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 Fri Jul 22, 2011
Index Member Comment: Ecclestone uses Molycorp's Silmet acquisition to pump Ucore and Great Western
    Publisher: Kaiser Research Online
    Author: Copyright 2011 John A Kaiser

Molycorp Inc (MCP-N: $60.33)


Index Member Comment - July 22, 2011: Ecclestone uses Molycorp's Silmet acquisition to pump Ucore and Great Western

Chris Ecclestone of Hallgarten & Company has published on July 19, 2011 a detailed discussion about Molycorp's Silmet acquisition (Silmet - a key component for a global player) which includes his prescription that Molycorp would be wise to mount takeover bids for Ucore Rare Metals Inc and Great Western Minerals Group. Ecclestone is an articulate thinker who burdens his work with a narrative style redolent of Scar in the Lion King who declares "I am surrounded by idiots". Although he admits having been wrong several times about predicting an end to the rare earth "boomlet", he throws his lot in with the Wrong Way Hykawy story that the rare earth sector is a tempest in a teapot best served by small scale rare earth operations, preferably ones with high grade ore, though low grade American deposits such as Bokan apparently will do. Ecclestone's report would not be worth a second thought if his goal was simply to promote certain companies and their projects, but rather than simply cheering for his favorites he has adopted Hykawy's strategy of bashing the competition not on their lack of merits, but on the premise that they are too big for the tiny puddle that he believes the rare earth sector to be. Ecclestone has used Molycorp's Silmet acquisition as a platform to pump Ucore and Great Western, and heap scorn on the rest of the rare earth juniors by being afraid to single out examples of the sort of frivolous junior that in his view might have had its hopes dashed by Molycorp's Silmet acquisition. So rather than explicitly beating up on juniors that are not contenders in the race to solve the world's rare earth supply problem, which the media would ignore, he has deliberately crafted a misguided and ultimately harmful narrative in a manner that serves the interests of the shorts that have lined up against the leading non-Australian contenders such as Rare Element, Avalon and Quest, and in doing so fools the media into covering his Ucore and Great Western promotion.

Chris Ecclestone does do a good job describing Silmet. He, in my view correctly, deduces that the main objective behind Molycorp's Silmet acquisition is to secure a facility that is already permitted for the messy business of rare earth oxide separation and metal refining. He also correctly recognizes that Molycorp's Mountain Pass production profile is deficient in the heavy rare earths, something Molycorp has yet to acknowledge, but he goes on to make the absurd contention that Molycorp would solve this problem by taking over Ucore and its Bokan Mountain project in southern Alaska. The trouble with Ecclestone's prescription is that 1) the Bokan resource is small and low grade, 2) a metallurgical flow-sheet has yet to be established for the target minerals, and, 3) a PEA seems to be at least 18 more months down the road. As it now stands Bokan will be too little and too late to solve the supply problem of any major downstream processing operation and is in fact much better suited for small operations such as Great Western's Less Common Metals. In fact, it is strange that Ecclestone does not see that a marriage between Great Western and Ucore makes a lot more sense than Molycorp becoming their adoptive parent. While Molycorp could buy Ucore for chump change today, it is not yet clear that Bokan is worth anything. Ecclestone's affection for Ucore is strangely at odds with his contempt for rare earth juniors who hype the virtue of heavies, propagate pronouncements by politicians, and pump out rare earth price updates.

As an alternative or perhaps supplemental acquisition by Molycorp Ecclestone recommends Great Western and its Steenkampskraal project whose potential output pales against that which Lynas and Molycorp will produce when Mt Weld and Mountain Pass are fully on stream. Why would Molycorp want to deal with the headache of a South African permitting regime for a project with an even higher thorium content than Mountain Pass, and deal with the BEE component? He makes the incredible claim that Great Western's UK division Less Common Metals is "a major REO manufacturer" when in fact it is a boutique generating less than $15 million annually in revenues compared to the $400 million plus Neo Material Technologies Inc will generate in 2011. Ecclestone seems to be on a credibility suicide mission with comments like "HREE claimants...had their ego bubbles burst by the Silmet deal" (why would heavy rare earth supply contenders be upset by Molycorp's purchase of a rare earth processor?), and once Molycorp absorbs Ucore and Great Western "the vast bulk of other REE plays are going to be dead in the water" (has he bought into the demand destruction mantra under which the world only needs the incremental slivers of supply Bokan and Steenkampskraal can add?), and that moving Bokan swiftly into production would steal "the thunder of other players who might have ambitions to produce HREE in the relatively near-term". But perhaps the biggest credibility buster is his contention that the "real business is in downstream processing", which may have been the case before China initiated a consolidation of a polluting, hazardous and inefficient mining industry, but is no longer the case today in light of the elevated rare earth prices and demand growth projections.

In fact, Ecclestone sounds suspiciously like he has joined Patrick Wong and Gareth Hatch in their Innovation Metals Corp venture which is seeking funding for a "centralized strategic refinery". Patrick Wong, a former hedge fund manager with a passionate dislike for junior resource sector venture capitalism, has adopted a peculiar marketing pitch in which he urges potential investors to put their capital in downstream processing operations rather than potential rare earth producers because the latter, who are supposed to be the suppliers of mixed rare earth oxides for his proposed refinery, inevitably lead to disaster. Of course, there could always be exceptions such as Ucore and Great Western, though neither of these juniors have published any meaningful amount of technical information which would give the market comfort that Ucore and Great Western are destined to be those exceptions. That may yet happen, but the rate of progress at these two projects resembles more the movement in a slough than the swift current of a river. If indeed Ecclestone is serious about his contention that value within the rare earth supply chain resides almost exclusively in the downstream processing segment, then he is not helping the cause by recommending Molycorp take out the two supply contenders whose successful crossing of the production finish line would in his view make all other potential non-Chinese rare earth mines irrelevant. Unfortunately for Ecclestone's vision, Molycorp can afford to wait to take out these two juniors because even if some other entity scoops them, Molycorp is hardly losing an opportunity to secure a substantial long term supply of rare earths. It would be wonderful for the shareholders of Ucore and Great Western if Bokan and Steenkampskraal make it into production, but their annual output potential of less than 3,000 tonnes each make it inconsequential whether or not they succeed. That is why Ecclestone's opposite position amounts to a big thumbs down for the rare earth sector, a prognosis of comfort to the rare earth bears. (For a visual illustration, look at the brown sliver at the top of the above supply evolution chart and double its height; that is the difference the combined output of Bokan and Steenkampskraal will make to future global rare earth supply.)


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