Q&A series: How to build an RE supply chain - Part 2

Covid-19, the US-China trade and technology war and previous trade disputes are focusing minds across the world on supply chains and industrial priorities, while the deepening economic crisis appears to be working both for and against a shake-up of the manufacturing base.

In the second of three interviews with rare earths producers, Argus spoke with MP Materials about building a sustainable supply chain outside China, from rare earth ore to oxide to metal to alloy to magnet, and about its experience of starting out in one of the most politically and economically brutal sectors in the world.

The Mountain Pass mine in California, developed in the 1950s, was once the world's largest suppliers of rare earths. The mine was bought out of insolvency in July 2017 by the MP Materials consortium comprising US investment funds JHL Capital Group and QVT Financial along with minority non-voting shareholder Chinese firm Shenghe Resources.

MP Materials restarted production at Mountain Pass in January 2018, producing a light rare earth concentrate marketed and sold to China. The company produces over 36,000 t/yr of light rare earth oxide contained in concentrate.

Argus spoke with James Litinsky , co-chairman and controlling shareholder of MP Materials. Edited highlights follow:

MP Materials is one of the more recent entrants to the rare earths industry. What was it like to start out? I never expected to be in this position. We purchased the Molycorp distressed debt in bankruptcy. Not a single credible strategic or financial buyer showed up to buy Mountain Pass. It was days away from reclamation, and we could not watch such an important national asset disappear.

We put in some money to keep the site going and figured out a plan. I had no idea how hard it would be. I hope people years from now will look back and feel the same pride I feel about the job our team out there is doing.

"Build it and they will come will never work for rare earths," a commentator said recently. Do you agree? I disagree, although I think that is certainly the perception of many people looking at the history of the industry. But something material has changed for the prospects going forward — the use cases for rare earths are really accelerating with modern technology, specifically for electric vehicles [EVs], but also eventually other 5G motion and transport technologies.

I think the game has changed for us all commercially. The automotive supply chain is $700bn of GDP and 10mn-14mn jobs, and with EVs going from 2pc to, pick your timeframe over the next 30 years, maybe 90pc, that is too much capital for there to be a single point of failure in the global supply chain. It wouldn't matter if it was China or the UK. The automotive supply chain will contract around single points of failure if they have a choice. We will build it, and they will come.

But the US imports car engines from China. What is the difference in terms of who makes the magnets? China has very intelligently and strategically taken over a significant chunk of the automotive supply chain. That is why our sector is so critical. Too much GDP is at risk for the west.

China utilised rare earths to take over the magnet industry. They could do this because there has been no rare earth supply chain in the western hemisphere for many years. China will continue to move downstream to compete for greater commercial share.

In June last year you said you would start production of rare earth oxides at the end of 2020. Why the push back to next year? The import tariff China levied on our rare earth concentrate sales to them [which has now been lifted] and the pandemic have pushed back stage 2 execution by a number of months, but we continue to make great progress.

If you do make oxides, who are you going to sell them to except for China? There is already more production of rare earth oxides outside China than there is consumption. Multi-billion dollar supply chains do not move overnight. The supply chain transition has to happen, and it will over time. MP is paving the way as a secure and sustainable source of supply based entirely in the western hemisphere. Our company will vertically integrate over time, and our success will help enable more overall western downstream investment.

Some might say that China will never allow that to happen. The new reality of the EV has changed the game though, in that the industry is going to demand an alternative source of supply. China will hopefully recognise that our output is helpful to the global industry, including theirs. It encourages growth and investment. MP's success will help pave the way for a more diverse and competitive supply chain, and also a more expanded overall opportunity set for all.

The current environment must be complex for a large US rare earth producer with a minority Chinese shareholder. How are you negotiating this challenge now and moving forward? We are an American company with American employees and 100pc shareholder voting rights and board seats held by Americans. We have a minority Chinese shareholder, Shenghe Resources, who is also our distribution partner in China. In the beginning, we asked Shenghe for technical advice.

When we took control of the site at Mountain Pass in 2017, there were eight people. It was in care and maintenance. Today, we have over 200 people, including an outstanding and growing team of engineers, and we command over 15pc of the global rare earth concentrate market. We have single-handedly restored the rare earth industry to the US, despite the many naysayers who said it could never be done.

We have an ore body in the ground in the state of California, and over $1.7bn of invested capital in a processing facility next to it. The Chinese government cannot pick it up and move it to Beijing. Our mission is to restore the full rare earth supply chain to the US.

Many great American companies like Apple, Boeing and Tesla have Chinese shareholders, operations and sales relationships. We hope to be as Chinese as they are one day.

What could government be doing to support the rare earths sector? The most important thing for the sector is a true level playing field globally. Historically, China has heavily subsidised its rare earth industry via capital and reduced environmental standards. In fairness, China has made some progress environmentally in more recent years.

Yet China continues to completely control the industry because they have smartly utilised a significantly subsidised cost of capital for the sector. We must do the same here. Tax incentives to encourage the domestic supply chain are a great first start. The recent bill proposed by US senator [Ted] Cruz is a great example of how to do it.

Governments, major corporations and global consumers should also continue to shine a light on issues like China's reduced environmental standards. Identifying the challenges, and then responding aggressively to them, requires a long-term approach. That is how China is doing it. We must do the same.

By Caroline Messecar

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