Interview with Mark Smith

The following interview took place on 17 September 2009.

CLINT COX: I am interviewing Mark Smith, CEO of Molycorp Minerals, LLC, now a private company. Why don’t we start with when and how did you get interested in the rare earth market?

SMITH: Clint, I had the very fortuitous fortune of being a lawyer for Unocal at one point in my life and Molycorp had some permitting, some environmental permitting issues that they were dealing with and I was asked by the Unocal law department to go and help Molycorp with those issues. They happened at the Mountain Pass Rare Earth Mine at Mountain Pass, California, and that’s when I got to start working with them, and I’ve always looked at that facility as being an absolute crown jewel with the right ownership and the right tender loving care.

COX: So I take it that you guys now have the right ownership with the right tender loving care.

SMITH: We feel we do. Yeah, we have a great group of private equity investors who have looked at this asset very hard, did a lot of due diligence on it, looked at all the rare earth markets, came to a conclusion that they could take this asset and reach its potential and they are very committed to doing so. And I think it’s exactly what this asset needed.

COX: While you’re talking about them, let’s jump ahead to what rare earth experience does each team member that bought Mountain Pass bring to Molycorp Minerals? You’ve got Resource Capital Fund, Pegasus Partners, Goldman Sachs group, Traxys North America and the Carint Group (which I’m not familiar with). Can you say what each one of these bring to the table?

SMITH: Well, Resource Capital Funds, of course, is a boutique private equity group that does nothing other than invest in mining and minerals. So what they bring to the table is expert mining and mining engineering, geology qualifications and I would also like to say for the record, that they are an absolutely wonderful shareholder because we can tap into that organization any day, anytime, and they can bring to us a wealth of knowledge about mining projects and mineral resources all over the world. So we never have to reinvent the wheel on anything. So they have just been outstanding. The person from Resource Capital Funds that was primarily responsible for the negotiations was a gentleman by the name of Ross Bhappu, who is Chairman of our Board of Directors. And it’s interesting to note that Ross’s father was a metallurgist and he actually did quite a bit of metallurgy consultation for Molycorp down at the Questa molybdenum mine in New Mexico. So Ross actually had a very close acquaintance so to speak, or a close connection with the Molycorp organization for a long period in his life.

The next shareholder I’d like to talk about who also has a very close connection with Molycorp is Traxys. The president and CEO of Traxys of course is Mark Kristoff. He’s on our board of directors. He was also primarily responsible for negotiating on behalf of the group of private equity investors. Mark’s father was actually the vice president of marketing and sales for Molycorp at one point in time. I believe one of his very first trips to a mine was a trip to the Mountain Pass facility in California. So Mark has known these facilities for a very long period of time, too. Now, in addition to Mark having that close connection through his father and kind of growing up in the Molycorp organization, Mark runs Traxys, which is a metals trading organization. They do about $4 billion worth of metals trading a year, and I think there’s no finer organization to work with in terms of finding customers and landing deals for our products. So they are an excellent addition to our organization.

We also have Goldman Sachs. What Goldman Sachs, brings to the table is obviously excellent financial sense. If I recall correctly, I believe Goldman Sachs had invested quite heavily into Lynas Corporation at one time as well and so they had a background and a history in the rare earth sector, at least for a period of time. I think they came in with their eyes wide open so to speak, in terms of what the potential for this market was and the potential for this resource.

Pegasus Capital is a private equity group that likes to focus on, I guess what would be called green technology type companies. And when they understood the connection between the rare earth minerals and the green technologies or clean energy technologies that all of us are so excited about right now, like hybrid vehicles, compact fluorescent light bulbs and, wind power generation, they became an investor as well. And we take great pride in having Pegasus as an investor because they only like to invest in clean green type entities. As management, we took this that as a really good sign of confidence in our ability to run the facility and to operate it safely.

The other group, Carint, was a group of private individuals, with a very small portion of the ownership, and then I have a small interest in the company as well. It’s a very diverse group of shareholders. We have outstanding, full dialogue on just about every issue that confronts the company, and I feel very, very confident at the conclusion of all those discussions that we reach very good decisions because of the diversity and broad view that everybody brings to the table for those discussions.

COX: What was the original driving force behind the deal? How did it come together? How did you guys decide to do this?

SMITH: Well, a little bit of interesting background here, too. When this group of private equity investors got together and put an offer in front of Chevron for this asset, I was actually the president and CEO of Chevron Mining at the time, and Chevron Mining owned and operated the Mountain Pass asset and the Questa moly mine. We had three coal mines and we were in the process of trying to open up an additional coal mine up in Wyoming. We had some other businesses as well, but those were the primary ones. When we received the offer letter from this group of investors, within 30 days there was actually, and I can’t remember the exact number anymore, it was either seven or nine, offer letters from different parties who were interested in this asset. We have no idea why it all happened in a 30-day period. But when I was wearing my Chevron hat and these multiple offers came in a very, very short time basis; we thought we may have something here. We wanted to figure out why there’s was such an interest.

