The following interview took place on 17 September 2009.
CLINT COX: I am interviewing Mark Smith, CEO of Molycorp Minerals, LLC, now a private company. Why don’t we start with when and how did you get interested in the rare earth market?
SMITH: Clint, I had the very fortuitous fortune of being a lawyer for Unocal at one point in my life and Molycorp had some permitting, some environmental permitting issues that they were dealing with and I was asked by the Unocal law department to go and help Molycorp with those issues. They happened at the Mountain Pass Rare Earth Mine at Mountain Pass, California, and that’s when I got to start working with them, and I’ve always looked at that facility as being an absolute crown jewel with the right ownership and the right tender loving care.
COX: So I take it that you guys now have the right ownership with the right tender loving care.
SMITH: We feel we do. Yeah, we have a great group of private equity investors who have looked at this asset very hard, did a lot of due diligence on it, looked at all the rare earth markets, came to a conclusion that they could take this asset and reach its potential and they are very committed to doing so. And I think it’s exactly what this asset needed.
COX: While you’re talking about them, let’s jump ahead to what rare earth experience does each team member that bought Mountain Pass bring to Molycorp Minerals? You’ve got Resource Capital Fund, Pegasus Partners, Goldman Sachs group, Traxys North America and the Carint Group (which I’m not familiar with). Can you say what each one of these bring to the table?
SMITH: Well, Resource Capital Funds, of course, is a boutique private equity group that does nothing other than invest in mining and minerals. So what they bring to the table is expert mining and mining engineering, geology qualifications and I would also like to say for the record, that they are an absolutely wonderful shareholder because we can tap into that organization any day, anytime, and they can bring to us a wealth of knowledge about mining projects and mineral resources all over the world. So we never have to reinvent the wheel on anything. So they have just been outstanding. The person from Resource Capital Funds that was primarily responsible for the negotiations was a gentleman by the name of Ross Bhappu, who is Chairman of our Board of Directors. And it’s interesting to note that Ross’s father was a metallurgist and he actually did quite a bit of metallurgy consultation for Molycorp down at the Questa molybdenum mine in New Mexico. So Ross actually had a very close acquaintance so to speak, or a close connection with the Molycorp organization for a long period in his life.
The next shareholder I’d like to talk about who also has a very close connection with Molycorp is Traxys. The president and CEO of Traxys of course is Mark Kristoff. He’s on our board of directors. He was also primarily responsible for negotiating on behalf of the group of private equity investors. Mark’s father was actually the vice president of marketing and sales for Molycorp at one point in time. I believe one of his very first trips to a mine was a trip to the Mountain Pass facility in California. So Mark has known these facilities for a very long period of time, too. Now, in addition to Mark having that close connection through his father and kind of growing up in the Molycorp organization, Mark runs Traxys, which is a metals trading organization. They do about $4 billion worth of metals trading a year, and I think there’s no finer organization to work with in terms of finding customers and landing deals for our products. So they are an excellent addition to our organization.
We also have Goldman Sachs. What Goldman Sachs, brings to the table is obviously excellent financial sense. If I recall correctly, I believe Goldman Sachs had invested quite heavily into Lynas Corporation at one time as well and so they had a background and a history in the rare earth sector, at least for a period of time. I think they came in with their eyes wide open so to speak, in terms of what the potential for this market was and the potential for this resource.
Pegasus Capital is a private equity group that likes to focus on, I guess what would be called green technology type companies. And when they understood the connection between the rare earth minerals and the green technologies or clean energy technologies that all of us are so excited about right now, like hybrid vehicles, compact fluorescent light bulbs and, wind power generation, they became an investor as well. And we take great pride in having Pegasus as an investor because they only like to invest in clean green type entities. As management, we took this that as a really good sign of confidence in our ability to run the facility and to operate it safely.
The other group, Carint, was a group of private individuals, with a very small portion of the ownership, and then I have a small interest in the company as well. It’s a very diverse group of shareholders. We have outstanding, full dialogue on just about every issue that confronts the company, and I feel very, very confident at the conclusion of all those discussions that we reach very good decisions because of the diversity and broad view that everybody brings to the table for those discussions.
