To revive rare-earth industry, U.S. looks to the Mojave

It is five years since the giant trucks hauling ore around the Mountain Pass mine in California’s Mojave desert fell silent.

Molycorp, the only major producer of rare-earth metals in the U.S., had just collapsed under the weight of a $1.7-billion debt. The bankruptcy burned investors and left the nation almost entirely reliant on China for the supply of 17 metallic elements that are embedded in most high-tech products, from wind turbines to electric vehicles and F-35 fighter jets.

Now, as relations between Washington and Beijing deteriorate further, the U.S. government is supporting the resurrection of Mountain Pass, which until the 1980s was the world’s biggest producer of rare earths. Disruption to supply chains during the COVID-19 pandemic has underscored the need for the U.S. and other nations to ensure they are not reliant on a single country or company for vital supplies of raw materials and goods.

The Pentagon has agreed to fund MP Materials — a private-equity-backed company, which bought the mine for $20.5 million in 2017 and restarted excavations — to design the first heavy rare-earth processing facility in the U.S. at the site. It is also backing a similar project in Texas proposed by Australian company Lynas, amid concerns that China could disrupt U.S. defense and other industries by withholding supplies of rare earths. In July, it handed $29 million to Urban Mining Co. in Texas, which manufactures rare-earth magnets by recycling electronic waste.

Beijing’s threat of sanctions on Lockheed Martin in July has added urgency to efforts to break China’s stranglehold on the industry. It controls four-fifths of the global mined supply of rare earths, and an even larger share of the manufacture of powerful rare-earth magnets — industries worth $13 billion a year combined. The Trump administration earmarked $209 million in public funds for the sector — thought to include the funding for MP Materials — this year.

“We’ve certainly learnt that a single point of failure in the global supply chain for anything critical is a significant challenge,” says James Litinsky, MP Materials’ chief executive, who adds that rare earths are essential to millions of future jobs in high-tech sectors.

“That is trillions of dollars of gross domestic product that, if we don’t build a supply chain in the Western Hemisphere, is going to be solely reliant on that single point of failure in China,” he adds.

Washington is not alone in being concerned over Beijing’s control of rare earths. The European Commission is working on a raw materials strategy that aims to wean domestic industries off their dependence on China by boosting industry collaboration and providing sustainable finance for new producers. Australia, which holds one-sixth of the world’s rare-earth deposits, has teamed up with the U.S. to source new deposits and support market entrants. And Russia has unveiled a $1.5-billion rare-earth plan to tempt investors with tax breaks and cheap loans.

Investors, previously chastened by Molycorp’s collapse, are again interested. MP Materials plans to list later this year on the New York Stock Exchange via Fortress Value Acquisition Corp, a special purpose acquisition vehicle, to raise $500 million to fund expansion. FVAC is sponsored by affiliates of Fortress Investment Group, owned by Japan’s SoftBank. Separately, a swath of smaller rare-earth miners and processors in the U.S., Australia and elsewhere are seeking to raise billions of dollars for projects to produce neodymium, praseodymium (NDPR) and other rare-earth oxides and metals.

Experts warn that the growing hype surrounding the sector masks the huge challenges new entrants face. China’s dominance of the supply chain stretches from mining to the manufacture of magnets and the assembly of electric vehicles.

“The investment risk on any one of these projects is monstrous,” says Jeffrey Wilson, director of the Perth-USAsia Centre at the University of Western Australia. “If you’re an investor wanting to put capital into that, then it’s got red flags all over it.”

The sector — a notoriously dirty, environmentally unfriendly business — is also plagued with technical complexity, a skills shortage in the West and a monopolistic market that hands pricing power to Chinese state-owned incumbents. When Beijing unexpectedly cut export quotas for rare earths in 2010, prices quadrupled — a surge that alerted Western nations to their reliance on China.

Establishing a viable non-Chinese supply chain, says Wilson, will take years and require major government support, international cooperation and collaboration from industrial giants in the U.S., Europe and Japan.