We ultimately decided to enter into a bidding process for the assets, as opposed to just grabbing one letter and assuming that it was better than another. So we entered into confidentiality agreements with all the parties. We went through a first phase where they were able to do a limited amount of due diligence on the facility and on the people. At the same time Chevron was able to do a limited amount of due diligence on all the parties that were interested. We asked everyone to submit a phase one bid if they were interested at the conclusion of this limited due diligence period As part of that phase one bid, one very important point that we required was that there could not be a financing contingency associated with it. And that narrowed down the group of interested parties very, very quickly to three, and we started working then with the three parties to go through a second round of bidding on the asset, where more information was divulged to each of them. We of course got to do more due diligence on them.

There were many considerations that we looked at as part of that round two. It was not simply the price of the assets. We looked at price, we looked at the commitment to the people that were working at those assets, their commitment to the environment, their commitment to bringing the business back on line and putting the capital and a very simple term, tender loving care, back into this business so it could reach its full potential. We looked at all of those considerations and ranked the bids in round two. This group of private equity investors came to the top very quickly. That all occurred probably about late February of 2008. The initial letters that I talked about earlier, were all received in roughly August of 2007.

So we went through those two rounds of bidding and by the end of February, we had narrowed it down to this group and we started the negotiation process with this group of investors. We had reached a definitive agreement with this group of private equity investors in roughly June of 2008 when the agreement was signed by all parties. We then worked to close the deal, and the deal was ultimately closed on September 30, 2008. Long explanation, but it’s such a fascinating story that I wanted to get into some of these details.

COX: Were you surprised at all that the deal was closed, given the market at the time? There was chaos for a couple weeks before that deal closed. And with these guys being involved, I was actually very surprised that the deal went through.

SMITH: Very good point. However , we knew who the investors were, and we knew how much due diligence that they had done on the market, the forecasts for the future. When you look at the track record of this group of investors you discover that their average holding time for an investment is seven years. That was very, very attractive to us because it meant we weren’t simply selling this asset to a group of investors who were then going to turn around and flip it to somebody else and just try to make a profit. They were committed to the facility and to getting it back up and running at its full potential. So yes, there were a lot of issues and questions that were raised right at the end of the deal when it was closed, but we felt confident on the our side of the table that we were dealing with people who were values based and were going to carry forward on this deal, regardless of what the economic situation turned into at that time.

COX: That’s interesting. So how has the rare earth market changed since the deal was completed?

SMITH: Well, as you know, it didn’t do too well from September 2008 through about June 2009. So for roughly a nine-month period, the market really struggled. Prices went down over 50% on some of the rare earth commodities. Volumes were literally stagnant. I mean, people just weren’t even buying material anymore. But that’s the beauty of having this group of investors own the company. They have the financial wherewithal to get through issues like that. They supported our ongoing production as we were what I call, perfecting our processes, and have been extremely supportive through the entire, almost one year now that we’ve been in existence.

COX: So Mark, can you walk us through a brief history of Mountain Pass?

SMITH: Yes, a very illustrious history, I might add. In the late ’40s, there were a couple of prospectors that were out in the area, and the hot commodity at the time was uranium. They were actually looking for uranium. And lo and behold, they’re walking through this area, the high mountain desert and they get a couple clicks on their Geiger counter. Nothing that got them excited from the standpoint of uranium.,but there was something that was different there, and they had no idea what it was. So they grabbed a sample of this material, took it back into Las Vegas, to the USGS office there and asked them, “What is this?” And USGS said we’re going to have to take a couple of weeks to figure it out. They did all their analytical work and found out that it was bastnaesite, and told the prospectors, “This is bastnaesite, this is some of the richest bastnaesite we’ve ever seen in our lives, this looks like this could be something”. So the prospectors filed their claims.

COX: Was this the Birthday Claim?

SMITH: Yes, the Birthday Claim, is where it started. That was in 1948 when the claims were filed, and then I believe it was about that same time, shortly after they filed those claims, Molycorp, Incorporated, which was a publicly traded company on the New York Stock Exchange at the time, purchased those claims from the prospectors and then started to put together their mining plans.

In 1952, Molycorp started mining the rare earth deposit at the surface outcrops, and put in small processing facilities. Now at the time, what was really interesting about this is that the understanding of rare earths was not at its best. The use of rare earth was extremely limited. As a matter of fact, the major use at the time was for the flint in lighters. It was the lanthanum, cerium mischmetal that was used, and that was the product that was produced out there for many, many years.

Then in the late, mid to late ’60s is when the colored television became the hot item in every household. And with the color televisions, the way they were manufactured at the time, they needed europium in order to create the red color, the red phosphor in the screen. Mountain Pass had europium in its ore body, and Mountain Pass at one point in time, was mining the bastnaesite from the pit, exclusively to recover the europium. The europium is probably about 0.1%, maybe even a little less of that ore body. So we learned a lot of lessons during that time. Europium was at a price by the way, that justified all the mining and all the processing costs to only recover the europium.

But what we learned as we look back in history, is that the rare earth industry has had that problem, where one of the rare earth elements, or maybe two, will all of a sudden become very, very popular and everybody wants to buy them. The problem is, what do you do with the rest of them because they’re all in the ore body, and you have to take them out and separate each one. What do you do with those other materials while they’re not as high in demand? You end up stockpiling them is what you do. And that’s been a historic problem within the rare earth mining industry and at Mountain Pass in particular, where you were stockpiling large quantities of material while you were selling other quantities of material.

