Inside the Baron Portfolio: Molycorp
In front of six thousand people, Ron Baron—Chairman, CEO and CIO of Baron Capital—opened his portfolio to fund shareholders at his annual Baron Investor Conference.
For 20 years, Baron has given access to these investors to give them the opportunity to ask questions to some of the CEOs whose companies are in his funds. One of those selected this year was Mike Smith, CEO of the rare-earth production company Molycorp.
The company is in the process of a dramatic production expansion in Mountain Pass, Calif. called Project Phoenix and the project is ahead of schedule by three months. Smith told the crowd the facility is being rebuilt to produce up to 40,000 metric tons of rare-earth elements by 2012 — a 700 percent increase from its production target for the end of this year.
LL: What are 5 things people don’t know about Molycorp?
MS: I would say people have no idea how ubiquitous rare earths are in our everyday life. People are in touch with these rare earths in every single thing they do all day long. From solar panels, wind turbines, cars to iPhones and iPads, rare earths play a role in these products.
This is a very, very, quiet industry and plus these materials have what we call tongue twister names so nobody ever wants to say what they are. So I think knowing what rare earths are used in is the one thing they don’t know. They probably don’t also know that Molycorp has been in this business for 60 years longer than anyone else in the entire world. Outside of China, Molycorp is the only company that knows how to process these rare earths and pull them out individually.
LL: In terms of China, which countries around the world are utilizing the rare earths efficiently? Where are the growth opportunities?
MS: The places where it's going to grow the most is not necessarily geographic places, it's kind of market segments. Anything that utilizes a rare permanent magnet is one that is growing exponentially. We’re talking double-digit compounded annual growth rates for the foreseeable future. Nobody knows when that’s going to stop so that’s a huge growth market for us. Those magnets are going to be used in hybrid and electric cars.
They’re already used in today's cars. When you look at the wind power business, the wind turbines, that are being converted are using permanent magnet generators so they can be more efficient and reliable than the old inductive coil gear-box type systems. So those are the huge, huge growth areas but as long as you and I need gasoline we still have to have rare earths.
LL: In terms of rare earth prices they were low and there was some talk on the Street your third-quarter earnings and fourth-quarter earnings might be impacted. But your third-quarters numbers were not impacted at all. Is it the timing of the contracts or demand?
MS: We want to have relationships with companies that even as prices are going up or going down, your customer constantly wants a secure and reliable supply of rare earths and they’re willing to pay a little bit more if they can have that security.
So we work very closely with our customers, making sure they’re happy with what they are buying and we’re happy with what we’re making in terms of profitability.
LL: In terms of the economy have you seen fluctuations in the large orders? Are some orders being cut down?
MS: We haven’t seen any change in our orders at all this year. In fact, what we had said when we did our IPO is that we wanted to have volume and revenue growth every quarter and we’re seeing that every quarter.
LL: What does that indicate to you about the health of the global economy?
MS: Well I think that there probably are some global economic issues but I think the order volume really indicates a supply and demand problem for rare earths. There just aren’t enough of these materials to meet the demand and so everything we make we are selling. And with the prices the way they are today even though we want to be very cooperative with our customers and make sure they’re competitive, we’re actually making the highest margins in the history of the company.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."