“The Chinese state-owned producers can do the Saudi [oil] trick,” he says, adding: “They turn on the taps, flood the market, the price of dysprosium crashes, the new entrant is washed out, and then they’ve reestablished their monopoly.”

Not that rare

Rare earths — the 15 lanthanide elements on the periodic table plus two other related elements, scandium and yttrium — have become an integral part of modern life. More than 90% of hybrid and electric vehicles use rare-earth-based magnets in their motors, while each F-35 fighter jet requires 420 pounds of rare-earth materials.

Despite their name, rare earths are relatively abundant. But they tend to be widely dispersed, making them difficult to mine profitably. The process of separating them into commercially viable products also poses technical and environmental challenges, which have caused many new entrants to struggle.

“Outside of China there’s very little expertise. We’re the only company in the past two decades, that have successfully ramped up, not just preliminary processing of rare earths, but right through to separated oxides,” says Amanda Lacaze, Lynas chief executive. “It is not something that you can easily do from a textbook. Our in-house IP [intellectual property] is one of the most valuable things we have.”

Lynas currently ships ore from its Mt. Weld mine in western Australia — said to be one of the richest rare-earth deposits in the world — to a $730-million plant in Malaysia for processing into neodymium and praseodymium, key ingredients in the most widely used rare-earth magnets. In July it won seed funding from the Pentagon to design a plant in Texas alongside its U.S. joint venture partner, Blue Line, to process dysprosium and terbium — heavy rare earths — that can, at the moment, be processed only in China.

“The U.S. has a strong and successful history of using the defense industry to create capable industries or supply chains,” says Lacaze, who is hopeful further government funding will become available to actually build, and not just design, a plant in Texas.

A growing number of experts — both inside and outside of the companies — suggest that public funding is the only way to build a supply chain outside of China. Lynas has struggled to compete with Chinese rivals, reporting a profit in just two of the last six years. In 2016 it required a bailout led by Japan Oil, Gas & Metals National Corp, a state-owned Japanese company, and it continues to burn through cash — raising $312 million from shareholders in August to bankroll a new facility to help meet environmental rules in Malaysia.

“There is no free market solution to this problem [of a non-Chinese supply chain] without significant initial government backing,” says Dylan Kelly, analyst at Ord Minnett, a Sydney-based brokerage. “Barriers to entry are extremely high, a project needs 10 years and over $1 billion to get up and running and there is no guarantee of success. Capital markets have been burnt in the past through misadventures.”

Beijing’s strategic vision

Beijing declared rare earths a “strategic” mineral as far back as 1990. A decade later during a visit to a mine in Baotou, Inner Mongolia, then-Chinese President Jiang Zemin declared that China’s task was to “improve the development and application of rare earths, and change the resource advantage into economic superiority.” When the trade war between Washington and Beijing intensified last year, President Xi Jinping visited a rare-earth magnet maker in Jiangxi province, almost as if to highlight his nation’s dominance in such a crucial element.

Chinese producers now hold about 80% of the global rare-earth market — up from 27% in 1990. Beijing initially used production and export quotas to build its rare-earth sector into a global leader, helping the nation establish itself as the “world’s factory” and win a greater share of global manufacturing. Under the Made in China 2025 strategy, Beijing is pushing to create an integrated supply chain in mining, magnets and high-tech manufacturing.

“They want to produce 50% of the world’s electric vehicles and 50% of the world’s hybrid vehicles by 2025,” says Dudley Kingsnorth, a professor at Curtin University in Perth. “If that is successful then that will decimate the automotive industry in Europe and North America and Asia.”

He warns that Beijing could further undermine the rest of the world’s ability to produce EVs and other high-tech products by limiting exports of rare earths and magnets. This is potentially a much bigger threat than any sanctions imposed on Lockheed or other defense companies, which probably have stockpiles that could last a few years, he adds.