By the late 1980s, the facility was being run for more than just europium. Cerium was becoming popular as a glass polishing agent and Lanthanum was beginning its illustrious history in the FCC catalyst industry. So now you’re starting to talk about some very large volumetric uses of the more prevalent rare earths that we had in the bastnaesite ore, and things started to even out a little bit more. We had a lot more units to spread production costs out over. We weren’t stockpiling materials so feverishly anymore. And the industry looked quite a bit better at that time.

In the late ’80s, early ’90s, Mountain Pass was supplying the world with probably about 70% of its rare earth needs. However, the market was only about 40,000 tons a year back then. And so when we say 70%, it sounds like a large percentage, but it’s not a huge amount of tonnage compared to today’s market, which is upwards of 125,000 tons. Mountain Pass continued to operate.

It had some environmental issues that it confronted in the ‘mid to late ’90s. They didn’t help Mountain Pass’s economic situation, but the environmental issues certainly weren’t the reason for the facility to stop mining. There were also, of course, the Chinese found rare earths in their country, and started to exploit those resources and really brought their products out to the market at much lower prices than what the industry had seen for quite some time. Again, it didn’t help our situation, but that isn’t what ultimately caused us to stop mining.

Interestingly enough, what caused the facility to stop mining in 2002 was the fact that we had no more capacity in our tailings basin. And we didn’t have a permit to build a new tailings basin. We had started the permitting process for the facility back in 1989 thinking that by 2002, when the tailings basin capacity would be realized, we would have a new permit and we would be able to build a new tailings facility. We were about two years off. We got our final permit, our 30-year mine plan and our approved environmental impact report in 2004. So it took us 15 years to get our 30-year permit. But Clint, as bad as that may sound, it wasn’t the state of California that was causing that long time period.

We were having troubles deciding exactly what we wanted the facility to look like. What was considered state of the art in the late ’80s versus what was considered state of the art in the late ’90s in the rare earth industry really changed dramatically. So most of the cause for the delays in the permitting were really our own. But we did finally come to a conclusion on what we wanted the Mountain Pass site to look like, what we wanted it to produce, and how we were going to build it, and then we got the permit issued in 2004. By that time, we didn’t have any place to put tailings, so we had no choice but to stop the mining of ore.

We never stopped selling products because we had quite a bit in inventory In fact, we had two very large inventories of material which could be sold “as is” and were sold “as is”, but they also had the potential to be processed further so that we could realize added value by producing higher purity products. In about September of 2007, the facility restarted their solvent extraction units using a lanthanum concentrate material that had previously been stockpiled. The lanthanum concentrate was basically lanthanum and neodymium and praseodymium, and it was material that europium had been removed from. We started to reprocess that material with the idea that it was going to be a low rate of processing because we were trying to perfect our solvent extraction processing capabilities. We needed to show that we had the capability to produce high purity rare earth oxides. By high purity, I mean greater than 99% purity levels, which we had not done before in our business, because when we were at the peak of our production in the late ’80s and early ’90s, pure was upper 80 percentile —

COX: Right. It wasn’t necessary.

SMITH: The Chinese have really increased customer expectations in this regard and we knew that we had to change our product purity levels. We’ve been working on the solvent extraction side of our business since September of 2007 and I am extremely proud of our people on site because they truly have perfected this process. We’re now realizing recovery rates in excess of 98% in our solvent extraction processes, and we are today producing a greater than 99% purity didymium oxide and selling that on the market.

COX: Didymium being a praseodymium and neodymium —

SMITH: Correct During a recent trip to Europe, I discovered at a rare earth museum that at one time, didymium was considered an element until a very famous chemist over in Austria discovered that in fact, didymium consisted of praseodymium and neodymium.

COX: Where was that?

SMITH: Treibacher.

COX: Treibacher?

SMITH: Yes. We’ve been doing business with Treibacher for a long time. It was my first trip to their facilities. We met some really great people there and we look forward to an ongoing, long-term business relationship with them as well.

In April of this year, our board of directors approved the next capital project where we plan to take a very significant stockpile of concentrated bastnaesite, about 70% concentrate, and we’re going to process it from cracking through solvent extractors. We will be focused on perfecting the cracking process during this part of the project.

COX: So the cerium never goes through the solvent extraction. Everything else.

SMITH: That’s correct. And we have a new, innovative process that our technology group has come up with. They started in the lab, went to a bench scale, and then we actually built a small pilot scale unit and increased our production levels and continued to scale the process up. Everything has worked very well and now we’re going to take it up to a commercial level production rate. As a result, we will now have cerium in our product suite, along with the lanthanum and the didymium and our production levels will go up by 50% at that time.

COX: OK, so 3,000 tons per year in 2010. How many tons do you have of the bastnaesite concentrate?

SMITH: We have about 12 and a half thousand tons of material. We will be producing at about 3,000 tons per year. We’re only going to run that for two years at which point the bastnaesite concentrate product will be depleted. Now, you’ll probably notice that the math doesn’t quite work out there.

