America's Only Rare Earth Mine Is Stuck in a Distressed Debt DisputeBy
Oaktree pitted against JHL Capital and QVT over mineral rights
Molycorp mine sits idle in bankruptcy amid creditor standoff
A long-running fight between distressed debt investors is threatening to scuttle the reopening of the only U.S. mine producing rare metals used in hybrid electric cars and some military hardware.
A court-appointed trustee for bankrupt Molycorp Minerals LLC will ask a judge Friday to approve the sale of the last remaining assets associated with a rare-earth mine at Mountain Pass, California. But a lawsuit over mineral rights and complaints by the losing bidder for those assets are complicating efforts to reopen the mine.
The dispute pits Oaktree Capital Management LP, which owns the most advanced ore processing equipment at the mine, against JHL Capital Group and QVT Financial LP, which control the most important mineral rights at the site. All of them held debt in Molycorp’s now-defunct parent, Molycorp Inc. until they traded their $1.9 billion in claims for different parts of the company. The court-appointed trustee held an auction on June 14 for the remaining parts of the mine hoping to attract a buyer to restart production and take responsibility for about $100 million in cleanup costs.
Auction winner MP Mine Operations LLC is majority owned by JHL and QVT, who are attempting to reunify enough of the mines remaining assets to reopen Mountain Pass. The runner-up, mining entrepreneur Tom Clarke’s ERP Strategic Minerals, is allied with Oaktree and has an agreement to use Oaktree-controlled equipment at the site.
ERP claims that because MP Mine will rely on Chinese mining giant Shenghe Resources Holding Co. for financial and technical help, the sale might be blocked by the Committee on Foreign Investment in the U.S., a government panel with the power to stop foreign companies from being involved in the purchase of strategically important assets. Even before the auction, Oaktree filed a lawsuit against JHL and QVT over the mineral rights.
Jennifer Bell, a spokesperson for ERP, didn’t return a call seeking comment. A QVT representative didn’t respond to emails seeking comment. Shenghe didn’t respond to a request for comment faxed to the company’s China headquarters. Oaktree and JHL declined to comment.
Should JHL and QVT defeat Oaktree’s lawsuit, avoid an adverse ruling from the federal committee and somehow get access to the advanced machinery Oaktree controls, making the mine profitable faces the same economic headwinds that drove Molycorp into bankruptcy in 2015: the low price for rare-earth elements.
“The price isn’t there,” said Richard Bourke, an analyst who covers basic materials for Bloomberg Intelligence. “These plants are hard to get up and running. That’s what Molycorp showed.”
Molycorp Minerals and its parent, Molycorp, filed for bankruptcy after spending hundreds of millions of dollars on an experimental ore-processing system. When prices for rare earths, which are dominated by low-cost Chinese producers, plummeted, Molycorp couldn’t compete.
As the June 14 auction got underway, lawyers for ERP tried unsuccessfully to get MP Mine disqualified by claiming the Shenghe connection would prevent the company from winning approval from the federal panel. In 2005, Cnooc Ltd., China’s biggest offshore explorer, had to scuttle a $18.5 billion bid for California-based Unocal Corp. after resistance from Congress. Some of that opposition focused on preventing China from gaining control of Mountain Pass, which at that time was owned by Unocal.
The court-appointed trustee, Paul Harner, rejected Clarke’s demand after Matthew Clemente of Sidley Austin LLP, a lawyer for MP Mine, argued that the company wasn’t required to submit the sale to the federal committee. MP Mine worked with the committee for a year, sharing key contracts with members, before making its bid for the mine, Clemente said, according to a transcript of the auction.
Both ERP and MP Mine have foreign partners to supply the technical expertise needed to extract, process and sell the rare metals used to make powerful, lightweight magnets for some military hardware. ERP is collaborating with Pala Investments Ltd. and Peak Resources Ltd. Pala is based in Switzerland and was founded by Vladimir Iorich, the former chief executive officer of a Russian steelmaker. Peak is an Australian-based mining company.
The bidders have claimed that they can operate the mine without the other side’s cooperation.
Since Molycorp filed for bankruptcy, its mine has been caught between the feuding creditors. The dispute has made getting the mine back into operation difficult, the trustee said in court papers. He compared his efforts to a three-legged stool that lost one of its legs.
In May, Oaktree sued JHL and QVT, to unwind a deal to transfer the main mineral rights from a company they jointly owned with Oaktree, to MP Mine, in which Oaktree has no stake. That lawsuit, filed in state court in Delaware, is in the early stages. Should a judge side with Oaktree, MP Mine could lose the mineral rights to Mountain Pass.
The case is In re Molycorp Minerals, 15-11371, U.S. Bankruptcy Court, District of Delaware (Wilmington).