Is There A Rare Earths' Renaissance?

FARMINGTON HILLS, Mich. (ResourceInvestor.com) -- The Renaissance was an historical period during which the culture of the ancient world was reborn and reintroduced into medieval Europe and the steady march began towards our modern world of science and technology.  Both historians of art and of finance love to greatly simplify the impetus for the renaissance into the ambition and skills of one family, the Medicis of Florence who were great collectors and patrons of the arts and of mining and industrial technology as well as great bankers.

Late last week a press release was issued by Chevron Mining, Inc, a wholly owned subsidiary of oil giant, Chevron (CVX) announcing that it had agreed to sell its the rare earth mining operation at Mountain Pass, San Bernadino County, California , and the name of the subsidiary, Molycorp, operating that mine to a group of investors that includes Goldman-Sachs, Inc. (GS).

Goldman-Sachs' web site does not list this Chevron press release nor does it have one of its own. I am going to assume that this is because:

1. Goldman-Sachs was not the lead investor in this deal;
2. Chevron Mining, Inc is, in fact, only a tiny part of Chevron Oil;
3. The financial amounts were not such as to be classed alongside of the deals that do get included in Goldman-Sach’s press releases; and
4. This investment by Goldman-Sachs was made with a long range objective that is not immediately apparent and thus would not get the attention of the sound-bite only crowd on Wall Street, Bay Street, and The City.

It is this last aspect I now want to expand upon for RI’s readers who I find to be much more intelligent and to have a much longer and sanguine outlook than “Wall Street types” other than those at Goldman-Sachs.

The press release, which I assume that you've read by now, is a bit misleading about the history of the Mountain Pass mining operation. In 1994  the Mountain Pass rare earths mining operation was shut down by its then owner, Molycorp, which was a subsidiary then of the oil company Unocal, a conglomerate assembled by legendary investor, Armand Hammer. The stated reason for the shut down by the company, Molycorp, was ‘market pressure.’ Molycorp said that the cost of producing the rare earths at Mountain Pass had exceeded their then market value, so that the mine was uneconomical.  The company did not comment then on the fact that environmental activists were then vocal in their concerns that residual thorium in above ground concentrates and residues being stored on the mine’s property ‘could’ or ‘might’ leak radiation into the ‘ground water.’ In addition the company did not comment on the ‘fact’ that Chinese rare earth pricing for REEs mined in China had then been recently dropping. Some commentators considered this ‘predatory’ pricing, i.e., pricing intended to put competitors out of business. The People’s Republic of China was not in 1994 a member of the WTO, and due to the political climate in 1994, it would have been difficult in any case for Molycorp to raise the charge against China of the dumping of rare earths on the U.S. market. The mine had a large quantity of ore above ground and that material was worked at the site or sold to Chinese refiners for rare earths’ recovery sporadically until 2005.

In 2005, Unocal put itself up for sale and the top bidder turned out to be CNOOC, the Chinese national oil company, a state owned enterprise. The free market oriented ‘conservative’ U.S. Congress panicked at the thought that a communist country’s oil industry could own and operate a California based ‘oil’ company. The U.S. Congress turned to Chevron (!) to rescue an American oil company from the clutches of the control of the People’s Republic of China (PRC). Chevron agreed and in the process also acquired Molycorp and through that acquired the moribund Mountain Pass rare earths mining operations.

Earlier this year it became obvious that Chevron Oil had lost interest in rare earth products, in general, when it refused to continue funding the joint venture it had formed in Detroit with Energy Conversion Devices, Inc., known as COBASYS, Chevron Ovonic Battery Systems. General Motors, which as far as I can tell, was the only company ever to have received a volume of vehicle sized nickel metal hydride batteries from COBASYS announced shortly after Chevron’s statement of disinterest that it, GM, would buy the company if Energy Conversion Devices were unable to fund it on its own, as seemed likely then and seems likely now. However, to the best of my knowledge, GM has not yet bought out either Chevron or ECD from the COBASYS JV.

This last spring at the SME (Society of Mining Engineers) Rare Earth Seminar in Salt Lake City I asked the Mountain Pass general manager if the mine were for sale. He said ‘no.’ I’m not sure that was entirely accurate.

Two weeks ago, at the Minor Metals and Rare Earths’ Conference in Hong Kong, I asked the Chevron Mining official who oversees the Mountain Pass operation if the mine had been sold. He also said, “No,” but I knew that was not accurate, because the day before I had been informed by one of the buyers that the mine had been sold. I couldn’t resist asking the Chevron official why, with its ownership in COBASYS and its ownership of Mountain Pass, Chevron didn’t put the two together and become a vertically integrated, mine to market, producer of nickel metal hydride (lanthanum based) batteries for hybrid vehicle use. The crafty executive looked at me and said, “Jack. Chevron is an oil company.”

