Why Did Molycorp Buy Silmet And Was It Worth The Money?

by Jack Lifton on April 6, 2011 · 27 comments

in News Analysis, Rare Earths

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If you understand the title of this article then you are a follower of the events shaping the present and future price of the NYSE-traded shares of Molycorp, the project to revive rare-earth mining and downstream refining and processing, I hope, in California. In a news release on Monday, Molycorp announced that it has purchased the operations of rare-earth processor, AS Silmet, based in Estonia.

There is nothing new to be discovered about Silmet, an Estonian operation established during the Soviet era as a typical central place to process uranium ores and fuels, to separate rare-earth concentrates into their individual elements and to process those separated forms into metals and alloys. Like all Soviet-era attempts at central planning, Silmet suffered from the worst problems of a centralized command economy; its payroll was bloated and its production quotas were set by Moscow bureaucrats determined to produce ever more goods to “achieve” the goals set by politicians for production levels for each successive five-year plan. The market fundamentals of supply and demand were not considered relevant if there was a five-year plan output level to achieve.

One has to wonder by the way, what the relationship was in the (good?) old days, between Silmet and the processing operation in Kyrgyzstan now “owned” by Stans Energy.

In general, at the conclusion of the Soviet era, the prices for all metals crashed as massive inventories of metals produced only to satisfy a five-year plan flooded the world market. These were sold at any price in an attempt by post-Soviet reformers to garner some, if any, value from the vast amount of labor and capital poured into the extractive materials sector by bureaucrats, in their mostly vain efforts to satisfy the whims of their political masters in Moscow.

Silmet was at that time, just 22 years ago, considered to be part of a massive radioactive-waste problem in the former Soviet Union. It was thought that the secretive Russians had been accumulating radioactive waste from mineral processing. To be fair this was not just from rare-earth-mineral processing, but also uranium-ore and -fuel processing, with the resulting materials being “stored” in Estonian reservoirs of process waste. I well remember it being asked if astronauts could see Estonian lakes at night by their glow…

Silmet seems to have been privatized after the demise of the Soviet system, by a group that also owned the long-time-producing rare-earth mine in the Kola Peninsula, and a magnesium-metal-producing plant in the Ukraine. I should note at this point that rare-earth mining, refining, and magnesium production are today virtual monopolies of the Peoples’ Republic of China due to the operation of global capitalism based on lowest costs offered.

As far as I knew until yesterday’s Molycorp announcement, Silmet was supplying rare-earth metals and alloys to Eastern European and Russian customers from the somewhat less than 3,000 net tonnes of rare earths each year, contained in the Russian ore concentrates produced by its sister company.

It has been my understanding that the highest quality purified rare-earth metals and alloys are produced in Europe only by Less Common Metals in the UK (a wholly owned subsidiary of Canada’s Great Western Minerals Group) and by Rhodia Rare Earths in France – both, I understood, utilizing Chinese raw materials. I welcome evidence that Silmet has been competing with either or both of these entities on price and quality. If so, then Molycorp really made a deal that, though pricey, may have significant value to its business model.

I am for the moment a bit confused by Molycorp’s actions. I thought it had a long history, as it has said repeatedly in press releases and its SEC filings, of producing high-purity chemical and metallic forms of the rare earths. I thought it was asking the US Government for loan guarantees to rebuild, modernize, and expand its rare-earth refining and processing facilities in California to create jobs in the USA.

Now it seems as if it is saying that $90 M of its shareholder’s money has been well spent, or pledged, to buy Soviet-era technology that others have overlooked (?).

Silmet is said by Molycorp to have 550 employees, who have the capacity to produce 3000 metric tonnes of rare-earth “products” per year. This will “double”, the press release says, Molycorp’s production capacity immediately to 6,000 metric tonnes per year.