COX: Yeah, I wasn’t going to bring that up, but now that you —

SMITH: As part of our process for the next two years, we’ll have a rare earth fluoride material that we aren’t going to work on. We’re going to store and save it for full restart at the facility in 2012.

COX: How does that help with a full restart?

SMITH: It doesn’t help one way or the other. It just gives us more time to perfect the rare earth fluoride processing, which is a science all to itself. We’re trying to make sure we don’t take on any more projects than what we can successfully manage.

COX: How does Mountain Pass compare to Chinese projects?

SMITH: Our goal is to be globally cost competitive. To produce a pound of rare earth oxide equivalent, we want to make sure that our unit costs are equal to or less than anybody else in the world. The processing techniques that we have been working on for seven years are now coming to fruition. When you couple all these new improvements together, we will be able to produce 20,000 tons of rare earth oxides at Mountain Pass using less than half of the feed stock ore to our mill. That to us is a demonstration of our commitment to sustainability and to managing the world-class resource that we have in the right way. We have effectively doubled the life of our resource by improving the processing capabilities on site. We’ve also focused heavily on water consumption. Our water consumption is going to be dramatically lowered in the full restart project. WhenYou couple that with a lot of the innovative approaches to managing acid and base material and reagents on site, we are absolutely, 100% confident that we will be cost competitive.

COX: That’s a big statement.

SMITH: It is a big statement. I want to reiterate, we are 100% confident that we will be cost competitive. The numbers that we’re seeing already suggest that we will actually have costs below Chinese costs. And that’s on today’s cost level. As you probably discovered in your interviews with various people in research in this industry, you know that the Chinese are going through some growing pains right now as well. And they’re very serious about changing their environmental practices and their health and safety practices. They want to do things better than they have been doing them and we encourage that. But that will further increase their costs.

COX: Although they’re also involved in a substantial effort right now to streamline their own processes —

SMITH: Correct.

COX: — and make it a lot more efficient. So who knows? Maybe they’ll be able to lower their costs. I certainly don’t know.

SMITH: Although we also see some other cost issues in China; for example, their labor rates aren’t going down. There’s lots of variables and we just need to watch them all. Our goal is to know what those variables are and to make sure that Mountain Pass continues to be the low-cost producer.

COX: So you recently announced the addition of Jack E. Thompson and Major General Charles R. Henry, US Army Retired. What do these two gentlemen bring to the table?

SMITH: These two gentleman first of all bring independence, which is something that again, I want to compliment our shareholders and our current board members because we all unanimously feel that having independent members on our board of directors is just the right thing to do and it provides additional views that come into our discussions that enhance our ultimate decisions. Jack Thompson, as you know, has an absolutely wonderful career in the mining industry, well over 30 years in the industry, very, very well connected and extremely experienced. Jack is an engineer by trade and has practiced engineering for a very long time. He brings the mining experience, the engineering experience and the general industry connections to us that very few people in the world would have the capability to bring to our board.

Major General Charles Henry, US Army Retired, also brings a tremendous amount of experience to the table. General Henry has written books on leadership and he’s studied the subject matter extensively. General Henry brings a level of contacts for us to the Department of Defense that we have not had before and he also has an illustrious career in the United States Army in the procurement area. He can really provide a lot of help and suggestions to us on how to improve our procurement practices. When one third of your production costs are tied up into reagents, that’s a huge win for us to get that level of experience on procurement.

COX: What is Rocky Smith’s role at Molycorp?

SMITH: Rocky’s one of the newest members of our team and his role is the general manager at the Mountain Pass facility. Everything reports to him out at Mountain Pass. Rocky brings over 30 years of chemical plant and operating experience to the table. He’s a chemist by trade; has had excellent results in union relationships,; has a significant experience level in solvent extraction; and really brings a level of maturity and wisdom to the site that we are very, very confident with.

COX: So that’s good. So you brought on Rocky. Rocky’s ready to roll.

SMITH: Rocky’s ready to roll. [LAUGHTER].

COX: OK. Fair enough. So the 2012 production date, do you still think that looks feasible?

SMITH: Absolutely. There’s no doubt that it’s aggressive. We recognize that, but we also know how you have to put that data out in front and work backwards. Three weeks ago we started dewatering the pit, because if we don’t start dewatering the pit now, you can’t lay the overburden back, you can’t have the fresh ore to feed the mill. So yes, we think it’s absolutely doable, but it is aggressive.

COX: Many deals have closed outside of China this year. Dong Pao in Vietnam, Sumitomo in Kazakhstan, JOGMEC in America, now in Scandinavia. Chinese companies trying buy into two Australian firms. What are your thoughts on these? And how do you think it is changing your position within the market?

SMITH: When we take a look at all of these deals we certainly first of all want to say that we want to encourage all of these to move forward. And we want to encourage all of them to achieve production levels to help the industry. When you take a look at the supply and demand forecasts for this industry we are going to need a lot more projects producing, rare earths, not just mentioning that they’ve been discovered. Actually producing rare earths, so that we can help China with the projected demand growth for rare earths. We’re happy to see these projects and we’re particularly happy to see those that involve some of the heavy rare earths because it provides the entire rare earth purchasing industry with more diversity, more alternatives.

