Is This The Beginning Of The End For Chinese Domination Of The Production Of Rare Earths?

Implications: Is a rare earth mining boomlet under way?

Analysis: In 1994 Molycorp, then a wholly owned subsidiary of the oil company  Unocal, which mined molybdenum in New Mexico and rare earth metals at Mountain Pass, California, shut down its rare earth mining operations for 'market reasons' it then said. Those reasons were stated as primarily the fact that the cost of producing rare earths at Mountain Pass in 1994 were more than the products could be sold for on the market.

Prior to its shut down Mountain Pass produced 100% of the US demand for rare earths and 34% of the global demand.

Environmental activists claimed then as now that the 'real' reason for shutting down the mine was local agitation over the potential for  leakage of radioactive thorium, produced as a byproduct of the rare earth mining, into the local aquifer.

Around a dozen years later, even as the Mountain Pass operations were dormant but were still shipping material already above ground in 1994 to buyers who would refine it, Unocal itself went on the block.

The Chinese national oil company, CNOOC, was the high bidder for Unocal, and the US Government being uncomfortable with the sale to China of an American oil company with US production, deep sea drilling technology, and retail operations in the US sought out a "White Knight.' Chevron agreed to match CNOOC's offer and so with the blessing of Congress it, Chevron acquired Unocal.

Chevron had over its long history and through predecessor companies accumulated some mining properties. Some it had kept and others were gone by the 2003 acquisition of Unocal's Molycorp. Chevron's mining operations soon thereafter became consolidated as Chevron Mining.

There was some logic to the acquisition by Chevron of the dormant Mountain Pass property. In the late 1990s Chevron had joint ventured with Energy Conversion Devices to create COBASYS, Chevron Ovonic Battery Systems, to manufacture and continue the development of the nickel metal hydride battery patented by ECD's founder Stanford R. Ovshinsky. The NiMH battery was critically dependent for its operation on the rare earth metal lanthanum.

Cobasys was like all other manufacturers in need of rare earths was forced to buy its raw materials from the People's Republic of China which had become overwhemingly dominant after 1994 in the production and supply of rare earths.

When, in 2003-5, Chevron acquired the Mountain Pass site it seemed trivially obvious that Chevron would reopen the rare earth mine so as to supply Cobasys, but it never happened.

This is probably due to the fact that the poor marketing skills and even poorer understanding of engineering by General Motors' 'top' management had caused GM to reject the NiMH battery based hybrid concept for a power train so successfully realized first in the Toyota Prius even though GM had first access to the NiMH battery technology. COBASYS based in suburban Detroit found itself without a major customer, and in its best year, 2007, it built only 9,000 NiMH batteries for GM and all of them suffered from mechanical defects and so many failed that GM recalled all of its 2007 hybrids for replacement batteries. In that same year Toyota built and sold more than a third of a million NiMH batteries in Toyota Priuses.

By late 2007 Chevron had enough of COBASYS and refused to advance any more funding. Chevron had up until then invested nearly a quarter of a billion dollars without any return on its investment at all. As of this writing GM has promised to buy out Chevron from its j/v with ECD and continue funding COBASYS and even to make COBASYS its quality control site for lithium batteries! However none of these things have happened and COBASYS is rapidly becoming moribund.

It is no surprise then that Chevron has sold its rare earth mine at Mountain Pass. The surprise is the buyer, a venture capital group led by Resource Capital. I am surprised that the new owners who do not now operate mines have not yet announced who will develop the mine. I suspect that it will be the Australian rare earth miner, Lynas, in which Goldman Sachs, a partner of Resource Capital in the Mountain Pass acquisition, is a major investor in Lynas, which itself is just about to get underway in producing rare earths in Australia and has under construction a too-large-for-just-Australia refining operation in Malaysia.

No mining has been done at Mountain Pass since 1994. It will take some time, perhaps as much as 2-5 years to bring Mountain Pass back to full operation.

If both Lynas and Mountain Pass are running at projected full operation within 3-5 years then together they will produce 40,000 mt of rare earth elements annually, which today would be 1/3 of the global total, and will most likely be enough in five years to be between 20 and 25% of the then global total.

I am betting that the investor group that has just bought Mountain Pass intends to create the world's largest producer of rare earths outside of China and further intends to ultimately create an entity which it will sell to a major miner or take public for an enormous profit.

I don't think that this investor group is anywhere near done with acquisitions, so I think that rare earth mining  will now get very hot as an investment opportunity.