Rare Earth Mineral IPO looks risky – Molycorp seeks to raise upto $478 million to build Mojave Desert mine

Rare  Earth Minerals have been in the news because of their necessity in production of Clean Technology products and a virtual Chinese monopoly which controls almost 95% of the world’s production.China has been cracking down on illegal exports as it tries to control this vital ingredient for products as wide ranging as Electric Vehicles to Cruise Missiles.The European Commission has already sounded the alarm over the future shortage of these 17 rare earth minerals while USA is contemplating taking China to the WTO over this issue.Capitalizing on these fears is Molycorp which is planning to raise $478 million through an IPO to extract these rare minerals from a 2,222 Mojave Desert mine near Las Vegas in California.

IPO is a high risk one for investors

This IPO is a high risk one for investors for the following reasons

1) Profits are not expected before 2013 as Molycorp continues to lose money in operations .It lost almost $29 million in 2009

2) China might loosen its export controls as the Chinese companies might want to destroy a potential competitor

3) Environmental issues may lead to long delays.About $140 million will be spent on environmental controls.This mine was closed in 2002 due to environmental issues as mining of rare earth minerals leads to high pollution and waste.

4) Molycorp might fail to win a DOE loan guarantee which is essential for funding its capex needs.It last application was rejected in 2009 though this time the application has passed the initial screening.

The IPO is a risky one as it bets on the strong future demand for these minerals which are essential to most Green Energy technologies.Japanese companies like Toyota and Honda depend on illegal exports from China for building their Electric Vehicles.As Green Industry grows bigger,the demand for these minerals will exceed supply leading to high prices.The opening of such mines is generally a long term project often taking 15 years.Molycorp is also benefiting from political backing as some US lawmakers get concerned over the threat of US Defense Industry from the Chinese monopoly over these rare earth minerals.

Molycorp’s IPO Aims at Chinese Grip on Smart Bombs – Businessweek

The company is seeking $478 million in a U.S. initial public offering today to start its mine in the Mojave Desert, which was shut down eight years ago, its regulatory filing showed. Molycorp hasn’t made a profit since its inception in 2008 and will use the IPO to refurbish the facilities and compete with Chinese producers that supply 97 percent of the metals, which are used to make magnets found in Raytheon Co.’s Tomahawk cruise missiles and Toyota Motor Corp.’s Prius sedans.Shipments from China, which began reducing output in 2006 to cut pollution, will decrease by 72 percent in the second half of this year, a Ministry of Commerce statement on July 8 showed. That gives China “market power” over the U.S., a report from the Government Accountability Office in April showed.U.S. Representative Ike Skelton of Missouri, chairman of the House Armed Services Committee, in April called for an inquiry after the GAO report exposed vulnerabilities for the American military because of its use of Chinese metals.

The 2,222-acre site, an open-pit mine located 60 miles southwest of Las Vegas in the Mojave Desert, produced a majority of rare-earth materials from 1965 to 1985, the GAO report said.While U.S. deposits also exist in several states such as Idaho, Wyoming and Utah, they are still being explored and could take as many as 15 years before becoming fully operational, according the GAO report.The company may get about 57 percent of its revenue in 2013 from neodymium iron boron alloy, which is used in magnets for electric car motors and lasers, according to London-based researcher Independent International Investment Research Plc.

Until that time, Molycorp expects to lose “substantial” amounts of money. The company’s first-quarter net deficit widened 38 percent to $7.75 million from a year earlier after selling its stockpiles at a loss. It lost $28.6 million in 2009