The U.S.’s only rare-earth mine files for bankruptcy

How plain old economics could end Molycorp’s Mountain Pass Mine in the Mojave Desert.

 

Last Thursday, Molycorp, the mining firm at the heart of HCN’s latest cover feature, “Dust to Dust,” filed for Chapter 11 bankruptcy. The move was not entirely unexpected, and its ultimate impact on the Mountain Pass mine in southeast California — the Colorado-based firm’s flagship operation, and the only U.S. producer of rare-earth elements — is not yet entirely clear. But until the very last minute, Molycorp had been signaling that it was determined to stay afloat on its own terms. The bankruptcy, then, had an extra tinge of disappointment, like a ninth-inning rally that fell one run short.

Molycorp ended its corporate life at a price of 35 cents per share, less than one two-hundredth of what it went for at its all-time high: $79.16, on May 3, 2011. By any measure, it was a spectacular collapse, but the timeframe — barely more than four years — and the mundaneness of its causes make it exceptional. Molycorp was not outmoded by new technologies. It did not overestimate its resources. Its product is still in high demand. Instead, the company was done in by simple market realities.

Molycorp Mountain Pass rare earth facility in California's Mojave Desert, which has recently filed for bankrupcy.
John Gurzinski

In 2010, China artificially raised the price of rare-earth elements by restricting exports. The result was an increase in supply: as existing mines outside China expanded production; as mothballed mines (like Mountain Pass) came back online; and as new mines opened. Predictably, rare-earth prices spiked after China cut its exports — a textbook panic. Then, just as textbook, they rapidly receded.

This, fundamentally, is what did Molycorp in. The company went public in 2010, pulling investors in, just before the panic sent rare-earth prices skyward. Flush with money, it initiated an ambitious, billion-dollar upgrade of its facilities, aiming to turn Mountain Pass into the cleanest, most energy-efficient, most reliable source of rare earths on the planet. And by and large it succeeded.

But well before the new Mountain Pass entered production, in August 2012, rare-earth prices were already way down from their highs, and have fallen further since. Globally, supplies have gone up over the same timeframe, and engineers have figured out ways of using less of the stuff. The operation simply never became profitable; Molycorp bled cash and lost market capitalization; and last Thursday the numbers finally added up to zero.

It’s tempting to ask why neither its directors nor its bondholders — who stand to lose much of the $1.7 billion the company owes them — recognized that the project was in mortal trouble until it was far too late. I suspect, in fact, that many of them recognized it almost immediately: The upgrade project was announced in June 2011, which, it rapidly became clear, was the precise moment when rare-earth prices imploded. But once they had started the upgrade, all sides had too much at stake to pull out. And who knew? Maybe China would initiate another price panic, and thereby save them.

Concentrate of rare earth waiting for further refinement at the Molycorp Mountain Pass rare earth facility in California's Mojave Desert.
John Gurzinski

The rest is now history. The future is unclear. The day the bankruptcy was announced, so was a plan to keep Mountain Pass running with a $225 million refinancing package, backed by Molycorp’s bondholders (who will become its owners as part of the bankruptcy restructuring). But the next day  — last Friday — its chief bondholder successfully blocked that idea in court. For now, the mine continues to operate, but without a lifeline it must eventually shut down.

It is hard to believe that one of the biggest, richest ore deposits of its kind, backed by the most advanced production facility anywhere, will be left to sleep in the earth. But then it was hard to believe, in early 2011, that Molycorp was anything less than a sure bet. Heck, only last year a respected investment advisory firm still believed Molycorp was a “Best Pick.” The difference between faith and fact is the difference between $79.16 and $0.35, and between a mine and hole in the ground. As other “energy-critical element” mine developers continue to promise the moon, that should be borne in mind. 

Tim Heffernan writes about heavy industry, economics and the environment for The Atlantic, Popular Mechanics and other magazines. In 2013, Esquire honored him as one of its Best & Brightest for his reporting on what he terms “big analog”: the industrial underpinnings of the so-called digital economy. He lives in New York.