Molycorp secures off-take agreements for 78% of production

Before markets opened on Jan. 3 Molycorp (MCP-N) announced that it has found a home for more than three quarters of its Phase I production ahead of the start up of its rare earth production facility at its Mountain Pass mine in California.

The company said it has signed written agreements covering 78% of its Phase 1 rare earth production from its new manufacturing facility at Mountain Pass, which comes online later this year. Some of that has been committed to production of its Xsorbx water treatment products.

Molycorp has agreements with customers covering 58% of its Phase I production and has allocated an additional 20% to production of Xsorbx from the 19,050 tonnes of rare earth oxide (REO) equivalent it plans to produce each year under Phase 1 at its flagship Mountain Pass rare earth facility. (Molycorp expects to sell its proprietary cerium-based Xsorbx water treatment products across four markets: municipal water treatment, recreational/pool/spa water, industrial wastewater, and drinking water purification.

Currently it is selling Xsorbx to commercial customers in the municipal wastewater treatment and recreational/pool/spa markets.)

Molycorp also said it is in final stage discussions with customers for another 6% of Phase 1 production.

The exact terms, prices, duration, and products covered by the agreements will vary from customer to customer.

“In an industry that traditionally has been driven by spot sales, Molycorp continues to break ground by moving customers to stable, secure, long-term supply contracts,” Mark Smith, Molycorp’s president and chief executive, said in a statement.

Analysts Anthony Young, Anthony Rizzuto Jr. and Joseph Gordano of New York-based Dahlman Rose & Co. have a price target for Molycorp of US$70 per share–nearly three times higher than its current trading price at presstime of US$24.73 per share.

“We note that a significant portion (20%) of these sales is directed towards the company’s Xsorbx business line, where we believe the margins are somewhat lower,” they wrote. “Nevertheless, we would tend to view this morning’s announcement as a positive for the stock and a positive for the broader rare earth industry.”

The analysts also noted that the off-take agreements will mean there will be less rare earth material hitting the spot market. Molycorp will only have to place roughly 4,200 tonnes of its initial production on the spot market, the analysts say, rather than the full 19,050 tonnes. And there is the possibility that the company could sign additional off-contracts, which would further whittle down the amount of material on the spot market.

“Given the relatively small size of the rare earth market, 130,00-135,00 metric tons, this will still likely have a dampening effect on prices, in our opinion, but should not have the crushing impact that the company’s full production of 19,050 metric tons would have on the spot market,” they reason. “With Lynas Corp. (LYC-A) pursuing a similar strategy of securing off-take agreements, we remain cautiously optimistic on the long-term outlook for rare earth prices.”

Molycorp–the largest producer of rare earth oxides outside China and the biggest in the Western Hemisphere–says it expects to be producing rare earth oxides at its Phase I run rate of 19,050 tonnes per year by Sept. 30 2012 and will be capable of a Phase II run rate of 40,000 tonnes per year as early as mid-2013, if customer demand warrants.

Mountain Pass has total proven and probable reserves of 2.2 billion pounds of rare earth oxides and total resources of 4.6 billion pounds. That equates to a mine life of more than thirty years.

Reserves at Mountain Pass can be broken down into different rare earth elements. Cerium makes up about 48.8% of the known deposit, Lanthanum 34%, Samarium 0.8%, Praseodymium 4.2%, Neodymium 11.7% and others 0.5%.