Could This Be the Last Nail in Molycorp's Coffin?

Could This Be the Last Nail in Molycorp's Coffin?

Already facing a rocky future because of a weakened rare-earth-elements market, Molycorp could be brought to its knees if a discovery in North Korea pans out.

Privately held SRE Minerals announced the other day that together with Korea Natural Resources Trading it will be developing what could be the world's largest deposit of rare-earth elements ever seen. It's so large, in fact, that it would more than double the current known deposits of rare-earth-element oxides, which are estimated at 110 million tonnes.

According to the U.S. Geological Survey, despite their name, rare-earth elements aren't really all that rare, but finding them in minable concentrations is what makes them uncommon. China, with reserves of 55 million tonnes, supplies some 86% of the world's needs for rare earths, though the U.S. has a substantial store of its own equating to about 12% of the total. (India is a distant third with less than 3%.) The difference is we just haven't mined them to the extent the Chinese have, but there are 14 states in the country that have large known deposits, including Molycorp's Mountain Pass in California, Bokan Mountain in Alaska, and the Bear Lodge Mountains of Wyoming.

It's been Molycorp's efforts at Mountain Pass, however, that began changing that dynamic domestically as mining resumed in 2012 and its back to nearly full production now. It's also nearing completion on a processing plant, but rival Lynas has begun production in Malaysia and Great Western Minerals rehabilitated its Steenkampskraal project in South Africa where it recently upgraded its mineral-resource estimates. With its Hoidas Lake project in Saskatchewan moving forward, Molycorp's advantages are quickly narrowing.

Part of the problem is that almost half of Molycorp's mine production is cerium, among the cheapest and most widely available of the rare-earth elements on the market. Lanthanum, the other element it says it will will focus upon, is also in abundance so the possibility that North Korea could be sitting on top of such a colossal deposit could cripple Molycorp, particularly because SRE says the light rare-earth elements cerium, lanthanum, and praseodymium have been identified as being the most prevalent.

Total mineralization of the discovery at Jongju in the North Pyongan Province is estimated at 6 billion tonnes, with 216.2 million tonnes associated with rare-earth oxides. Of that amount, less than 3% are heavy rare-earth elements. In addition to the right to develop this project, SRE says it was also granted the right to construct a processing plant on site.

As damaging as all this sounds, and as wary as I am of an investment in Molycorp, I have to admit to being skeptical of such momentous news emanating out of North Korea. After all, its leader Kim Jong-Un was said to have learned to drive a car at the age of 3 and before him his father was credited with inventing the hamburger.

Yet the technical information for the deposit does come from a scientist with decades of experience and who comes with bona fides that qualify him as competent. In short, it can't be dismissed out of hand as you might do upon hearing Kim Jong-Il directly coached the Korean Olympics team in 2010 with an invisible cell phone.

Of course, discovery is one thing; ramping up production, processing, and shipping to market is another. With the U.S. being one of the world's top consumers of rare-earth elements, would we even accept shipments from North Korea? Nevertheless, it remains yet another area of concern for Molycorp investors, one that continues to argue against placing any money with the company.

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