When we run our business we look at the procurement area very strategically. We look for alternatives. We make sure that we mitigate our risks of having sole suppliers. We expect our customers to do the same.

We know most of these new rare earth projects actually fairly well. Molycorp had a very long history of exploration and we have files on just about every single one of these new projects. We don’t think it’ll change our position in the market a lot, because the production rates from these facilities are not going to become overwhelming for the market all by themselves. They’re incremental projects at best. There won’t be anything that competes with Chinese production. The US will probably be the second largest country producing this material, and then Australia will be third. These smaller projects will hopefully come in to help the larger producers.

COX: So it’s going to be one big happy rare earth family.

SMITH: Well you know, a competitive one, but certainly it is a small world out there.

COX: So talk to me a bit about the joint venture with Arnold Magnetic Technologies.

SMITH: Our stated business strategy is to go from mining to magnets, and we are very, very committed to that process. When you take a look at the wind power generation supply chain, you start with mining and you end up with your wind power turbine. There are a lot of steps in between there. You start with the mine, and then you have to process the ores into oxides. The oxides have to be converted into metals. The metals have to be alloyed, the alloys are turned in a magnetic powder, the magnetic powder is manufactured into magnets. Then the magnets are put into the generators on the wind turbine, and then the generator goes on top of the wind turbine when it’s finally put out in the field.

When we take a look at that whole supply chain, and all the steps that are required, it’s impossible to put the entire supply chain together outside of China. There is no place in the world other than China that converts Neodymium or Praseodymium oxide into its metallic form. We want to make sure that there are options available for the purchasers of magnets that are reliable. It gets very complicated and , and it creates risk from a procurement standpoint, so we’re committed to making sure there is a full supply chain for mining to magnets outside of China.

COX: So right now you guys can make oxides.

SMITH: Correct.

COX: So you still have to go from oxide to metal, metal to powder, powder to magnet.

SMITH: Correct. And as an example most of our didymium oxide customers are in Japan. When we sell our oxides to Japan, our Japanese customers have to arrange for that oxide to be shipped into China, converted to metal, and then shipped back to Japan. Japan then has all the other steps in their country. They’re missing that one step, and of course in the United States we don’t have any capability to go from oxides all the way to magnets, because we don’t do any of that in the states anymore.

COX: So what is Arnold Magnetic Technologies, or I’ll call it AMT.

SMITH: AMT.

COX: What is AMT, where do they pick up in the process, and where do they finish?

SMITH: We have a letter of intent to form a joint venture for this, and Molycorp will be engaged in mining to alloying on its own, because we know how to do that. Most of it will occur right on the Mountain Pass site, so that we have close coupled manufacturing, in an effort to minimize our costs. Oonce we have the alloy, some of that alloy will probably be sold through the joint venture; the joint venture being us and Arnold Magnetics. We will form a new entity, have new facilities that will actually produce magnets, and then the magnets will be sold by the joint venture. We wanted to choose a very strong magnet company to be a partner of ours, because when you take the final product to a magnet, the sale of that magnet is very different than what we’re used to at Molycorp in terms of selling products. There is a wide array of users out there. There’s a much more OEM nature to it where each customer needs something very specific. Arnold has connections like this already in place. They’ve been selling magnets to the world for a hundred years or more.

COX: So they don’t make the magnets, or they do make the magnets?

SMITH: They have some joint venture rare earth magnet production facilities in China right now. And they do have a place over in Europe where they have the equipment to do this, but they are not producing rare earth magnets in the United States.

COX: So they have the technology, the know-how, but they don’t have the facility yet.

SMITH: Not in the United States.

COX: OK. So to make sure I understand this, you’re going to take the oxides, then you’re going to take and make metals, then the alloys.

SMITH: Correct.

COX: On site at Mountain Pass most likely.

SMITH: Correct.

COX: And so you’ll have to build new facilities for that?

SMITH: Well that’s a great question. Have you been to Mountain Pass?

COX: I have.

SMITH: OK. Then you know it’s a major facility in terms of rare earth manufacturing. If we just took a bulldozer and demolished everything to the ground, we could build brand new, state of the art facilities, and that would probably cost us $450 million.

COX: Hence the $450 million that you just mentioned in the recent press release.

SMITH: Correct. And purposefully so. There doesn’t need to be a secret there. A brand new facility would cost us $450 million. We have a facility sitting at Mountain Pass that has produced 20,000 tons per year of rare earth oxide in the past. What we’re trying to balance is, how much of that equipment can we continue to use such that we lower our capital costs, and at the same time recognize that in all likelihood if you use the older equipment your operating costs are going to be higher. So we’re trying to balance what the right use of existing equipment, versus building new equipment .

I just mentioned to another reporter earlier today, I think the low end of the number we would be using for this purpose in terms of balancing existing new equipment with new equipment would be probably in the $250 million range. So the project capital is ultimately going to be somewhere between $250 and $450 million.

COX: Gotcha. And this $450 million should you use it, will take you all the way through to alloys, is that right?

SMITH: No, that would take us all the way through magnets.

COX: And when you’re back, up and operating, what elements will you actually be extracting, what will be the stopping point?