“If the jobs disappear to your kids and grandkids then that impacts GDP,” says Kingsnorth, who is an adviser to NATO on rare earths, “and then there is less money to spend on defense.”

Ahead of its time

From MP Materials’ headquarters in Las Vegas, Litinsky is plotting the rebirth of the U.S. rare-earth industry from Mountain Pass. The founder of Chicago-based hedge fund JHL Capital teamed up with U.S. investment group QVT Capital and Shanghai-listed Shenghe Resources for the 2017 deal to buy the mine.

They restarted mining a year later but have to ship ore to China for processing, generating annual revenue for MP Materials of about $70 million. Using the money raised from its upcoming listing, MP Materials plans to restart the mothballed processing plant at the Californian mine by 2022 and later build the capability to produce metals and magnets.

“Molycorp had a great vision but the execution was lacking,” says Litinsky, adding that MP Materials’ mission to restore the rare-earth supply chain in the U.S. will boost jobs, national security and green technologies.

He says Molycorp was ahead of its time but did not benefit from the boom in electric vehicles, which he forecasts will consume the world’s current entire supply of neodymium and praseodymium within a decade. Technical problems that dogged the company’s processing plant at Mountain Pass have now been resolved, adds Litinsky.

But critics remain skeptical about MP Materials’ prospects, warning that another rare-earth failure could poison the investment climate in the sector for a decade.

James Kennedy, president of Three Consulting, says the geochemistry of the Mountain Pass deposit does not enable MP Materials to produce on a commercial scale the heavy rare earths, such as terbium and dysprosium, required for military-grade magnets in the F35 or drones. And politically, Shenghe Resources’ 9.9% stake in MP Materials is not consistent with the U.S. government’s stated goal of building a non-Chinese supply chain, he adds.

The Pentagon briefly paused its initial decision in April to fund MP Materials and Lynas after a call by a group of U.S. senators led by Ted Cruz (R-Texas) to support only U.S. rare-earth projects.

MP Materials says these concerns are groundless, noting that Richard Myers, a retired U.S. general and former chairman of the Joint Chiefs of Staff, has agreed to join the board and that once it becomes a NYSE-listed company, any foreign company, including from China, is free to invest in its shares.

But the project could yet fall foul of geopolitical tensions. “The political wind blowing against MP is the minority Chinese position,” says Wilson. “The question would be: Is the U.S. Defense Department about to fund a big technical study on how to separate U.S. rare earths, of which every single piece of information is going to go straight back to a Chinese competitor?”

Greater collaboration

If the U.S. is to establish a non-Chinese supply chain of rare earths and the magnets that power modern machinery it will require international collaboration, experts say. Rare-earth industry executives complain Western industry prioritizes low-cost products rather than ensuring its supply chain is not dominated by a single company or nation.

“Most companies require relatively small volumes of rare earths for their operations, compared to other raw materials. And even though rare earths are vital to their operations the procurement decisions tend to be taken by lower-ranking executives with an eye on costs, rather than by chief executives who might take a more strategic view,” says Anthony Marchese, chairman of Texas Mineral Resources Corp., which is seeking to develop a rare-earth and lithium mine in Texas.

“There needs to be a change in mind-set at the top end of the supply chain to ensure a U.S. supply chain is viable,” he adds.

Lynas has benefited from this type of support from Japanese customers, which have prioritized security of supply over cheap pricing since China slashed export quotas in 2010. But U.S. and European companies have been less willing to take a strategic approach to procurement, according to rare-earth experts.

“China is steadily tightening its grip on the entire rare-earths vertical supply chain,” says Kingsnorth. “Until the automotive industry, high-tech manufacturers and Western governments collaborate and use their purchasing power to underwrite investments in rare-earths processing and other downstream activities, they will continue to be outflanked by Chinese competitors.”

The Financial Times’ Katrina Manson in Washington contributed to this report.

© The Financial Times Ltd. 2020. All rights reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied or modified in any way.