I have watched the rare earth (RE) space with a lot of interest over the past 7 months or so. It is an industry where technical knowledge very often translates into effective investment action. I have been very fortunate to have a good friend, whom I consider to be a rare earths specialist, flood me with valuable articles, references, and sharp opinions on this critical industry. I have frequently asked my friend to start a rare earths blog given the wealth of knowledge he has acquired and accumulated (not to mention a blog could make it easier for me to organize and find info on the fly!).
Recently, my friend listened to a conference call in which Molycorp (MCP) announced its acquisition of AS Silmet, a rare earth processor based in Estonia. MCP acquired “a 90.023% controlling stake in AS Silmet…in a transaction valued at approximately $89 million.” MCP soared on the news, closing up 12% at new all-time highs.
*Chart created using TeleChart:
(snapshot taken just before market close, April 6, 2011)
My friend took great notes from this conference call, and I managed to cajole him into allowing me to publish them here. These are exciting times for MCP (and rare earth in general) investors, and I think this conference call further demonstrates the promising scope and scale of MCP’s potential. Please note that most statements were paraphrased for clarity during the transcription process. Visit the MCP website to listen to the conference call for yourself.
Molycorp Conference Call 9 am EDT 4-April-2011 regarding acquisition of controlling interest in AS Silmet.
Introduction by Mark Smith, CEO of Molycorp
- Acquisition completed last Friday
- Value: $9M in cash, 1593419 MCP common
- Silmet named for town it’s in (Sillamäe, Estonia): 110 mi sw of St. Petersburg Russia, on Baltic Sea
- Current Silmet management team will stay; CEO David O’Brock will stay as a managing director
- Note that current Molycorp production is now 3-4k tpa (ie. not 3k tpa)
- Immediately gives more exposure to current high REEs prices; thus gives immediate additional revenue in 2011+2012
- Advances several major strategic imperatives:
- Expands rare earth product line and manufacturing capabilities
- First physical presence in Europe, better serves & expands customer base
- Broadens product line into Niobium and Tantalum – Silmet is a global leader
- From the Estonian perspective, Silmet will now have stable long-term supplies of high-quality feedstock.
Question and Answer (Q/A) Session
[Note the following abbreviations are used for the following elements: “Ce” is Cerium, “La” is Lanthanum, “Nb” is Niobium, “Ta” is Tantalum.]
Stifel Nicolaus, Paul Forward
Q: Revenue enhancement potential: regarding existing Silmet contracts, would have greater exposure to spot, or to fixed-price?
A: All spot as far as we know.
Q: Does Silmet have a significant inventory of rare earths in place?
A: Yes, fairly significant – and its value has gone up since bought late last year.
Q: detail within REs – breakdown of individual products, which ones are the most important contributors to revenue?
A: Aligned with global natural REEs distributions; Silmet primary business is 3k tpa of solvent concentration/extraction; right now La and Ce markets have very high demand
Q: Significant IP acquired?
A: Silmet doesn’t own any actual patents, but have 550 people with know-how/experience making oxides and metals
Dahlman Rose & Co., Anthony Young
Q: La: Does your W.R. Grace lanthanum contract get grandfathered into this, or would your La sales from Silmet be at spot?
A: All Silmet production will be at spot
Q: Are you long on processing capacity now, or will you be able to increase mine production to feed both Mountain Pass and Silmet?
A: Will be production in addition to Mountain Pass’s current; new bigger mill has more than sufficient capacity; new better mill recovery rates will provide enough to feed Silmet plus Mountain Pass Phase I + Phase II
Q: Given 20,000 tpa, this will mean 23,000 tpa in Phase I?
A: Yes, and with phase II, 43,000 tpa. The beauty of this is that Silmet also has capability to expand, so we’ve added flexibility and optimization potential
Q: Order of magnitude of costs to expand Silmet’s capacity?
A: Tens of millions; they have a lot of existing buildings and equipment available
JP Morgan, Michael Gambardella
Q: How big is the other European RE processor; and what are you forecasting the European RE demand to be this year?
A: They’re in France, presently 100% dependent on Chinese sources, so don’t know what they will be able to produce this year. European RE demand looks like 5-8000 tons.
Q: What’s the valuation of MCP common used?
A: Used 20-day average: $50.21
Morgan Stanley, Partas Krashniza
Q: Looks like Silmet’s average revenue per kg would be very similar to what you’re getting right now; what about costs?
A: Cost will be higher than at Mountain Pass, but great synergy: we’ll be immediately applying our tech developments to their facility to lower their costs and improve quality.
Q: Have you already run your concentrate through Silmet? Any technical issues?
A: Did it historically, and had good results on a purity level; we’re doing it now and it’s working fine.
Mackey Research Capital, Matt Gowing
Q: Cash acquired and debt assumed?
A: Molycorp CFO answered: As of end of 2010, assets about $40M US; cash about $10M US (later correction: about $6.3M US counting receivables); Mark Smith added: there was some debt, but it was very small.
Q: Primary motivation their capacity, or their expertise?
A: Both: short term it’s capacity, long run it’s David O’Brock and their expertise
Q: What more needs to be done to have the required separation capacity for your 40k tonne output?
A: Will build all of Phase I and II; Silmet will add 3k tpa to both, with potential for further expansion; Silmet also brings dydimium oxide->metal capacity so we now have all 5 parts of the mine-magnets supply chain
Q: Could you tell us Silmet’s revenue, EBITDA, and net earnings contributions?
A: Will announce that a little bit later, because we are changing how things are run; they had to buy feedstock elsewhere before, but will get that mostly from us now, which will be dramatically cheaper.
Q: Timescale for that info?
