Molycorp ramping up rare earth mine as China demand rises

Molycorp is revving up its business with a profitable 2011 on sales of $396.8m, more than ten times its 2010 turnover, and plans to more than quadruple annual production rates as its California mine comes online later this year.

Rare earth metals and magnets are a key component in wind turbines, electric vehicles and other advanced technologies. The market is currently dominated by Chinese producers.

Molycorp describes itself as "the only US-based company that is fully integrated acrossRare earth metals company the rare earth mine-to-magnets supply chain".

Chief executive Mark Smith says the 2012 market will continue to be dominated by China, which is forcing industry consolidation and constricting internal production.

"As we look at the coming year, we expect to see a continuation of China's enhanced enforcement of internal production quotas and its crack down on facilities that don't meet significantly tougher environmental performance standards," Smith says.

He also notes an initiative announced last week by Chinese officials "aimed at developing new rare earth materials over the next five years in order to boost their manufacturing capacity and promote application of rare earth materials in high-end manufacturing.

"Clearly this is yet another signal to the rest of the world that China expects its internal consumption and utilization of rare earths to continue to grow in the years ahead," Smith says.

Molycorp says higher prices, production volumes and increased sales resulting from 2011 acquisitions of metals and alloys manufacturers drove the sales increase. The company had a gross margin of 55.2% in 2011, compared to a negative margin in 2010. Molycorp turned a profit of $117.5m, or $1.27 per share, last year, against a $50.8m loss in 2010.

The company announced that its Project Phoenix manufacturing facility at Mountain Pass, California, is ahead of schedule and began sequential start-up this week. An initial production run rate of 19,050 metric tons of rare earth oxide (REO) is to be reached by the end of the third quarter. The company's 2011 REO sales hit 3,516 metric tons. It expects to produce 8,000-10,000 metric tons this year.

Costs are expected to rise as the facility is completed, but the degree of increase remains unclear, giving some analysts pause.

"We continue to believe the company has an opportunity to reach an industry-leading cost structure, but also believe the street is prematurely giving the company credit for a new and unproven process that is more likely to show its benefit closer to 2015 than 2012," write analysts at ThinkEquity in a note to investors.

The analysts also say the company's mine-to-magnet strategy "has promise", although the ramp-up at Mountain Pass is their primary concern.

In addition to its metals and alloys acquisitions, Molycorp formed the Intermetallics joint venture with Daido Steel and Mitsubishi, to make permanent rare earth magnets, used in many direct drive wind turbine designs. Production is to begin by the end of the year.

The company also noted its 2011 investment in startup Boulder Wind Power, which is developing a permanent magnet wind turbine that uses no dysprosium, which Molycorp describes as "truly scarce in today's markets".

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