In late 2010, two questions were on the minds of many commodities investors: What are rare earths? And where could they buy some?
The group of 17 obscure, difficult-to-pronounce minerals, used in hot-ticket items like smart phones, electric cars and wind turbines, were beginning to post the kind of price gains not seen even in the traditionally volatile energy and metals markets. For many investors, the only way to get in on the action was to buy shares of U.S. producer Molycorp Inc. Its market capitalization had shot up to $4 billion after an initial public offering earlier that year.
On Thursday, Molycorp filed for bankruptcy protection, having run out of cash after a precipitous and sustained slide in rare-earth prices. The company has become a cautionary tale for investors looking for the next hot thing, a lesson in how excessively high commodity prices can quickly reverse.
“In hindsight it was an absolute commodity bubble,” said Jon Hykawy, an analyst at Stormcrow Capital Ltd. in Toronto who tracks the rare earths industry.
The trigger for the rally was the decision by China in 2010 to suddenly restrict exports, sending users scrambling for supplies of lanthanum, neodymium, cerium and other rare earths. Yet grave predictions of a shortage of these critically important materials proved to be flawed. Rare earth consumers such as Toyota Motor Corp. simply switched to cheaper alternatives.
Until the 1990s, the U.S. was the dominant producer of rare earths and China mined almost none. That would soon change as the largest U.S. mine shut and Chinese producers took advantage of cheap labor and more relaxed environmental regulations. By the early 2000s, China supplied 97 percent of the global market, according to the Council on Foreign Relations.
Rare earths would soon assume geopolitical significance. The minerals are used in smart bombs, Tomahawk cruise missiles and F-35 fighter jets. Concerned by the reliance on Chinese supplies, the U.S. Department of Defense and other government agencies began studying the issue. In July 2010, just months after their report was published, the fears began to be realized when China cut export quotas by 72 percent to ensure domestic supply.
Rare earth prices began to climb as consumers built up inventories, and the rally would last into much of 2011. Lanthanum, used in hybrid-car batteries, and neodymium, for powerful magnets, both jumped fivefold during 2011. Cerium, for glass polishing, soared sixfold.
In the U.S., Molycorp became a stock-market star. Investors who had bought into the Greenwood Village, Colorado-based company at its July 2010 IPO at $14 a share saw the stock touch $79.16 in May 2011.
Molycorp’s sales pitch billed the reopening of its Mountain Pass mine in California as the only North American source of rare earth, breaking the grip of Chinese buyers.
Then, the rare earth boom ended almost as quickly as it began, with prices posting steep declines in late 2011. More supply was coming on the market, not just from California but also from Australia and Malaysia, according to Kevin Starke, an analyst at CRT Capital Group.
“The industry shot itself in the foot with so much new supply,” he said.
Prices also came under pressure as corporate buyers did work-arounds. The glass polishers started recycling cerium, according to Stormcrow’s Hykawy. Toyota went one step further, developing motors for hybrid and electric vehicles that don’t need rare earths. Oil refiners substituted rare earths from the catalysts used in refining.
“There’s a maximum price that you pay,” Hykawy said. “I’m sick to the stomach of the argument that rare earths are irreplaceable.”
Even as prices continued to slide, Molycorp elected to double down on the industry by buying Neo Material Technologies Inc., a Canadian metals processor, for $1.2 billion in 2012.
No longer profitable, Molycorp’s woes mounted. In November of that year it said it was being investigated by the U.S. Securities and Exchange Commission over the accuracy of the company’s public disclosures. Further equity and bond sales followed to help fund the development of Mountain Pass. By January 2015, the company was talking to debt-restructuring advisers.
In court documents, Molycorp listed assets of $2.49 billion and liabilities of $1.79 billion. A group of creditors has agreed to provide $225 million in financing. The company continues to operate and says it plans to exit bankruptcy by the end of the year.
The shares, which trade over the counter after they were delisted from the New York Stock Exchange following the bankruptcy, fell 30 percent to 9 cents at the close. Three analysts recommend selling the shares while one has a hold rating, according to data compiled by Bloomberg.
Despite Molycorp’s plight, rare earth demand continues to grow. Yet analysts say the industry needs to smooth out supply management to lessen price volatility, or permanently scare away users. China remains the dominant global supplier with a share of at least 70 percent, the Council on Foreign Relations said.
“There needs to be a stable source of rares supply outside of China,” said Melissa Tan, a New York-based analyst at RW Pressprich & Co. “Large buyers, the Japanese companies and others, they want to diversify their exposure.”