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How China's Rare-Earth Chokehold Has Helped One Small U.S. Company

Nothing like a little supply shortage fear and a Chinese monopoly to get business deals moving. U.S. rare earths producer Molycorp Minerals (MCP) announced a joint venture this week with Japan's Hitachi Metals to make the coveted alloys and magnets used in numerous modern-day devices including cell phones, laptops and anti-lock brakes.

Molycorp's aspiration to team up with a third-party manufacturer isn't exactly a secret. Molycorp laid it all out in April when it announced plans to raise an estimated $350 million in an initial public offering filed with the SEC. In its IPO, Molycorp described plans to restart its Mountain Pass rare earths mine in California and eventually form a joint venture with a manufacturer that had the tech and facilities to turn their rare earth materials into high-performance permanent magnets.

What's curious is the company's rise from tepid IPO to tripling of its share price and finally the Hitachi joint venture in less than a year. It's all because China, which controls some 97 percent of the rare earth supply in the world, used its power to punish Japan.

China rising
China blocked shipments of rare earths to Japan in September as a diplomatic dispute over the detention of a Chinese fishing boat captain heated up. As BNET colleague Erik Sherman noted at the time, the implications were disturbing for Washington and any high-tech company. The move got Japan's attention as well as some folks on Capitol Hill. The rest of the world took notice a month later when China reportedly announced it would reduce its rare earth exports by 30 percent in 2011. The Energy Department has since released a 166-page report outlining a U.S. strategy to make rare earths more available here.

Missed opportunity
Molycorp had hoped for a DOE loan guarantee to help it restart its Mountain Pass mine, which is estimated to cost more than $500 million, but was denied because it was "too far upstream" from energy production, Molycorp's CEO Mark Smith told a House committee during testimony on rare earth minerals back in March 2010. Molycorp has filed another request for a DOE loan guarantee. We'll see if their luck changes this time around.

Since China began flexing its rare earth muscle, shares of Molycorp have skyrocketed from its rather pitiful $12 beginnings to more than $40 this month. Since the joint venture with Hitachi was announced Tuesday, shares have hit a high of $45.67.

Highlights of the deal:

  • The ventures will focus on making neodymium-iron-boron (NdFeB) alloys and magnets;
  • The magnets and alloys will be made in the U.S.
  • Hitachi and Molycorp expect to sign definitive agreements for the alloy venture by April 2011 and the partnership to produce magnets later in the year.
Photo from U.S. Agricultural Research Service via Wikipedia, public domain