COX: What was the original driving force behind the deal? How did it come together? How did you guys decide to do this?
SMITH: Well, a little bit of interesting background here, too. When this group of private equity investors got together and put an offer in front of Chevron for this asset, I was actually the president and CEO of Chevron Mining at the time, and Chevron Mining owned and operated the Mountain Pass asset and the Questa moly mine. We had three coal mines and we were in the process of trying to open up an additional coal mine up in Wyoming. We had some other businesses as well, but those were the primary ones. When we received the offer letter from this group of investors, within 30 days there was actually, and I can’t remember the exact number anymore, it was either seven or nine, offer letters from different parties who were interested in this asset. We have no idea why it all happened in a 30-day period. But when I was wearing my Chevron hat and these multiple offers came in a very, very short time basis; we thought we may have something here. We wanted to figure out why there’s was such an interest.
We ultimately decided to enter into a bidding process for the assets, as opposed to just grabbing one letter and assuming that it was better than another. So we entered into confidentiality agreements with all the parties. We went through a first phase where they were able to do a limited amount of due diligence on the facility and on the people. At the same time Chevron was able to do a limited amount of due diligence on all the parties that were interested. We asked everyone to submit a phase one bid if they were interested at the conclusion of this limited due diligence period As part of that phase one bid, one very important point that we required was that there could not be a financing contingency associated with it. And that narrowed down the group of interested parties very, very quickly to three, and we started working then with the three parties to go through a second round of bidding on the asset, where more information was divulged to each of them. We of course got to do more due diligence on them.
There were many considerations that we looked at as part of that round two. It was not simply the price of the assets. We looked at price, we looked at the commitment to the people that were working at those assets, their commitment to the environment, their commitment to bringing the business back on line and putting the capital and a very simple term, tender loving care, back into this business so it could reach its full potential. We looked at all of those considerations and ranked the bids in round two. This group of private equity investors came to the top very quickly. That all occurred probably about late February of 2008. The initial letters that I talked about earlier, were all received in roughly August of 2007.
So we went through those two rounds of bidding and by the end of February, we had narrowed it down to this group and we started the negotiation process with this group of investors. We had reached a definitive agreement with this group of private equity investors in roughly June of 2008 when the agreement was signed by all parties. We then worked to close the deal, and the deal was ultimately closed on September 30, 2008. Long explanation, but it’s such a fascinating story that I wanted to get into some of these details.
COX: Were you surprised at all that the deal was closed, given the market at the time? There was chaos for a couple weeks before that deal closed. And with these guys being involved, I was actually very surprised that the deal went through.
SMITH: Very good point. However , we knew who the investors were, and we knew how much due diligence that they had done on the market, the forecasts for the future. When you look at the track record of this group of investors you discover that their average holding time for an investment is seven years. That was very, very attractive to us because it meant we weren’t simply selling this asset to a group of investors who were then going to turn around and flip it to somebody else and just try to make a profit. They were committed to the facility and to getting it back up and running at its full potential. So yes, there were a lot of issues and questions that were raised right at the end of the deal when it was closed, but we felt confident on the our side of the table that we were dealing with people who were values based and were going to carry forward on this deal, regardless of what the economic situation turned into at that time.
COX: That’s interesting. So how has the rare earth market changed since the deal was completed?
SMITH: Well, as you know, it didn’t do too well from September 2008 through about June 2009. So for roughly a nine-month period, the market really struggled. Prices went down over 50% on some of the rare earth commodities. Volumes were literally stagnant. I mean, people just weren’t even buying material anymore. But that’s the beauty of having this group of investors own the company. They have the financial wherewithal to get through issues like that. They supported our ongoing production as we were what I call, perfecting our processes, and have been extremely supportive through the entire, almost one year now that we’ve been in existence.
COX: So Mark, can you walk us through a brief history of Mountain Pass?
