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It’s interesting to consider what it might look like if Lynas took over Molycorp, but some aren’t so sure such a deal would make sense.
The rare earths space saw some excitement after Bloomberg suggested Australian rare earths producer Lynas (ASX:LYC) could be looking at taking over its former rival, Molycorp (OTCMKTS:MCPIQ).
As per the news agency, Lynas stated it “[was] ‘interested to understand’ the cost savings that could be available from a combination with Molycorp.” Molycorp said in October that it was in the process of signing confidentiality agreements with 17 potential buyers.
At the time, Rob Brierley of Patersons Securities said that such a merger would make sense to consider. However, Christopher Grove, president and director of Commerce Resources (TSXV:CCE), isn’t so sure. In a recent interview with the Investing News Network, he shared some of his thoughts on the subject.
While Grove stressed that the most important takeaway from the situation is that people think there’s opportunity in the rare earths space, he suggested that a merger between Molycorp and Lynas may not be the best opportunity out there.
For starters, he pointed to some of the challenges Molycorp has seen with its Mountain Pass deposit. The deposit is fairly high grade, but as Grove explained, it isn’t that simple when it comes to rare earths. “One of the crazy things about rare earth elements is a 6 percent deposit that is 98 percent cerium and lanthanum isn’t worth anything today,” he said.
That’s because cerium and lanthanum, being vastly oversupplied, are the cheapest of the rare earths. Ryan Castilloux of Adamas Intelligence has even suggested it might be more effective for rare earths companies to treat cerium and lanthanum as waste.
“Molycorp, for the last couple of years at a minimum, were their own worst enemy,” Grove said. “They were a depressant on the prices for cerium and lanthanum because they continued to produce them at a loss.”
To be sure, Luisa Moreno of Tahuti Global has stated that while it’s possible that it could have been simply a matter of time before issues at the Mountain Pass plant were worked out, after spending $1.5 billion expanding Mountain Pass, Molycorp still wasn’t able to fully optimize its operations to make them cost effective.
“Essentially, they have negative earnings out of that plant, so it’s not profitable at all,” she said in an August interview. “Obviously they cannot continue running it for perpetuity unless there is improvement in the market in terms of prices, or unless they can fund further the commissioning of the plant.”
Of course, Molycorp has other assets as well. Molycorp has said that its Molycorp-Silmet facility in Estonia continues to process rare earths. However, Grove said that while there may be some benefits to owning Silmet — after all, Lynas’ deposit at Mount Weld in Australia does not feature the same host rock that Silmet is set up to process — that acquisition may not make sense either.
Molycorp also has rare earth facilities in China, but Grove doesn’t see what advantages they could bring to Lynas other than the potential for shutting down some of the competition.
Finally, there’s the point that Lynas has been financially troubled for quite some time, and while the company has reported positive cash flow since March, Grove isn’t convinced the company is ready to acquire its former competitor. “They say they’re cash positive. I would say you would need to see a bit more clarity on their financial statements to prove they’re cash positive,” he said.
Certainly, the idea of a takeover of Molycorp by Lynas is still hypothetical at this point — Lynas has not publicly announced a bid for the company, having only stated it would be interested in considering the benefits of such a business combination.
Still, Grove made some interesting points, and those watching the rare earths space will no doubt take them into consideration. Most recently, Molycorp announced that it has filed a plan to emerge from its Chapter 11 bankruptcy filing, with its exit strategy consisting of either “a stand-alone reorganization that would substantially de-lever its balance sheet or a sale of substantially all of its assets”
Stay tuned for part two of our interview, in which Grove speaks about recent progress made at Commerce’s Ashram rare earths deposit.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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