Where Do I Stand On Rare Earth Mining Companies?

This will be the first of many posts that start with "Where do I stand on [insert topic]." I'll reserve these for whenever I receive the same question three or more times in a week.

This past week, the week of January 26th, I hit the threshold on rare earth mining companies. Thankfully, not on precious metals miners. I've addressed those enough (see here and here).*

So, where do I stand on rare earth mining companies?

No. And I know it wasn't a yes/no question.

There are very few pure play rare earth mining companies. Investors tend to focus on the big players like BHP, Rio Tinto, and Glencore. Those companies are diversified miners. They’re enormous. They mine things like copper, iron ore, coal, and nickel. Rare earths are a tiny fraction of what they do.

Have BHP, Rio Tinto, and Glencore been good long-term investments? Not really.** Could they be good investments today? Nobody knows.

So forget the diversified miners. What about the actual rare earth miners? They are, for the most part, a roll of the dice. But the dice are loaded.

Enter: Molycorp.

The Mountain Pass rare earth mine in California–the only one in America–has been producing since 1952. For decades, it supplied the majority of the world's rare earth elements. And in 2008, its owner, Chevron, sold it.***

Two years later, the new owners took Molycorp public at $14 a share on the New York Stock Exchange. The timing looked perfect: China had just restricted rare earth exports, prices were spiking, and Washington loved the idea of a domestic supply chain.

By May 2011, the stock was at $79 and the company was worth $6 billion. It spent over a billion dollars upgrading the mine.

Then China eased its export restrictions, and the price of rare earth materials collapsed. By June 2015, the company filed for Chapter 11 bankruptcy and its shares were removed from the NYSE.

The mine was sold at auction for $20.5 million. Chevron was right.****

Molycorp isn't an exception. It's a template. To compete in the rare earths market you need enormous capital. You are entirely at the mercy of a commodity price you can't control. And you are competing against a state-backed producer (China) that can flood the market whenever it wants. Molycorp had the best deposit in the country and Washington's support. None of it mattered.

So where do I stand on rare earth mining companies? No.

*Monday to Thursday, by the way, was incredible. While Friday was a reminder that volatility works both ways.

**Over the last fifteen years, the S&P 500 has returned roughly 600%. The TSX has more than doubled. BHP's share price is up about 24%. Rio Tinto's is roughly flat. If you factor in their dividends (both pay around 5-6% annually) BHP's total return gets to about 88% over that stretch. Rio does better with dividends included, but neither comes close.

***Like many mining company stories, the intricacies of who bought it (and how) is complicated, convoluted, and confusing. For the sake of this post, know that it was a large group of private investors.

****The mine was sold at auction in 2017 for $20.5 million. It is now operated by MP Materials, which produces over 15% of global rare earth output. Meanwhile, Molycorp itself was reorganized by its largest creditor as Neo Performance Materials, a separate company that kept the profitable processing assets while the mine was left behind. Whether any of that ends differently this time around is an open question.