SMITH: Yes, a very illustrious history, I might add. In the late ’40s, there were a couple of prospectors that were out in the area, and the hot commodity at the time was uranium. They were actually looking for uranium. And lo and behold, they’re walking through this area, the high mountain desert and they get a couple clicks on their Geiger counter. Nothing that got them excited from the standpoint of uranium.,but there was something that was different there, and they had no idea what it was. So they grabbed a sample of this material, took it back into Las Vegas, to the USGS office there and asked them, “What is this?” And USGS said we’re going to have to take a couple of weeks to figure it out. They did all their analytical work and found out that it was bastnaesite, and told the prospectors, “This is bastnaesite, this is some of the richest bastnaesite we’ve ever seen in our lives, this looks like this could be something”. So the prospectors filed their claims.
COX: Was this the Birthday Claim?
SMITH: Yes, the Birthday Claim, is where it started. That was in 1948 when the claims were filed, and then I believe it was about that same time, shortly after they filed those claims, Molycorp, Incorporated, which was a publicly traded company on the New York Stock Exchange at the time, purchased those claims from the prospectors and then started to put together their mining plans.
In 1952, Molycorp started mining the rare earth deposit at the surface outcrops, and put in small processing facilities. Now at the time, what was really interesting about this is that the understanding of rare earths was not at its best. The use of rare earth was extremely limited. As a matter of fact, the major use at the time was for the flint in lighters. It was the lanthanum, cerium mischmetal that was used, and that was the product that was produced out there for many, many years.
Then in the late, mid to late ’60s is when the colored television became the hot item in every household. And with the color televisions, the way they were manufactured at the time, they needed europium in order to create the red color, the red phosphor in the screen. Mountain Pass had europium in its ore body, and Mountain Pass at one point in time, was mining the bastnaesite from the pit, exclusively to recover the europium. The europium is probably about 0.1%, maybe even a little less of that ore body. So we learned a lot of lessons during that time. Europium was at a price by the way, that justified all the mining and all the processing costs to only recover the europium.
But what we learned as we look back in history, is that the rare earth industry has had that problem, where one of the rare earth elements, or maybe two, will all of a sudden become very, very popular and everybody wants to buy them. The problem is, what do you do with the rest of them because they’re all in the ore body, and you have to take them out and separate each one. What do you do with those other materials while they’re not as high in demand? You end up stockpiling them is what you do. And that’s been a historic problem within the rare earth mining industry and at Mountain Pass in particular, where you were stockpiling large quantities of material while you were selling other quantities of material.
By the late 1980s, the facility was being run for more than just europium. Cerium was becoming popular as a glass polishing agent and Lanthanum was beginning its illustrious history in the FCC catalyst industry. So now you’re starting to talk about some very large volumetric uses of the more prevalent rare earths that we had in the bastnaesite ore, and things started to even out a little bit more. We had a lot more units to spread production costs out over. We weren’t stockpiling materials so feverishly anymore. And the industry looked quite a bit better at that time.
In the late ’80s, early ’90s, Mountain Pass was supplying the world with probably about 70% of its rare earth needs. However, the market was only about 40,000 tons a year back then. And so when we say 70%, it sounds like a large percentage, but it’s not a huge amount of tonnage compared to today’s market, which is upwards of 125,000 tons. Mountain Pass continued to operate.
It had some environmental issues that it confronted in the ‘mid to late ’90s. They didn’t help Mountain Pass’s economic situation, but the environmental issues certainly weren’t the reason for the facility to stop mining. There were also, of course, the Chinese found rare earths in their country, and started to exploit those resources and really brought their products out to the market at much lower prices than what the industry had seen for quite some time. Again, it didn’t help our situation, but that isn’t what ultimately caused us to stop mining.
Interestingly enough, what caused the facility to stop mining in 2002 was the fact that we had no more capacity in our tailings basin. And we didn’t have a permit to build a new tailings basin. We had started the permitting process for the facility back in 1989 thinking that by 2002, when the tailings basin capacity would be realized, we would have a new permit and we would be able to build a new tailings facility. We were about two years off. We got our final permit, our 30-year mine plan and our approved environmental impact report in 2004. So it took us 15 years to get our 30-year permit. But Clint, as bad as that may sound, it wasn’t the state of California that was causing that long time period.
