UPDATE 4-Molycorp speeds up plan to boost rare earth supply

Thu Oct 20, 2011 4:57pm EDT

* Company to start up new processing plant 3 months early

* Early start up to boost 2012 production by 3,500 tonnes

* Acceleration to cost additional $114 million

* Molycorp shares close down slightly on NYSE

By Julie Gordon

Oct 20 (Reuters) - Molycorp , the largest supplier of rare earths outside of China, will open a California processing plant months ahead of schedule, easing the threat to Western manufacturers posed by Chinese export controls.

The new plant, which will refine rare earths into oxides and metals used in smartphones, wind turbines and a range of other high-technology products, is expected to start initial production in early 2012, about three months earlier than previous estimates.

Molycorp said on Thursday it would start mining at the Mountain Pass project next week, with fresh ore being stockpiled to feed the new plant.

The early start-up will boost 2012 rare earth production by about 3,500 tonnes to 8,000-10,000 tonnes, and contribute to a further doubling of output to 19,500 tonnes in 2013, or about 20 percent of current global production.

"That's going to do a lot to help with sentiment in the industry," said Brandon Tirpak, an analyst with metal pricing firm Asian Metal. "People will have a little bit more confidence in the supply."

But the move to speed up production will increase capital costs for Mountain Pass by about 15 percent, the company said, and Molycorp shares ebbed on Thursday to $37.70 on the New York Stock Exchange.

Still, the added production will likely help stabilize prices by easing reliance on China, which controls about 95 percent of global production. Beijing has repeated clamped down on exports, sending prices skyrocketing.

Cerium, used primarily in glass polishing, surged from about $4 a kilogram in 2009 to about $157 in July 2011. The price has since fallen to around $55/kg.

"The problem is that there isn't enough material out there for all of the customers demands," Molycorp Chief Executive Mark Smith told Reuters. "Every month that we accelerate our start-up provides that much more product to customers who need it now."

While prices for the 17 rare earths could keep fall in the coming weeks, analysts expect prices to rise again in late November ahead of China's 2012 quotas.

China has capped 2011 production at 93,800 tonnes and exports at 30,184 tonnes. It is expected to lower 2012 quotas.

By starting up the processing plant early, Molycorp will be in a solid position to strike deals with end users looking to secure supply outside of China.

"It is obviously a positive," said Gabelli & Company analyst Brian Chin. "The quicker they can get into production the better it is for the company."

CHINA DOMINATES

Chinese export controls have led to some companies, such as the makers of high powered magnets used in smartphones and hybrid cars, to consider moving their manufacturing chain into China to avoid paying hefty export duties.

"Part of what we're doing is trying to give the market, including all of our customers, a great deal of confidence about keeping their businesses where they are and not moving them to China," said Smith.

He added that Molycorp sells every kilogram of rare earths it currently produces and is seeing strong demand from the magnet sector and glass polishing clients.

Also at issue is the catalyst industry, which uses rare earths in the process of refining oil. That industry cannot simply move manufacturing to China, and as such, has invested in finding substitutes.

"What we are seeing in 2011 is a lot of these companies are going back to their engineers and trying to reduce the amount" of rare earths they use," said Tirpak.

He points to companies like Albemarle Corp , BASF and W R Grace , which produce catalysts for the petroleum sector, as well plastic and chemical industries.

W R Grace signed a five year lanthanum supply deal with Molycorp late last year, while BASF recently signed a similar agreement with Australia's Lynas Corp .

Molycorp currently produces rare earth products from stockpiled material at Mountain Pass. Once the new facilities are complete, the company would have the capacity to produce up to 40,000 tonnes a year, depending on market demand.

"I do think Molycorp coming into production earlier is going to make (end users) say, 'let's stick out for one more year and see how much prices come down,'" said Tirpak.

HIGHER COSTS, NEW DEMAND

The expansion of Mountain Pass, located some 212 miles northeast of Los Angeles, was expected to cost $781 million. The acceleration will add $114 million for labor, fees related to changing delivery timelines for equipment and materials, as well as contingency, Smith said.

Molycorp will finance the early start-up through current cash flow and existing cash balances.

The main criticism Molycorp has faced in the past is that its Mountain Pass project is low in high-value heavy rare earths. The company recently said that it is exploring a nearby heavy deposit and that that ore could be processed at the new facility at Mountain Pass.

With heavies added into the mix, Molycorp will appeal to a broader range of customers, driving home the point that there are options outside of China, analysts said.

As production outside China ramps up, end users will again start developing new applications for rare earth.

"It is important that additional secure supplies come online," said Chin. "New technologies will be developed using those rare earths."

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