Molycorp: Long term contracts will be the future for rare earths

By Siobhan Lismore-Scott
Published: Monday, 18 November 2013

“Lessons from the trenches” suggest confidence will return to market, CEO tells IM

 Molycorp's Mountain Pass processing facility.                                                                Source: Molycorp

One might be forgiven for thinking that Molycorp president, Constantin Karayannopoulos, would be all but sunk under the deluge of bad news that has hit the rare earthscompany over the last few months.

A succession of dismal financial results in 2013, investigations into company disclosures, a lawsuit over engineering deficiencies and sluggish production at the company’s Mountain Pass production facility in California, US, led the company to ask for more fundingin October.

But when IM met Karayannopoulos, who will be stepping aside as CEO in December to let Geoff Bedford take the reins, he was upbeat and optimistic.

“ In terms of delivering on our promises, it's taken longer than expected, but over the next few quarters we expect continuous output,” Karayannopoulos told IM, adding: “ We are very close; we really need to deliver what we promised.”

Karayannopoulos was attending the 2013 Rare Earths Conference in Hong Kong, where he presented on the company’s progress with its Mountain Pass project and its associated production facilities.

The presentation, entitled “Lessons from the Trenches”, aptly described the embattled miner’s struggle with operational difficulties and spiralling costs.

Stockpiled inventories, falling pricesand substitution of rare earths for other materials have also assailed the US company, and the rare earths industry as a whole, meaning that the economics of many potential new projects failed to stand up on a cost per tonne basis.

“ A lot of folks had major projects, but then with what happened in the industry two years ago, they’re gone,” Karayannopoulos said.

“The industry has lost confidence and the supply chain has lost confidence,” he admitted.

“ I don't think we thought it was sustainable in 2011 when we saw prices running up, because of the substitution that would cause. Pricing speculation was a double  whammy. It  wasn't just the price – it was also that, for downstream consumers, stuff just stopped showing up, and that is when the panic set in,” he added.

In order for customers to trust rare earths producers again, Karayannopoulos believes the industry needs to evidence security of supply: “things need to show up on time, on spec and with no surprises,” he said.

At the same time, “they need to plan [for the] longer term and be prepared to enter into long term contracts with consumers,” he explained.

Long term contracts

With a rare earths trading exchange being established in China and with other mineral industries moving towards spot pricing, it may seem erroneous to consider long term contracts a necessity of the rare earths market. But, explained Karayannopoulos, this is what the industry wants.

“From my perspective, what needs to change is the strategy. Right now everything is done on the spot market. It's hand to mouth. We are saying we can guarantee long term contracts and long term prices,” Karayannopoulos said.

Although it’s hard to believe end users would sacrifice the ability afforded by spot pricing to control costs themselves in favour of long term contracts, in the largely Chinese-monopolised rare earths business, it is plausible that customers would want to move into long term future agreements to secure supply.

“In the last 20 years, it's been totally impossible to enter into long term contracts,” Karayannopoulos explained. “ There's always been a group in the industry that made it impossible to offer long term pricing. But some of the industry are eager for longer term contracts. The automotive industry want three year contracts,” he said.

“Some of the technology companies are also very interested in longer term contracts,” he added. “They cannot continue to take the risk that the industry has taken with spot pricing”.

Outside China

In his presentation, Karayannopoulos outlined that he believed environmental pressures in China would mean prices will recover – although he added he did not believe the market would see the 6,000% increases witnessed in 2011.

“ China is clamping down on illegal mining, and on the process and smelting industries also. The Chinese government can't ignore this; illegal operations take a huge toll on the environment,” he told IM.

Another factor that he believes is key to the confidence returning to the rare earths industry is rational regulation. The price spikes witnessed in 2011 resulted from the reduction of rare earths export quotas, implemented by China’s Ministry of Information and Technology (MIIT)

“I'm sure the MIIT had good reasons, but by restricting exports this drove panic buying, which led to a spike in price. We need rational regulation to be implemented that takes these outcomes into account,” Karayannopoulos  said.

Lessons from the trenches

Although Molycorp is in a place where it feels it can issue “lessons from the trenches” the truth is that the company is still very much in the warzone. However, as Mountain Pass starts to ramp up in the coming quarters, Karayannopoulos said he believed the future will start to brighten.

“We have seen several sectors returning: magnetic powers remain strong, chemical oxides markets are coming up, as is the phosphor market,” he said.

At Mountain Pass, “the cost of production will improve as we see more volumes and we should be able to see improvements quarter after quarter,” Karayannopoulos said. “It's a tricky time when you are transitioning from a start up operation to a producer,” he added.

In SorbX, the cerium wastewater product the company created to treat its own waste, the company believes it could be a gamechanger, but it will take time – “years, not weeks, months or quarters” – for the industry to catch on, said Karayannopoulos.

Green giant

In terms of the challenges faced by the company, Karayannopoulos said that the sheer scale of the project put forward in the time allocated was probably the largest hurdle.

“Getting Mountain Pass up and running was a very ambitious project, and it was done very, very quickly. The scope of the plan and the amount of time it took was really extraordinary. If we were to do it all over again, we would add a couple of years,” he said.

The project’s location in California, with its tough as nails approach to environmental regulation, also meant that costs were elevated as environmental compliance formed such a large part of the project.

“[California] is the toughest place in the world to operate an extraction process, but you don't have a choice. It's where it is. We have to play by the rules,” Karayannopoulos said.

The mine’s environmental credentials will curry favour with green technology consumers, such as wind turbines and electric vehicles, hoping to distance themselves from ‘dirty mining’.

“A lot of industries that you serve are the in the so-called green industry so you can't work in an environmentally unsound way. You have to be environmentally responsible every step of the way,” Karayannopoulos said.