We were having troubles deciding exactly what we wanted the facility to look like. What was considered state of the art in the late ’80s versus what was considered state of the art in the late ’90s in the rare earth industry really changed dramatically. So most of the cause for the delays in the permitting were really our own. But we did finally come to a conclusion on what we wanted the Mountain Pass site to look like, what we wanted it to produce, and how we were going to build it, and then we got the permit issued in 2004. By that time, we didn’t have any place to put tailings, so we had no choice but to stop the mining of ore.
We never stopped selling products because we had quite a bit in inventory In fact, we had two very large inventories of material which could be sold “as is” and were sold “as is”, but they also had the potential to be processed further so that we could realize added value by producing higher purity products. In about September of 2007, the facility restarted their solvent extraction units using a lanthanum concentrate material that had previously been stockpiled. The lanthanum concentrate was basically lanthanum and neodymium and praseodymium, and it was material that europium had been removed from. We started to reprocess that material with the idea that it was going to be a low rate of processing because we were trying to perfect our solvent extraction processing capabilities. We needed to show that we had the capability to produce high purity rare earth oxides. By high purity, I mean greater than 99% purity levels, which we had not done before in our business, because when we were at the peak of our production in the late ’80s and early ’90s, pure was upper 80 percentile –
COX: Right. It wasn’t necessary.
SMITH: The Chinese have really increased customer expectations in this regard and we knew that we had to change our product purity levels. We’ve been working on the solvent extraction side of our business since September of 2007 and I am extremely proud of our people on site because they truly have perfected this process. We’re now realizing recovery rates in excess of 98% in our solvent extraction processes, and we are today producing a greater than 99% purity didymium oxide and selling that on the market.
COX: Didymium being a praseodymium and neodymium –
SMITH: Correct During a recent trip to Europe, I discovered at a rare earth museum that at one time, didymium was considered an element until a very famous chemist over in Austria discovered that in fact, didymium consisted of praseodymium and neodymium.
COX: Where was that?
SMITH: Treibacher.
COX: Treibacher?
SMITH: Yes. We’ve been doing business with Treibacher for a long time. It was my first trip to their facilities. We met some really great people there and we look forward to an ongoing, long-term business relationship with them as well.
In April of this year, our board of directors approved the next capital project where we plan to take a very significant stockpile of concentrated bastnaesite, about 70% concentrate, and we’re going to process it from cracking through solvent extractors. We will be focused on perfecting the cracking process during this part of the project.
COX: So the cerium never goes through the solvent extraction. Everything else.
SMITH: That’s correct. And we have a new, innovative process that our technology group has come up with. They started in the lab, went to a bench scale, and then we actually built a small pilot scale unit and increased our production levels and continued to scale the process up. Everything has worked very well and now we’re going to take it up to a commercial level production rate. As a result, we will now have cerium in our product suite, along with the lanthanum and the didymium and our production levels will go up by 50% at that time.
COX: OK, so 3,000 tons per year in 2010. How many tons do you have of the bastnaesite concentrate?
SMITH: We have about 12 and a half thousand tons of material. We will be producing at about 3,000 tons per year. We’re only going to run that for two years at which point the bastnaesite concentrate product will be depleted. Now, you’ll probably notice that the math doesn’t quite work out there.
COX: Yeah, I wasn’t going to bring that up, but now that you –
SMITH: As part of our process for the next two years, we’ll have a rare earth fluoride material that we aren’t going to work on. We’re going to store and save it for full restart at the facility in 2012.
COX: How does that help with a full restart?
SMITH: It doesn’t help one way or the other. It just gives us more time to perfect the rare earth fluoride processing, which is a science all to itself. We’re trying to make sure we don’t take on any more projects than what we can successfully manage.
END PART 1
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