Molycorp Inc, the largest rare earths miner in the US — and at one point one of the largest rare earths miners in the world — is reported to be close to bankruptcy.
Once worth around $6bn, Molycorp’s market value has fallen to just $114m. Soon, the company could be worth nothing.
Unfortunately, this reflects badly on Rare Earth Minerals (LSE: REM). But all may not be as it seems…
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Global operation
Molycorp is a global operation. The company has over 25 offices in 10 countries with more than 2,400 employees. Further, Molycorp has several joint-ventures with companies around the world that use rare earths in their manufacturing processes.
Nevertheless, falling demand for Molycorp’s key rare earth metals has pushed the company over the edge.
Molycorp has been unable to turn a profit during the past three years. Since 2012 the company has racked up losses of around $1.5bn, debt has spiralled, and Molycorp is now struggling to fund interest payments.
A disaster waiting to happen?
Rare Earth Minerals and Molycorp do have some similar traits. For example, Rare Earth Minerals’ Yangibana Main and Greenland rare earths projects contain minerals similar to those mined by Molycorp.
However, unlike Molycorp, Rare Earth Minerals’ main projects are lithium mines. Molycorp had no real presence in the lithium market.
And this is where Rare Earth Minerals has an edge over Molycorp.
Lithium edge
One of the key rare earth metals that Molycorp produces is lanthanum, which is used to manufacture nickel-metal-hydride batteries.
Lithium batteries are far superior to their nickel-metal-hydride alternatives, giving Rare Earth Minerals an edge over Molycorp.
By management’s own forecasts, Rare Earth Minerals estimates that the demand for lithium ion batteries for use in electric vehicles will more than quadruple by 2020. The demand for ‘smart-grids’ to improve global electricity use will also drive the demand for lithium ion batteries.
Large mine
According to figures already published by Rare Earth Minerals, the net present value (NVP) of all Rare Earth Minerals’ interests in the Fleur — El Sauz, Ventana, Yangibana and Western Lithium projects amounts to $1.2bn.
Simply put, NPV is a profit figure that the company — in this case, Rare Earth Minerals– expects to receive over the life of the project after deducting investment costs and the company’s required annual return. Or, to put it another way, this is the profit attributable to Rare Earth Minerals’ shareholders over the life of the mining projects.
And after taking into account the estimated value of Rare Earth Minerals’ resource base, coupled with the bright outlook for lithium, it’s easy to conclude that the company is better placed to succeed over the long-term than Molycorp.
Undervalued
Rare Earth Minerals’ market capitalisation is only £66m, a fraction of the company’s resource base. The company could be one of the market’s hidden gems.