What does all of this have to do with my theme of renaissance and Goldman-Sachs?

The register of shareholders of Lynas Corporation Ltd (LYC) shows that  Goldman-Sachs itself is a major investor in the Australian rare earth mining company. The business development manager of Lynas told the conference attendees in Hong Kong that Lynas has $400, 000,000 in the bank, expects to be in operation by the end of 2009, and expects to be producing 20,000 tons of rare earths by 2011-12, which would make it then the largest single producer of rare earths in the world. Now put this information together with the fact that until 1994 Molycorp’s Mountain Pass mining operation was supplying 34% of the annual global production of REEs and 100% of total U.S. demand and that the company has stated that at full production it could produce 20,000 tons a year of REEs for up to 50 years. Goldman-Sachs, if it holds onto its investments until then, could by 2012 be very influential in the production of 40,000 tons per year of REEs. This would be between 25 and 34 %(!) of projected global production in 2012. Today China has more than 90% of the global production of REEs. I think that Goldman-Sachs is making a bet that this monopoly can be broken and part of the method of breaking the monopoly would be to go back to its, the monopoly’s, 1994 roots in the shutdown of Mountain Pass and reversing it.  

Why is Goldman-Sachs investing in the renaissance of rare earth mining?

It is for the same reason that Goldman-Sachs is already the only independent investment bank to survive the Wall Street meltdown of 2008: Goldman-Sachs has long term strategic vision that informs its investments. In other words Goldman-Sach’s bankers, like the Medicis of old, are a lot smarter than their rapidly disappearing competitors. I think that:

Goldman-Sach’s investment analysts and bankers see the future of rare-earth metal (lanthanum)-based nickel metal-hydride batteries for broadly useful and increasingly popular hybrid vehicles based on the technology pioneered by the Toyota Prius; they also recognize that the very limited usefulness of overhyped gimmicks such as the Chevrolet Volt were forced upon formerly great companies such as General Motors because it failed to secure the supplies of rare earth metals critical to the building of nickel metal hydride batteries in mass production-a mistake that Toyota did not make,

Goldman-Sach’s analysts and bankers also have analyzed why the dynamic and growing permanent magnet industry has vanished from the U.S. The former magnet industry’s leaders failed to recognize the need to secure long term supplies of the rare earth materials, neodymium, praseodymium, and samarium when in 1984 the modern rare earth based magnets were invented by Magnaquench and Sumitomo. Magnaquench was then a wholly owned subsidiary of Delco Electronics, itself then a wholly owned subsidiary of General Motors. Today all but a small percentage of all such magnets are made in China; the remainder is made outside of China but only with Chinese rare earth based alloys,

Goldman-Sach’s analysts and bankers have also analyzed the long term strategic needs for rare earths for the fluid catalytic cracking catalyst industry, which is daily growing in importance, in order to manufacture useful petroleum products from heavy (sour crudes, tar sands, and shales). Those f.c.c. catalysts based on the rare earth metals, lanthanum, must now use only Chinese produced starting materials.   This is a growing and potentially huge market. In fact the speaker in Hong Kong from Lynas admitted that Lynas has already sold an off-take of its future rare earths production to a western producer of f.c.c.s that is very far sighted. I wonder if Goldman-Sachs arranged that off-take agreement in order to strengthen the balance sheet of Lynas?, and

I believe that Goldman-Sachs is now continuously engaged in adding to its portfolio of rare earth properties

It took the Medicis almost a century to go from banking to the papacy and to become Dukes of Tuscany and Queens of France. In the last 16 years Goldman-Sachs executive alumni have three times served as Secretaries of the U.S. Treasury-including the present one, Henry Paulson-and as U.S. Senators, Governors of New Jersey, and Presidents of Harvard. These are very smart people who are very good at long range planning, a skill sorely lacking in most American executive suites.

I think I would take their word at Goldman-Sachs, as evidenced by their recent aggressive actions, that there is a renaissance underway in the evaluation of rare earths. Aren’t these metals, in fact, among the most precious metals of the 21st century? I and Goldman-Sachs certainly think so.

By the way I am not affiliated with, nor have I ever been paid for any reason by, Goldman-Sachs, nor do I or have I ever owned stock in it or in any of the companies mentioned in this article.