SMITH: I can tell you precisely what we will produce. We’ll produce cerium, lanthanum, neodymium, praseodymium, samarium, europium, and gadolinium. There is only one question in our mind right now. We do have dysprosium in our ore body, at very low concentrations, but we are looking at what the cost would be to put in the solvent extraction facilities and produce dysprosium out of our ore body. We’re trying to balance that versus what the price forecasts are for that material. When you have very low ore grades as everyone else who’s claiming to have discovered rare earths is going to find out when they get into the processing side, it’s a whole new equation when you talk about processing.

COX: Right. Interesting. So basically what AMT then is bringing is the technology and the know-how on the backend.

SMITH: And the marketing. They have the contacts already in place. Now they do produce ferrite magnets in the United States. So they do produce magnets, it’s just they —

COX: Just not that juicy, special rare earth kind.

SMITH: Not the rare earth permanent magnets.

COX: And when you talk about magnets with them, they’re neodymium- iron-boron, they’re not samarium-cobalt, correct?

SMITH: That’s correct. Samarium-cobalt is a very important sector of the market as you know, mostly for defense purposes, but it’s a very small market.

COX: Do you have any plans for new products?

SMITH: We do. For the last seven years as we’ve had a group of people in our technology group working on process technologies. We’ve also had another group of people working on intellectually protected products and processes, for cerium in particular. The reason behind this is if you take a look at the light rare earth deposits, which is what Mountain Pass is classified as, and what Bayan Obo is classified as, and what Mount Weld is classified as, the primary component is cerium. However, CRT production has continued to decline, the use of cerium as a glass polishing agent has continued to decline, and no significant new uses were coming in. We want to literally sell every pound of rare earth that we pull out of the ground.

So we focused on big volumetric uses of cerium, and we have come up with some patented products, and patented technologies that will be using rare earth products primarily based on cerium. If our up coming process tests are successful, which we have every reason to believe they will be, we will have a market for our cerium that will be very, very promising. What that does for us, and it all goes back to our absolute commitment to be the lowest cost producer, is that by including cerium in our product mix, and selling the cerium, we now get to spread our manufacturing costs over a much larger number of units of production.

COX: So will you license that technology, or will you actually build the technology yourself?

SMITH: We will do both, we will license it, and we will build and operate some of that ourselves.

COX: OK. Are you allowed to say anything more about this technology?

SMITH: I would love to say more about it. We think it has a whole lot of win-win propositions to it. This is a technology that we’re commercializing in the copper and nickel industries right now. As the copper and nickel industries start to experience higher and higher arsenic levels in their ores, they need to have a way to pull that arsenic out so that they can recover as much of the copper and nickel that they’re trying to produce as possible. Our product and our process does that, and it does it extremely well.

The other area that we focused on is water treatment. And we have a product that will go out for sale in the fourth quarter of this year through Cascade Designs, who has been one of our partners in this research effort. I will be available to the backpacking industry. We’re also trying to make it available to our soldiers in our military. The U.S. military asked us to figure out if there was a way to clean up arsenic laden water so our soldiers are safe. We worked on that, we perfected that, and we can remove arsenic very, very well. But we started to take a look at how well it could do at removing other contaminants from the water. And to really put it into summary form, we haven’t found anything it doesn’t remove yet.

In fact as far as we can tell, the biggest problem anybody will have with this water filtration product and process is that you’ll have to take vitamin supplements because there is literally nothing in the water when you’re done. It’s on the order of distilled water.

COX: There’s still H2 and O.

SMITH: There is, yes. That’s about all there is. Which we’re happy to report. So we plan to start a very strong marketing effort on that product and that process as well. We’ll be in the backpacking industry, we’re hoping to serve the military, and as part of our corporate culture which Molycorp has a long history of, we also want to help other people in the world, and so we’re trying to introduce this product and process to some of the Third World countries to try to improve their water quality as well.

COX: How does that compare to other things like SteriPEN and the hand pumps, and the other competing devices for water purification right now?

SMITH: Number one, ours will actually remove many if not all of the heavy metals. Ours will also deal with biological activity in the water, it removes viruses in the water, it will remove mustard gas, sarin gas. There really is nothing that our material has not removed yet, and it removes contaminants to what the water industry refers to as a log four level of removal – which is 99.99% removal. There aren’t any other products that we are aware of that can make that claim on that many items that it can remove from the water. So it’s kind of a one stop shop so to speak, as opposed to having multiple filters that perform different functions all lined up in sequence.

COX: Is it bigger, lighter, heavier?

SMITH: The size we’re looking at for the military is roughly a six inch long cartridge that is about one to one and quarter inches in diameter, very small, very light.

COX: I see. Is it going to have a nice little Molycorp thing on it, or just —

SMITH: Absolutely, it’s going to have Molycorp on there. [LAUGHTER]

COX: Right.

SMITH: Our dream, Clint, is to some day follow the Intel business marketing model where every computer you open says Intel inside.

COX: Molycorp inside.

SMITH: Yes. And we’ll have to work on the copyright for that, I’m sure. But, we would love to have a little sticker on there that says Molycorp inside.

COX: Right, right. Switching gears a bit, who are your biggest competitors?

