Prices soared. “The Japanese were buying everything in sight,” said Constantine Karayannopoulos, current chairman and former interim CEO. “It was a bubble.” Investors piled into Molycorp, the only major rare-earths producer outside China.
Mark Smith, who was CEO at the time, was treated like a rock star at investor roadshows. “I was used to there being a dozen people at these events,” he said in a recent interview. “And suddenly there were hundreds and hundreds.” Mr. Smith said he knew it was a bubble at the time, but there was nothing he could do about it.
Molycorp rode the wave. It committed to an expansion at the mine in California, which cost $1.6 billion after overruns, and bought Neo Material Technologies Inc., a Toronto-based rare-earths processing firm, for $1.3 billion.
Then, in late 2011, the bubble popped, along with Molycorp’s share price. China relaxed restrictions on exports, oversupplying a market of only up to 140,000 tons a year. The iron-ore market, by comparison, is two billion tons a year. Molycorp says the problem has been exacerbated by illegal mining in China, which has further stoked production, artificially dropping prices. Chinese officials have made no secret of the fact that the industry has long been plagued by illegal production and trade.
Rare earths are used in tiny quantities. Molycorp’s open pit in California is the mining equivalent of a kiddie pool. One-ton bags are stacked outside a warehouse near the mine. Each bag contains enough rare-earths elements to make over five million magnets.
It doesn’t take much movement in supply or demand for prices to swing wildly. Since 2011, prices for the rare earths lanthanum and cerium, for example, have fallen to under $4 a kilo (2.2 pounds) from over $150 a kilo; and prices for neodymium have declined to under $60 a kilo from over $330 a kilo. Overall, the rare-earths market has shrunk to a billion-dollar market from one worth over $15 billion.
‘The Japanese were buying everything in sight. It was a bubble.’
—Constantine Karayannopoulos, Molycorp’s current chairman and former interim CEO
Even as scarcity fueled by Chinese quotas on rare-earths exports drove up Molycorp shares, engineers went to work finding substitute ingredients. “And the high prices back then encouraged more mining,” says Dudley Kingsnorth, an Australian academic who has advised the U.S. Department of Defense on rare earths. “All together, it killed the market.”
Ford Motor Corp. , for example, cut use of Dysprosium, which as an alloy can increase the heat resistance of a magnet, by 50%. The new system, says a spokesman, “is also 50% lighter and 25% to 30% smaller than previous-generation hybrid batteries.”
Even Pentagon officials say the panic was overblown. The U.S. Department of Defense only buys between 5% and 8% of all the rare earths consumed in the U.S. Many of the magnets it purchases contain rare-earths elements that may be mined and produced in China, according to a U.S. military official. It has stockpiles and contingency plans in case China cuts off exports, the official says.
In late 2012, Mr. Smith was dismissed without a statement from the company. The U.S. Securities and Exchange Commission investigated whether statements Mr. Smith and other executives had made during the boom were misleading or overly bullish. Angry shareholders have filed a cluster of lawsuits, which have been consolidated into four suits. Three have been dismissed. |
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