Some other questions arise:

  • Is Molycorp going to ship ore or ore concentrates to Estonia for processing there?
  • Will Silmet continue to also process ores or ore concentrates from Siberia or places other than Mountain Pass?
  • If so, who now owns that Russian mine?
  • What customer standards are met today by Molycorp and/or Silmet products?
  • What, in fact, are Molycorp’s and Silmet’s products?
  • Is a 550-person operation in Estonia profitable, and, if so, is it still profitable when American corporate overheads and the repayment of its purchase price are factored in?
  • Was there outside or inside financing involved in the purchase?
  • If it was financed all or in part by the previous owners who are they??
  • When will we see an environmental-impact statement for Silmet, detailing how the problems associated with radioactive ore processing, today and in the past, have been addressed?
  • Why should the US government guarantee loans to a company to develop technology it has already, apparently, purchased for operations overseas for overseas customers?
  • Did Molycorp simply buy ‘time?’ In other words, will Molycorp-Estonia now immediately deliver goods to its customers as proof that Molycorp is first in operation of the current crop of non-Chinese juniors?
  • Was this purchase to realize the mine-to-magnet (alloy?) story and make it more credible?

I want to believe that Silmet was a ‘sleeper,’ a valuable property overlooked by those supposedly in ‘the know.’ I also want to believe that Silmet’s acquisition will enhance the value of Molycorp and create American jobs.

Finally I want to believe that the US defense establishment agrees that buying raw materials or finished goods from Molycorp is not affected by the remaining ownership of this formerly Soviet-owned and -operated entity. A simple statement to that effect by the US Department of Defense would suffice.

I think the investors in Molycorp deserve answers to these questions, before the next round of US Congressional debate on the issue of loan guarantees begins.

I am a believer in American natural-resource production and processing self-sufficiency. I want Americans to have good jobs and to maintain American standards of living and well-being before any American taxpayer funds are used to help others to do the same. Is that too much to ask of a government?

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

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1 Jason Burack April 6, 2011 at 1:13 pm

Jack,
Kevin Kerr, who co-authored the Dragon Metals report with me knows David O’Brock (CEO of Silmet) well and Kevin toured Silmet’s facilities a few months ago along with videotaping an interview with him. It’s on Vimeo. Here’s the link to the interview. http://vimeo.com/19113246
Silmet was actually ahead of Less Common Metals in the UK. We have a Dragon Metals facebook group and myself, Kevin Kerr and David O’Brock post in there. I have asked Kevin Kerr to interview David O’Brock about the acquisition of Silmet by Molycorp.

2 Jim Bond April 6, 2011 at 3:29 pm

Hi Jack:
I have been asking myself a number of the same or similar questions for a few days now since the news came out. A couple of possibilities are as a hedge against the nimbyites in California on the thorium issue and as a way to keep the naive and mining knowledge challenged analysts on Wall Street Happy; note the raise in their stock price after the news came out. A version of your buy time question. Another possibility is that they are trying to foreclose a potential competitor such as Tasman or GWG from acquiring existing cracking facilities. Anyway nice article and when I get some free time I an going to look at the dragon Metals video.

3 Andriette April 6, 2011 at 3:49 pm

Thanks so much for yourintelligent insight experience ………sharing with folks, who are interested and invested…….but who are limited even though we are interested and invested.

Thanks again……to both of you’

Sincerely,

Andriette

4 Peter April 6, 2011 at 5:01 pm

Hi Jack,

Thanks for the great article. btw, I thought you sold off GWG from your previous artcle. Did you buy them again?

5 G H April 6, 2011 at 5:20 pm

Jack,

Good questions. At 9 am EDT Monday, Molycorp held a conference call which provides the answer to many of them. A link to that web cast, and fairly thorough notes from it, are available here:

http://drduru.com/onetwentytwo/2011/04/06/molycorp-acquisition/

(I listened to the webcast and can vouch for the accuracy of the notes.)

The video linked in Jason’s comment above is also very helpful, although the interview was performed before Silmet was acquired (and, based on Mr. O’Brock’s answers, before the companies had even talked).

– G H (no, I’m not Gareth)

6 Noah Snyder April 7, 2011 at 12:01 am

This is the top of a bubble. Stock being a way for spec. projects. All knowledgeable investors already know that MCP production will lead over supply and the market will crash. Is ignorance still bliss?

7 Springer April 7, 2011 at 2:16 am

Jack and all others,
I must say that Jack’s knowledge about post-soviet Silmet is close to zero. And this is shocking. Please read Roskill or even Silmet’s website, then you will realize that all facts presented by Jack are simply wrong. Silmet is the only profitable REE company, compared to speculative non-producing GWG or Stans. There are no such radioactive issues like mentioned in Jacks blog entry. Less Common is compared to Silmet a very small company an doesn’t offer near same quality.

