Molycorp Agrees to Acquire Neo Material for $1.3 Billion

Molycorp Inc., owner of the largest rare-earth deposit outside of China, agreed to buy Canada’s Neo Material Technologies Inc. for about C$1.3 billion ($1.3 billion) to increase Chinese sales and gain technology used to make magnets.

Investors will get C$8.05 in cash and 0.122 of a Molycorp share for each Neo share, Greenwood Village, Colorado-based Molycorp said in a statement yesterday. The offer is equal to C$11.19 a share based on yesterday’s closing price, representing a premium of 40 percent.

Molycorp, which held an initial public offering in 2010 to fund the restart of a California rare-earth mine, will get Toronto-based Neo’s processing factories. It also will obtain Neo’s patented Magnequench range of metal powders used to make neodymium-iron-boron magnets, which can be found in electronic motors and sensors.

The deal “puts the upstream and the downstream together in a very significant way,” Molycorp Chief Executive Officer Mark Smith said in a telephone interview. “This acquisition allows Molycorp to access 100 percent of the demand in the world now.”

Neo jumped 37 percent to close at C$10.94 in Toronto. Molycorp rose 19 percent to $30.89 in New York.

Rare-earth prices soared in 2010 after China -- which accounts for 95 percent of global supplies according to the U.S. Geological Survey -- imposed a quota on exports. The 17 chemically similar metals are used in applications ranging from catalysts for oil refining to radar systems and batteries.

Chinese Quotas

Molycorp’s stock rose more than fivefold before paring gains in the past 10 months as rare-earth prices declined. China will maintain the same export quotas this year after only 60 percent of 2011’s quotas were used, Commerce Minister Chen Deming said March 7.

The takeover is subject to the approval of Neo investors and is expected to close in the second or third quarter, Molycorp said. Morgan Stanley and Credit Suisse Group AG agreed to finance most of the cash portion of the deal. Permanent financing will come from long-term debt, cash from the combined company, and potential stock offerings, Molycorp said.

The Neo deal also gives Molycorp production of gallium, which is used in light-emitting diodes; rhenium, used in high-temperature alloys; and indium, used in electronics.

‘Fundamental Weakness’

“This deal addresses the fundamental weakness that our company has: we are not in control of our raw materials,” Neo CEO Constantine Karayannopoulos said in a telephone interview. Smith will remain CEO of the enlarged company and Neo’s boss will take the role of his “most senior manager,” Karayannopoulos said.

Neo employs about 1,375 people in 19 locations across 10 countries, according to its website. Neo received 74 percent of its $337.6 million in revenue in 2010 from its Asia division, according to data compiled by Bloomberg.

“Neo can do more business with Molycorp material than they can begging for Chinese feedstock, so the transaction is positive all around,” Jonathan Hykawy, an analyst at Byron Capital Markets in Toronto, said in an e-mail. “What they both lack is a strong, near-term and low-cost supplier of more heavy rare earths.”

So-called heavy rare earths are the less abundant members of the group of elements, such as dysprosium, used in wind turbines, and erbium, used in lasers.

Mine Restart

Lanthanum, cerium, praseodymium and neodymium -- so-called light rare earths -- accounted for 60 percent of Molycorp’s sales from its Mountain Pass mine in 2011.

Molycorp is expanding production at the mine. The company said in February it started some operations at the rare-earth manufacturing plant in Mountain Pass, which is scheduled to produce at a rate of as much as 19,500 metric tons of rare-earth oxides a year by Sept. 30. Molycorp plans to double capacity to 40,000 tons by the end of 2013.

Morgan Stanley advised Molycorp. Jones Day and McCarthy Tetrault LLP were its legal counsel and Cutfield Freeman and Co. was a strategic adviser. GMP Securities LP advised Neo and Fogler, Rubinoff LLP and McDonald Hopkins LLC acted as its legal counsel. Stikeman Elliott LLP was legal counsel to the special committee of Neo’s board of directors.