A: Just guessing, should have that by the 2nd quarter earnings call.
Federated Investors, John Garnish
Q: When was Silmet plant originally built?
A: Buildings 1920s-1930s, still in excellent shape; equipment in Mountain Pass & China is typically fiberglass, but at Silmet it’s titanium, designed to last for a very long time, performed very well so far, and has excellent long-term capabilities remaining
Q: In reviewing operations, I assume you will take care of any refurbishment and upgrades that might need to be done?
A: Yes, but the plant was well-maintained and runs very well today, very little needs to be done to keep it running as-is; but we want to incorporate our knowledge there, and use their know-how to improve product quality at Mountain Pass.
Q: In Q2 call, will you provide cost estimates for that?
A: Absolutely
Q: Plant has lots of extra space; might we expect to hear about a potential magnet production facility being built there?
A: Haven’t looked at that, but the space is there; must do feasibility studies, make sure have required know-how and intellectual property.
T.I.P. Wealth Manager Inc., Jim Huang
Q: Supplying Silmet plant from Mountain Pass; will you also look at locally closer sources of supply?
A: Both: we will mix sources of supply as economically as possible; historically Silmet’s feedstock came out of a Russian rare earth mine. We don’t see any need to stop that, but it’s pretty low volume; there are extreme advantages to using Mountain Pass feedstocks, for example tax planning and operational optimization. The primary feedstock will be Mountain Pass feedstock but we will take advantage if we find a good deal.
Q: How will you ship the feedstocks?
A: Ocean containers; they have a good port facility close by.
Q: On their rare metals, Ta and Nb: was that because feedstock contained them and it’s sort of add-on, or is it something more strategic for Molycorp?
A: More an add-on right now, but we see a lot of strategic advantages; Silmet has made itself well known for those products, we see no reason to reduce that very good business; they have just re-furbished some of that equipment.
Q: Where is the Nb and Ta feedstock from?
A: They bought open market; they’ve had no problem getting those feedstocks.
Mackey Research Capital, Ravil Aswal
Q: Is it safe to assume the average selling price is around $40/kg? What’s the average selling price being realized by Silmet?
A: Depends on concentrate used; they used inputs similar to Mountain Pass’s, so should be similar to historic, but that’s north of $90/kg today.
Q: What’s Silmet’s current production of Nb and Ta?
A: 300 tpa Nb, 60 tpa Ta
Q: In the arrangement you have with Hitachi regarding the production of magnets, how does that differ in terms of the magnets being produced, compared to the magnets that Neo Materials produces?
A: That really should be a sidebar conversation, but quickly: Neo materials produces primarily bonded NbFeB magnets, Hitachi sintered; bonded is 5% of markets, and sintered is 95%.
Stifel Nicolaus, Paul Forward
Q: Tax planning details – rate in Estonia vs. U.S.?
A: Estonia 21% on distributable profits or divs, no tax on retained earnings
CIBC World Markets, Matthew Gibson
Q: Inventory levels at Mountain Pass: years you have left at 6000 tpa?
A: Existing on site, or ore body?
Q: Existing on site: stockpiled inventory
A: Enough material so we can produce at Mountain Pass through startup of Phase I; we also have La concentrate, we’re sending that to Silmet as we speak. Our stock will last us until Q1 or Q2 2012, by that point we’ll have the new mill running, and a good source for both facilities.
Jacobs Securities, Luisa Moreno
Q: If you are processing 3000 tpa, how can you double production in the short term? Won’t you have to process all the 3k you have, and Silmet will have to purchase outside their own concentrate?
A: Will be able to feed a lot of Silmet’s needs with the La concentrate; also hope to, without causing any inventory issues at Mountain Pass, send them some Bastnasite concentrate materials as well; key is to max both capacities until Q1 or Q2 2012 when we have our new mill running, at which point we have no feedstock worries whatsoever; also, we will buy concentrates from the Russian source and any other sources we can find in the interim
Q: So in the short term, Silmet will have to buy some outside to double?
A: Yes, to get the full 3000 tpa, will purchase some from outside
Q: Percentages of heavies coming out of Silmet?
A: Don’t know, but somewhere close to normal natural distribution of elements ie. 1-2% would end up in heavies
Be careful out there!
Full disclosure: long MCP
Dr.,
In evaluating this acquisition, I found myself wanting the answer to 4 questions:
1) Has Silmet recently processed rare earth and other minor metal ore concentrates into products that it was able to sell to third parties?
There is plenty of evidence available to answer “Yes” to this question, particularly in the interview with David O’Brock (Silmet’s Managing Director) posted a couple months ago here:
http://vimeo.com/19113246
2) Can Silmet expand its production by increasing its rare earths based output, by adding ore concentrates from Mountain Pass to its input stream?
Mark Smith’s answers (above) to questions from Partas Krashniza of Morgan Stanley, then careful and persistent questioning by Luisa Moreno of Jacobs Securities, provide an unequivocal “Yes” to this question as well.
3) How profitable is this business?
Statements about recent earnings growth by Molycorp and Great Western Minerals Group (to name just two) provide the obvious answer: “currently, quite”. Given forecast supply and demand, the future looks similarly profitable for two years at least.
4) How does this change the landscape of the rare earths sector?
Through this acquisition, Molycorp has created a fully vertically integrated supplier, giving it at least for the moment the strongest position in the ex-China rare-earths marketplace. Note that Stans Energy and Great Western Minerals Group likewise aspire to this level of vertical integration – but by acquiring Silmet, Molycorp has achieved it first. Some remain stubbornly skeptical of Molycorp’s capabilities, but I hear no one making the case that Molycorp has blundered this week.
Thanks! Valuable additional info.