America's valuable minerals could be headed for China

What soon will be America's only functioning rare-earth mine may ship at least a portion of its product overseas.

Some of its valuable minerals might go to China, which controls the market for the 17 elements known as rare earths.

Rare-earth elements are used in many high-tech products, from medical and consumer-electronic devices to hybrid cars and the military's precision-guided "smart" bombs.

Molycorp Inc., a Colorado-based company with a California rare-earth mine, says it plans to become a fully functioning "mine-to-magnets" integrated firm. At least 3,000 metric tons of its 40,000 metric tons in projected annual production is slated to go to Japan, according to Japanese trading firm Sumitomo Corp.

China produces 97 percent of the world's rare earths. The United States produces none, although it dominated the market in the 1980s. Molycorp's Mountain Pass, Calif., facility was the last U.S. rare-earth mine before closing in 2002. The company plans to reopen it.

For two years, China has drastically cut its export quotas for rare-earth elements, forcing U.S. and other foreign firms that rely on those materials to manufacture in China.

Analysts describe China's actions as part of a long-term strategy to become the leading high-tech innovator.

In mid-December, Sumitomo signed a memorandum of understanding to invest $130 million in Molycorp by buying $100 million in new common stock and loaning it $30 million.

Sumitomo would get access to a new supply of rare earths.

Molycorp is in discussions with Canadian-based Neo Material Technologies to send rare earths to China, according to Neo CEO Constantine Karayannopoulos. In exchange, Neo would help Molycorp to make rare-earth alloys and metals in Thailand, Karayannopoulos said.

A congressional staffer involved in rare-earth legislation, speaking on condition of anonymity, said the Molycorp-Neo deal could be politically dicey, if products from America's only functioning rare-earths mine become subject to Chinese export controls.

How many tons of American rare earths might go to China is unknown, and no deal has been inked, Molycorp CEO Mark Smith said.

Molycorp "doesn't take shipments to China lightly," he insisted, and would talk to the federal government before proceeding.

Karayannopoulos, however, said he doubts U.S. politics will block a deal.

"As far as I can tell, these are commercial decisions," he said. "There is no embargo on shipping rare earths to China, and I would be surprised if that would be the case.

"If and when it runs afoul of political considerations, we would have to take it up at that time."

In 2010, China sharply reduced export quotas for rare earths and briefly embargoed shipments to Japan.

Japanese firms, which are major importers of rare earths, scurried to find other producers, and rare-earth prices skyrocketed by as much as 700 percent.

China also began restricting domestic rare-earth trade, according to industry experts.

China's actions have caused supply concerns for other international companies, such as Canadian-based Neo.

Neo absorbed the remnants of a U.S.-based firm, Magnequench, in 2005 after two Chinese firms and a U.S. investment group bought that company and later moved its operations to China.

Magnequench was one of the last U.S. companies making neodymium iron boron magnets, or neo-magnets. The rare-earth-based magnets are widely used in wind turbines, the military's "smart" bombs and other high-tech gadgetry.

No U.S. companies now produce neo-magnets.

The moving of Magnequench's operations to China "made Neo dependent on the Chinese for (rare-earth) feedstock, which appeared to be a good decision, until now," Smith said.

He said Karayannopoulos "could find himself in a bind pretty quick," prompting the search for alternatives to Chinese supplies.

Smith said he has "been very clear ... from day one" that Molycorp's priority was not in providing feedstock to other rare-earth developers.

He agreed that sending even limited amounts of rare earths to China "has the potential to be political."

Karayannopoulos said the rare-earth scare in the United States, which prompted several proposed bills in Congress in the past, has been tinged with "a certain amount of jingoism."