SMITH: Chinese. But you can also say too that we have a 57 year history in this industry. So we know the Chinese processors and producers, since their very beginning. We have very good relationships with all of the Chinese producers and processors. And we really enjoy exchanging technologies, where it’s appropriate. One of the things that we have committed to the Chinese government as of late, and we’re going to make a stronger commitment to that in October, is helping the Chinese understand how to deal with environmental, health and safety issues. That is something that the United States is pretty far along on with, and I think we can really help the Chinese get through that learning curve fast, and get them operating properly very quickly.

COX: How often do you go to China?

SMITH: I will be there three times this year. I anticipate that it’s going to be a three or four time a year routine from now on.

COX: Have the Chinese ever come to Mountain Pass?

SMITH: Absolutely. They’ve come to Mountain Pass and we have another group of visitors from China coming in October.

COX: When you get back to actually mining, how are you going to do that? Are you just going to keep drilling down, or are you going to blow out the sides, how are you going to expand the operation?

SMITH: Great question. The thirty year mine plan that we have approved by the State of California, and the Environmental Impact Report that was associated with it, suggests that at then end of the 30 year mine permit, the current pit, which is about 55 acres in disturbance at the surface, and roughly 400 feet deep, will become a surface pit that will be 110 acres in size, and I believe it will be somewhere in the neighborhood of 500 feet deep.

The ore body is a very, very well proven ore body. It has served its purpose for 57 years. We haven’t found the bottom of it yet. Keep in mind too that the approved 30 year mine plan said that at the end of that 30 years we would have a 110 acre disturbance at the surface, but that was assuming 2000 tons per day of ore coming into the mill. We’ll only be feeding 900 tons of ore into the mill every day to achieve our 20,000 tons of production a year so our surface disturbance will be far less than predicted.

COX: Is there any possibility of going beyond the 20,000 tons?

SMITH: Absolutely, there is. Our current permits allow us to process up to 2000 tons of ore per day. So if we’re only doing 900 tons per day, and producing 20,000, the math is pretty simple, it just ratios right up. We can produce over 40,000 tons of product from that facility with existing permits. We have taken a quick look at what the capital requirements would be for the larger production levels, and it is very surprisingly incremental. Once you reach a certain point of volume, the incremental capital is surprisingly low to increase your production.

COX: Yep. Will you be accepting any material from outside of Mountain Pass?

SMITH: We have talked about that internally. And with the right arrangements tolling arrangements accepting other ores is a possibility. However, you need to understand that you don’t just accept a new ore into your processing facilities, you have to run this through significant testing to demonstrate processability. Assuming all that works out well, we are looking at the idea of making sure that our production facilities always have the potential to produce more rare earths than what we’re bringing in from our existing open pit. So the answer is yes, but it’s a complicated yes.

COX: So is your end goal to take the company public, or will Molycorp remain private?

SMITH: Excellent question. Again we have private equity investors who are always looking for exit strategies. However, we really like our private equity investors because they are committed to an average seven year life on the things that they buy. I think a very natural exit strategy for this company is going to be to go public. There’s a lot of other options too, selling to other mining companies, consolidating with somebody else, having another group of private equity investors come in, simply financing what we need to do, and keeping the company private. So we have a lot of options, but I think a very likely scenario is that we will go public.

COX: Is there any timeframe on that?

SMITH: No specified time frame. We certainly want to keep our options open at all times, but we also have to recognize what the IPO market looks like, and when the deal closed last September 30, 2008, until just recently, there really wasn’t any IPO market out there.

COX: Right.

SMITH: That is improving dramatically, and we’re certainly taking a hard look at it.

COX: Is the U.S. leadership aware of rare earths and their strategic importance?

SMITH: I want to say a resounding yes to that. I’ve been going out to Washington, D.C., every other week for about nine months now. I will readily admit that when I go into an office to talk to one of the members of Congress or the Senate, or the White House, or any of the agencies in the executive branch, there is very little knowledge to start with on rare earths. However, they all have accepted the presentations that we provide with absolute open arms.

We’re starting to see a building of action now as a result of this newfound knowledge. As an example, the Department of Defense has a strategic stockpile of materials, and rare earths are currently not in that stock pile at all. I have reason to believe because of discussions that I’ve had with members of Congress and the Senate, and the Department of Defense, that there is a new view being developed on what the strategic stockpile is all about, and that it really needs to be viewed from a supply chain concept. If they view it from a supply chain concept there is absolutely 100% certainty on my behalf that rare earths will be part of that strategic stockpile.

COX: So what are the biggest changes you see coming for the industry?

SMITH: You know Clint, there’s a lot of hype out there right now on rare earths, and it’s rather concerning to me because I think there’s going to be a lot of people out there that are going to have expectations that are not going to be met. We’ve been in this industry for a long time, we know what it takes to permit a facility, we know what it takes to define a resource, we know what it takes to put feasibility studies together, and to actually build facilities. We know what it takes to figure out how to put the processing steps together to actually pull these individual elements out, and believe me, that takes a significant period of time.

So when I hear junior exploration companies out there today who have just taken surface samples or put their first trench into a potential deposit; say that they will be producing rare earths in two years, I get very concerned because I think their shareholders who are buying in right now are going to be very disappointed in two years. That’s what concerns me, if we build up a bunch of hype and we don’t produce what we say we’re going to produce, where does that really lead us? The industry loses credibility. I’ve been on a personal mission as of late to ensure that we bring honesty and integrity to our industry, because without it, we’re not going to survive.

