DEALTALK-Molycorp, Neo Material deal a rare earth game changer
* Molycorp to buy Neo Material for C$1.3 billion
* Deal gives Molycorp access to magnet alloys
* Could make Molycorp attractive to automakers
* Regulatory hurdles seen
* Molycorp, Neo shares both soar on deal
By Julie Gordon
TORONTO, March 11 (Reuters) - Molycorp's $1.3 billion deal to buy rare earth processor Neo Material Technologies will turn industry leader Molycorp into a one-stop rare earth shop, and could make it attractive for a takeover of its own.
The deal gives Molycorp, which has a mine-to-magnet strategy, the ability to produce both the large magnets that power the main motor in a hybrid car and also the smaller magnets that move that car's side mirrors and seat.
"Does this make them interesting in terms of being an acquisition candidate for GM or a Toyota or a Nissan, or somebody like that, I would think so," said Byron Capital Markets analyst Jon Hykawy.
The multibillion-dollar auto sector is one of the biggest consumers of rare earths, which are also important in smartphones and other appliances and electronic equipment. Supply is highly restricted, and that makes prices volatile.
The takeover, announced after markets closed on Thursday, will see Colorado-based Molycorp pay C$8.05 in cash plus 0.122 of a share for each share of Toronto-based Neo Material.
The deal comes about a year after a deft Chinese campaign to crack down on rare earth exports sent prices of the individual oxides and metals to peak levels. Shares of rare earth companies soared, even though most had no production of their own.
The shares fell back last year as plunging rare earth prices weighed on the highly speculative market, and Molycorp shares slumped more than 65 percent between May 2011 and Thursday.
The stock closed at $30.89 on Friday, up 19 percent on the day, but well below last year's peak of $79.12.
China produces more than 90 percent of the world's supply of the metals. Molycorp, which is modernizing and reopening the Mountain Pass mine in California, is the largest producer outside China and its output is growing. The company listed on the New York Stock Exchange at $13.25 in July 2010.
Stock of Neo, which has been in business for some 20 years, closed at C$7.97 on Thursday, 23 percent off its 2011 high of C$10.67. The shares soared 37 percent to C$10.94 on Friday.
Molycorp has plans to develop the entire rare earth chain, from raw material to high-value rare earth magnets. The bid for Neo will give it cutting-edge processing technology, expand its product portfolio and provide valuable magnetic alloy patents.
The move could also silence some of the criticism the U.S. company faces for being overly reliant on lower-value light rare earths like cerium and lanthanum.
The deal is strategic for Neo too, which, faced with dropping margins on feedstock costs in China, will gain a secure supply of raw materials, said Hykawy.
"To put it bluntly, the biggest risk to Neo Material was its reliance on Chinese feedstock for a supply of REO (rare earth oxides). Neo needed a mine," he said.
Neo currently buys concentrates from China to make rare earth oxides, alloys and magnetic materials, along with minor metals. China is not only the world's top producer of rare earths, but also the top consumer.
HURDLES TO COME
The cash and share deal is expected to close in the second or third quarter, but there could be bumps along the way.
"We note that Molycorp will now have to ship rare earth elements into China, which may raise some regulatory flags in the United States," Dahlman Rose analyst Anthony Young wrote in a note to clients.
Molycorp will now also have to deal with Chinese export quotas, although analysts noted that some products that Neo produces in China could be made at Molycorp's facilities in Europe and the United States.
"A Neo/Molycorp combination makes considerable strategic sense, in our view," wrote RBC Capital Markets analyst Steve Arthur. "Further, we expect it to be well-received in the U.S., boosting rare earth capabilities and supply outside of China."
The bid for Neo is Molycorp's third deal in the past year, as the miner looks to increase its processing abilities.
With Mountain Pass expected to be online and producing at a rate of 19,050 tonnes by the end of the third quarter, the timing was right for its largest deal yet, the company said.
Deal hungry investors, hopeful that Molycorp will next turn its sights to another mine, snapped up rival stocks as well.
Rare Element Resources, which is developing a mine in Wyoming, closed up 20.55 percent at C$6.10, while Quebec-focused Quest Rare Minerals rose 17.34 percent to C$2.91. Lynas closed 9.26 percent higher at A$1.18.