A rare earth IPO fizzles

Renewable energy market analyst Jeff Siegel has an interesting post today at Green Chip Stocks about Molycorp, a mining company that held an initial public offering last week and got — well, not much. On the first day of trading the stock was kicking around in the $12 to $13 neighborhood, several dollars below the anticipated asking price.

Before its IPO, Molycorp received the sort of attention not usually lavished on obscure mining enterprises: I was written up in the New York Times and the Atlantic, and featured prominently on a recent installment of PBS’s NewsHour. This is because the company has a monopoly in the Western Hemisphere on rare earth elements, materials that are necessary for manufacturing all sorts of consumer electronics — everything from TVs to iPhones — and clean-energy technology, including wind turbines and the batteries for hybrid and electric cars.

If you want to get your hands on rare earths today, you have just one option: China, which accounts for the near-entirety of the world’s supply. This wasn’t always the case. The mine that Molycorp now owns, in Mountain Pass, Calif., used to be the world’s biggest rare-earth producer. (It’s currently idled.) In the 1980s and ’90s, however, China managed to push down prices — low labor costs and a disregard for expensive environmental protection measures will do that for you — and cornered the market. Today the only rare earth the United States exports is these guys.

China’s monopoly wasn’t really much of a problem until recently, but a couple of things have changed that. One is the increased demand for clean tech, in response to concerns over climate change and oil supplies and prices. But the bigger issue is the exploding demand for consumer electronics — most crucially in China itself, where by some projections demand for rare earth elements could outstrip supply in the next few years.

Not long ago the BBC dubbed the impending scramble for rare earth elements "The New Great Game," which is a bit much; rare earths are relatively common in at least half a dozen countries, and most of them — Canada, Greenland, Paraguay — aren’t exactly geopolitical hotspots. What rare earths aren’t is especially profitable. Only tiny quantities of the elements actually go into these electronics, and before they’re processed rare earths are worth hardly anything. Even with demand rising and prices intermittently spiking as they have in recent years, it’s just not worth it for the mining majors.

So for now the future of the industry rests on small, idiosyncratic companies like Molycorp. And as we learned from that company’s Wall Street debut, they have an uphill battle in a tough investment climate that has proven especially daunting for clean tech startups. It’ll be a while before anyone outside of China is actually making money on this kind of mining.

Of course, as Siegel notes, there’s one sure way to make something profitable in a hurry: Get the U.S. military interested. The Pentagon needs rare earths for all kinds of surveillance and weapons systems, and is increasingly worried about relying on China for them. A bill proposed in the U.S. House of Representatives this spring by Colorado Republican Mike Coffman would use government backing to resuscitate the domestic rare earths industry. It hasn’t gone anywhere, but given that the Pentagon’s annual budget is more than 500 times the size of the entire rare earth market in the United States, you can see why anyone owning a mine would salivate over the prospect.