COX: I agree. Who are the typical end users for Molycorp products?

SMITH: We have catalyst producers. We have glass polishing companies. We have medical companies. Anybody that uses a permanent rare earth magnet is involved in our industry in one form or another. We have literally sold to every rare earth user in the world from Mountain Pass. We don’t necessarily have the intentions to do that once we restart, because we’re only going to be 20,000 tons of production in a 120,000 to 150,000 tonne market . We will be a significant player, but we won’t be able to make promises to all customers, and the ones that we do make promises to, we want to keep, and we want to perform on.

COX: That old-fashioned, keep your promise thing.

SMITH: Absolutely. We think it works, it’s historically worked very well, we’d like to stick to it.

COX: So besides the water treatment, and the arsenic removal, besides your own in-house applications, what are some of the more significant new applications that you see being developed or currently being developed in rare earths right now.

SMITH: What’s interesting is I don’t know that I see a whole lot of new rare earth products necessarily being developed. We see the same ones being used, but see them being used in more applications. You can really get specific by talking about the magnet again. The rare earth magnets, their growth has been double digit rates for seven or eight years now. It’s predicted to be double digit growth rates for the next ten years at least, and that’s because these powerful light weight magnets have been shown to perform exactly the way they were designed to perform. They’ve allowed all of our cell phones to become as small as they are now. They’ve allowed speakers to become two inch by two inch speakers that put out better sound than the old ones that were three feet tall, and a foot wide. They are phenomenal. They’re being used in electric bikes, hybrid cars, wind power turbines and literally by every electronic device. Your computer has a hard disk drive with a permanent magnet in it.

I think we’re going to continue to see the use of these magnets grow because they are light weight and they are extremely powerful. They clearly increase the efficiency of a lot of these systems.

COX: So many companies are looking for rare earths right now. Are you satisfied with Mountain Pass or will you be looking for other rare earth properties as well?

SMITH: We are absolutely satisfied with Mountain Pass. It has a long, long life to it, well in excess of a hundred years based on 20,000 tons of production a year. But we also recognize that we are a mining and technology company, and when you’re in the mining or natural resource industry, it is always a good idea to make sure that you have additional resources to pursue, once that time comes. So we don’t have to put a lot of effort into exploration right now, because Mountain Pass is so strong and so rich, and so big. But we know that it’s in our best interest, and in our customers’ best interests to continually be looking for additional deposits. And we have some activities ongoing right now.

COX: What would you say are some of the biggest misconceptions about rare earth mining? It seems there are more misconceptions than conceptions!

SMITH: Yeah, [LAUGHTER] , I’m thinking of all of them, and being overwhelmed with the misconceptions. I’m going to go right back to the misconception, we discussed earlier. It’s really not so much a market misconception as it is a rare earth resource misconception. Rare earths are not like copper or gold, or iron ore. When you discover rare earths you only have part of the equation done. You have to figure out how to process those rare earths. It is a very, very complex chemical, and chemical engineering issue that has to be resolved.

I can’t even believe the number of people who are reporting rare earths in their exploration efforts everywhere in the world. When you take a look at the data just at a very high level, most of those rare earth levels are being reported at significantly less than one percent. We use a five percent cutoff for our ore grade to define it. I would like to note that we are undertaking a 43-101 compliant resource study right now. It should be done somewhere around the first of November. We have asked our consultant to provide us advice on what should be used for the cutoff level, and I do believe that we will use a cutoff level below five percent. Probably something in the range of two percent. It doesn’t take a scientist to figure out that when you do that, your resource is going to grow. And ours will grow significantly.

So the misconceptions to me are, this industry isn’t like other minerals. There is a huge processing question mark on every single deposit that’s found out there. There are going to be many deposits that are discovered that are not processable.

COX: I agree. Have there been any particular people who have influenced your understanding of the rare earth in this market?

SMITH: Dudley Kingsnorth and Judith Chegwidden have been absolutely instrumental in my understanding of the market, the issues associated with rare earths, and the misconceptions with rare earths. Those are two of the primary people, and then what’s really, really nice, Clint, is that when our group of private equity investors bought this facility, every single person that was an employee at that facility the day before the deal closed, was an employee the day after the deal closed. And we are blessed with people that have 30 plus years of experience, and the people at our facility teach me more about rare earths every day. There is a tremendous amount of history and institutional knowledge about the rare earth industry, and the markets, right at our facility. Can I put another plug in for our guys? As of today gone, we have gone 1,528 days without a lost time accident at our facility. We are exceptionally proud of that, that’s well over four years.

COX: Excellent. What’s been the biggest surprise you’ve experienced in the business so far?

SMITH: My biggest surprise, and I hate to keep emphasizing this over and over again, is the fluff that can be created in an industry There’s generally no history by the people who are creating the fluff. They have no experience in the industry, no processing experience at all. How people take advantage of the moment has been devastating to my sense of integrity. It really bothers me.

COX: Yes – I feel your pain. Thank you Mark Smith for a fantastic interview.