner with a world-class processing company.
But the deal also paves the way for Molycorp to ship minerals from its California mine to the Chinese operations of a Neo Material arm called Magnequench, in a reminder of how much technological rare-earth capability resides in China.
Ed Richardson, president of the U.S. Magnetic Materials Association, says the plan is worrisome. The U.S. is already "dangerously dependent on China" for rare-earth-magnet materials, including to supply its weapons systems, Mr. Richardson said in an email. Molycorp's "export of U.S. rare earth assets into China will only exacerbate this problem," he added.
Mr. Smith played down political and historical implications of the deal that now ties Molycorp, Magnequench and China. He said sending rare-earth oxides to China is a bid for "higher volume, higher margin" that will only reduce production costs in the U.S. and by implication boost supply of the metals for industrial users. "It does not in any way deplete our ability to serve the market outside of China whatsoever," Mr. Smith said.
While much of the debate over China's hold on the rare-earths market has focused on mining, the Molycorp deal highlights China's ability to process mined oxides into metals that help electric cars hold their charge, make wind turbines turn and bring precision to military gyroscopes.
Like most developments in the tiny but critical rare-earth industry, the merger is a response to China's market supremacy. Companies such as Molycorp and Australia's Lynas Corp. are trying to provide supply alternatives to China, which has 90% market share in many aspects of the industry. It comes as analysts predict a formal challenge of China at the World Trade Organization over its rules to limit export of some rare-earth materials, rules that Beijing says are meant to protect the environment but Washington labels a trade barrier.
Analysts concur with Molycorp's assertion that the acquisition of Neo Material gives it significant new technological capability, particularly in powders used in sophisticated high-performance bonded magnets. The U.S. company becomes more global, with production and sales in a number of new markets. Molycorp argues that the deal also can lower production costs as the company restarts its California mine, which was once the world's No. 1 rare-earth mine before it was closed several years ago due to falling rare-earth prices and environmental concerns.
Molycorp's acquisition includes magnet-materials maker Magnequench, the name of a Neo Material predecessor that started in the U.S. and later moved primary operations to China. Western nations, including the U.S., remain reluctant to permit often-polluting rare-earth processing. Molycorp itself last year dropped plans to build a rare-earth magnet plant in the U.S. in partnership with Hitachi Ltd. of Japan.
General Motors Co. divested itself of Magnequench in 1995, and a group of investors including government-owned China National Non-Ferrous Metals Import & Export Corp. acquired the highly specialized producer of magnet materials. The investment group then opened a facility in the Chinese city Tianjin and closed an Indiana plant. For many rare-earth industry experts, that chain of events marked a shift toward China's domination of the industry that U.S. policy makers didn't expect.
Neo Material's Tianjin plant and its other facility in China have spare processing capacity that Molycorp's Mr. Smith said he intends to exploit by sending output from the California mine to be processed there. Molycorp sold no material to Neo Technology in China last year, he said.
The acquisition—coming amid cooling prices for rare earths and shares of the production companies such as Molycorp—will give existing shareholders of Neo Material about 14% of the combined company, a written statement from the companies said.
Molycorp and Neo Material executives told analysts in a conference call Friday they had informed authorities in Washington and Beijing about the deal hours after the announcement and that they don't expect regulatory hurdles in either country.
Constantine Karayannopoulos, the CEO of Neo Materials, said he expects Chinese authorities to honor existing quotas that permit its export of material the company produces once it becomes U.S.-owned. "The early indications are there shouldn't be any issue," he said. -----
Lifton comment:
I have to note that the WSJ did not bother to ask why Neo has "spare capacity." The answer is that access to rare earth feed stock in China is very competitive and it is material for EXPORT that is allocated, and companies with "foreign ownership, even in part, go to the back of the line. It'll be interesting to see how China treats an American company with its head office in the world's third largest market for rare earths as opposed to the way the Canadian owned entity was treated.. Canada has essentially no domestic demand for rare earths and so does not compete with Chinese miners or refiners for market-share.
I'm going to stock up on popcorn so i can watch this melodrama.
LYC Price at posting:
$1.19 Sentiment: LT Buy Disclosure: Held
(20min delay)