By Jeff Ferry, CPA Research Director
A U.S. bankruptcy court has decided to sell a California mine, the sole U.S. source of rare earth minerals, to a consortium including Chinese mining company Shenghe Rare Earth Shareholding Co. If the transaction goes ahead, this would turn over the unique domestic producer of these vital minerals, used in many high-tech electronics products, to a Chinese-affiliated company.
China already accounts for some 90% of world production of rare earth minerals and has demonstrated its ability to prioritize its own Chinese customers with export restraints on rare earths imposed in 2009, causing anger and consternation worldwide.
The $20 million sale of the Mountain Pass, California mine follows the 2015 bankruptcy of Molycorp, a public company that invested over $1 billion trying to build a U.S.-based producer of rare earths. There were two bidders interested in Molycorp’s assets: ERP Strategic Minerals, a U.S.-led consortium led by Tom Clarke, a Virginia-based entrepreneur and coal industry veteran and including Pala Investments and Australian mining company Peak Resources, and last week’s winning consortium which includes JHL Capital Group and QVT Financial as well as Shenghe. Clarke told the Wall Street Journal that his ERP group intends to challenge the court’s decision on national security grounds. Although there have been conflicting reports on Shenghe’s role, the Wall Street Journal quoted a Chinese-language document from Shenghe that said Shenghe would have a profit share as well as exclusive sales rights for Mountain Pass minerals.
Rare earths are a group of 17 little-known elements, most of them with unpronounceable and un-spellable names like neodymium or ytterbium. However, many of them are used in small quantities in vital electronic components like smartphone displays, sensors, and electric motors. Those applications also make them vital for defense applications and most major defense contractors depend on components and subsystems that contain rare earths. According to the US Geological Survey, last year the U.S. imported $120 million worth of rare earth compounds, the vast majority from China. That relatively small financial figure dramatically understates our dependence on rare earths because we also import billions of dollars worth of electronic products that contain rare earths. Some rare earth elements have strong magnetic properties used in electric motors. Growing demand for electric motors from two industries expected to grow fast in coming years, electric cars and wind turbines (used for renewable wind energy), add even more urgency to the need for a secure supply of rare earths.
In 2009, China imposed quotas on rare earth exports, and cut off supplies to Japan, claiming it needed to reorganize its domestic industry. In a rare display of concern for the environment, the Chinese government also cited the environmental damage of the mines, attributing “landslides, clogged rivers, environmental pollution emergencies and even major accidents and disasters” to its rare earth mining industry. Some observers suspected that China’s real goal was to boost its own high-tech industry at the expense of competitors. Japan, the U.S., and other nations complained at the World Trade Organization (WTO), which ruled in 2014 that China was violating WTO rules. At the end of 2014, China abandoned its quotas, exports rose once again, and rare earth prices plummeted. An unfortunate by-product of that series of events was the bankruptcy of Molycorp, which could not compete at the lower price levels.
Rare earths are critical to the U.S. on three grounds: national security, today’s mainstream electronics products, and tomorrow’s industries of the future like electric cars. If ever there was a case for the federal government to step up and ensure a U.S.-owned alternative to an industry dominated by China, this is it. Defense consultant James Kennedy wrote last year that “all rare earth metallurgy used in U.S. defense systems originates in or must pass through China.” Kennedy argued that in 1998, the U.S. lost its leading rare earth company, Magnequench, when that company was: “…sold to members of Deng Xiaoping’s family. Magnequench was shut down, moved and reopened in China in 2003.” Kennedy said that until the U.S. has a secure source of rare earths, “the Pentagon has built its entire advanced weapons [strategy] on Chinese quicksand.”
New Mandate for CFIUS
At CPA, we have argued that CFIUS (the Committee on Foreign Investment in the U.S., an inter-departmental federal agency charged with overseeing foreign takeovers of sensitive U.S. companies) should broaden its mandate and block some takeovers not only on national security grounds but also on grounds of economic security. The proposed Shenghe-Mountain Pass acquisition is a good illustration. In addition to the national security concerns, rare earths are vital to our economy. We simply cannot afford to have such a broad and vital set of products as consumer electronics dependent on one country’s source of supply, particularly when that country is now engaged in merging and consolidating the industry, increasing government control, and has already shown willingness to use the industry as an economic weapon.
CFIUS should step in and tell the bankruptcy court to change its decision and award the Mountain Pass mine to Clarke’s ERP. And Congress should enlarge CFIUS’s mandate to include economic security. This is not only good for the U.S., but good for allies like Japan, who would thank us for taking steps to create a reliable alternative source of supply. Our government must understand that good foreign relations need not mean outsourcing our supply chain. It can instead mean insourcing our supply chain, and then selling to other nations at competitive, free market prices. If the federal government has to take action to support this enlightened strategy, such as guaranteed research and development dollars to U.S. companies that commit to buy Mountain Pass rare earths, so be it.
The environmental concerns over rare earth mining are very real. That’s one reason China dominates the industry. Rare earths are usually found as a by-product of mining for more widely used minerals such as iron ore. Most mining companies outside China avoid the expensive and dirty processing operations necessary to extract rare earths. However, we spoke to David Wert, the public affairs executive for California’s San Bernadino County. He told us the county is in favor of reopening the mine and is confident that practices can be developed to mine the minerals safely. “We were dismayed when Molycorp closed,” Wert said. “Close to 500 very good-paying jobs went away when the mine closed. That was important to our county economy.”