8 Henk Mol April 7, 2011 at 2:51 am

Jack and all others, especially Springer,
please enlighten us risktakers with information about Silmet and the consequences of the this acquisition. Financiers behind Moly- like Goldman S etc – may know much more but will keep all this as their business secret. We small investors can never achieve this level of insight and what Jack tries is at least get some communication about this. Best regards, Henk.

9 John Petersen April 7, 2011 at 3:03 am

I just listened to the first couple minutes of Molycorp’s conference call and learned that the acquisition required “just over $9 million in cash” with the balance being paid through the issuance of 1.6 million MCP shares, or about 2% of the company.

Depending on your view of the fair value of Molycorp before the acquisition, the transaction may have been worth a good deal less than the headline number. If you think the IPO price of $14 is closer to fair value, for example, the acquisition tipped the scales at closer to $31 million.

10 Robert Gill April 7, 2011 at 3:09 am

I would like to add some intelligent comment, but the only thing I can think of is the numerous blogs on Seeking Alpha that are questioning Molycorp’s stated goals. There are many professional and knowledgeable people making the comments that MCP is a marketing company and their claims of production start-up cannot be backed up in any substantial or real fashion. Jack’s article above again brings into question MCP’s claims. What in the world are they trying to achieve by buying Silmet? There is more to this story, but MCP is becoming a scary story due to their lack of supplying the market with tangible answers to support their claims of being in production by 2012. Many say they have nothing that back up this claim.

11 Springer April 7, 2011 at 5:50 am

Henk,
1. Buy Roskill Research and visit http://www.silmet.ee . And check google earth whether you find “soviet uranium lake” ; ) have you ever heard that Eastern Europe buys 3000t REE, like Jack claims?? Ridiculus!
2. Assume REE basket of 90usd and 3000reo tons. You get decent revenue!
3. Based on Roskill Silmet is big player in high purity Ta/Nb metal business (many tons less common metals in uk produces??). It implies that certain revenues are linked to these strategic metals.
4. Check K.Kerrs video – technology is quite modern!

12 fran April 7, 2011 at 8:19 am

the “gut grabbing” questions raised by mr. lifton remain unanswered at this time. molycorp could alleviate much suspiscion and conjecture by bringing final agreements/contracts from the many MOU/LEI established among themselves, NEO MTLS, HITACHI, SUMO, ARNOLD et al.
a “mine to magnets roadmap” from the lawyers/financiers on the board would add credibility.

13 Mark Watts April 7, 2011 at 9:38 am

I think the Soviet element of this is being overplayed a little. Estonia has been a member of the European Union since 2004, which is bound to be a positive with regards to environmental regulations, radioactivity etc.

The plant has also been modernised since the Cold War.

From a European perspective it is interesting to look at what this means for EU strategically. Does this weaken the EU’s rare earths security, losing its only non-Chinese-reliant asset to an overseas company? Or is it a positive that it is in the hands of a strong Western company, which can help boost its output.

In other words is America’s rare earth security being gained at the expense of the EU? Or is it a gain for the West as a whole?

14 Robert Olson April 7, 2011 at 10:25 am

What is the price of insurance these days?

Can Insurance against excessive EPA destruction of Molycorp future earnings be bought?

Silmet purchase.

Worth every penny as a Molycorp insurance policy vs. the USA EPA?

15 Jack Lifton April 7, 2011 at 10:39 am

With all respect to my readers whose comments I appreciate and take careful note of:

The error most Americans make in life is in assuming that all other peoples of the world wish to have our values and beliefs and to be governed by our best laws and regulations.

Sadly, as a result of extensive global traveling, business dealings, and observation over the last 36 years I know that nothing could be farther from the truth.

Just as an example: The former Soviet empire was a dark, corrupt, and cynical place where the subjects universally referred to their official (Moscow based) state newspaper, Pravda, the Russian word for truth, as nepravda, the Russian word for untruth or a lie.

Today east Europe is a place of sharp contrasts of wealth and poverty with systemic government corruption still dominant.

I am frankly amused that anyone should think that EU membership guarantees following EU rules for individual corporate veracity in reporting in places like Estonia or Romania, for example.

If Silmet is a first class rare earth refining company then it has become this only since the fall of communism woudl have released it from its duty to obey central planners rather than the market.

That may be the case but no western businessman who i know who has bought a business in the former Soviet empire has had an easy time of modernizing it.

Silmet surely has more employees than it needs. Soviet era businesses were social welfare centers. How will Molycorp handle that? And, please note, that issue must be handled before any meaningful work can be done economically.

I would invest more readily in the company that sold Silmet than in Silmet. But I don’t think that company was public.

I suspect that this deal was brokered by Luxembourg based Traxys, a major Molycorp backer from the beginning. Because otherwise I cannot understand how Molycorp could deal in east Europe. I am adding to my list of questions: “What part did Traxys play in all of this?”

16 Philo Beddoe April 7, 2011 at 11:30 am

Very nice rebuttal Jack. I always tend to put more faith in the people who ask questions if something doesn’t seem quite right like you have done. Much more so than the folks who express supreme self confidence in their ability to believe that without question, everything is as they say it is.

17 Ian McNeil April 8, 2011 at 6:38 am

I am confident that Jack knows what he is talking about as regards Silmet.
However , something has inspired Molycorps shares-is it the acquisition, or the market ?

18 fran April 8, 2011 at 11:43 pm

mr. lifton–

key members of the board of directors/ major stock controlers[TRAXYS] would be involved?

your question- TRAXYS involvement? is a good one which needs an answer.

this would not be the first instance for suspicions of the BOARD’S arms length process and less than acceptable minor shareholer representation.

but, as always

CAVEAT EMPTOR

19 robert olson April 9, 2011 at 8:06 pm

One of the main reasons for Silmet purchase is an insurance policy vs. Obama/Boxer EPA.

Molycorp is not going to allow Obama in an election year to kill them again?

Molycorp stock shall double again this year despite the expected economic coming this May.

Congrats to Mark Smith.

As well as Molycorp is doing, watch when Western Mining finally lands the Japanese deal of the century, and the tiny Australian REE miners climb this “wall of needless worry”.

For example, one of the safest stock investments going forward is Alkane, up a mere 1,000 percent in the last 52 weeks, and is going much higher this year.

Oh, why did Lynas put the REE finishing plant in Malaysia. Could it be due to the Australian Greens (EPA)? Sounds like a Molycorp “Silmet” play to me?

Again congrats Mark Smith. You are the American CEO of 2011 and a realist in the Obama years.

20 Chris April 12, 2011 at 8:27 am

Jack,
Thanks you for such an insightful article. I have read your other articles on Seeking Alpha as well and I see that you are currently long GWMGF. Can you share the reason you chose this over the others?

21 prescient11 April 12, 2011 at 3:56 pm

Jack,

I agree with Dr. Olson. Biggest thing Silmet gives them is a PERMIT to actually do it, and enhances separation capacity by 3,000. So now MCP can supply 6,000 to the market from its stockpile.

Beyond that, not sure what it gets them, although a purchase is definitely out for Neo.

22 fran April 15, 2011 at 6:15 pm

PRESCIENT11–

by Neo, do you refer to NEM.TO? if so, why would Neo want to purchase SILMET?

23 higirl April 16, 2011 at 12:07 pm

because you are not supernatural to understand everything…… I am adding to your list of questions: why do you think you should know everyone’s deal behind door
you should try to be more objective.
can understand your view since you are long on GWG to promote them…

24 paul April 17, 2011 at 5:52 am

you stated : I want Americans to have good jobs and to maintain American standards of living and well-being before any American taxpayer funds are used to help others to do the same. Is that too much to ask of a government?
are you aware that there is a possibility that the money of American investors will go to EU. therefore your sentence might be in contradiction

25 kev April 17, 2011 at 8:01 am

how about, Stans Energy is it worth to invest ?

26 prescient11 April 17, 2011 at 2:59 pm

Fran,

What I had meant is I think a lot of people expected MCP to take out Neo. Obviously I don’t think that’s happening now. Cheers!

27 Marc February 23, 2012 at 8:47 am

Jack,

Thank you for your article.
Regarding your scepticism about Silmet’s performance, have you found any evidence to support it?
Or do you still think Silmet will not equal (on the short/medium term) Less Common Metal metal-making performance?

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