The Rare Earths sector was rocked last week by news of a deal in which Molycorp — the U.S. industry leader ramping up new operations at the old Mountain Pass (California) Mine — tabled a $1.2 billion offer for Toronto-based Neo Materials, which produces a range of Rare Earths powders used in permanent magnets and other applications, with facilities in 10 countries, but fully half of its revenues generated in China.

On its surface, early analysis pronounced the deal as another step for Molycorp up the Rare Earths value chain, if not all the way from “mining to magnets,” as the catch-phrase goes, then at least from mining to refining the notoriously hard-to-separate REEs.

But at least one metals expert hangs his favorable assessment on the access the deal gives Molycorp to a Chinese market that currently consumes 70% of global Rare Earths production.

Analysts seem united in seeing the acquisition as net-positive for Molycorp. The cloudier question at the far end of the supply-chain is: will the deal benefit Rare Earths fabricators and end-users in the U.S. or in China?

Witness the first question on the March 9 conference call held by the heads of Molycorp and Neo Materials to discuss the deal:

From a regulatory standpoint, Neo Materials has export [quotas] that allow them to export rare earths out of China. Will the Chinese government… seamlessly honor those quotas? And then… you will be exporting rare earths from Mountain Pass into China, have you had any conversations with the U.S. Government and will they be taking a look at this…?

To be sure, it’s possible that REEs mined in California could be shipped to China for refining, and then shipped back to U.S. and non-Chinese users under the terms of Neo Materials’ current export quotas. It’s also possible, however, to envision a situation in which REEs mined in California and refined in China — a country that currently consumes 70% of total REE production — could be impacted by future policy developments that would make it difficult or even impossible to bring them back into the global market.

A weekend piece at WSJ Online captured the back-and-forth:

Ed Richardson, president of the U.S. Magnetic Materials Association, says the plan is worrisome. The U.S. is already ‘dangerously dependent on China’ for rare-earth-magnet materials, including to supply its weapons systems, Mr. Richardson said in an email. Molycorp’s ‘export of U.S. rare earth assets into China will only exacerbate this problem,’ he added.

Mr. Smith [CEO of Molycorp] played down the political and historical implications of the deal that now ties Molycorp, Magnequench and China. He said sending rare-earth oxides to China is a bid for “higher volume, higher margin” that will only reduce production costs in the U.S. and by implication boost supply of the metals for industrial users. “It does not in any way deplete our ability to serve the market outside of China whatsoever,” Mr. Smith said.

There’s a history here. As metals analyst Rick Mills recounts, Neo Materials is parent company of Magnequench, formerly a U.S. REE magnet materials maker. Bought in 1995 by a firm that proved to be controlled by Chinese state-backed companies with ties to the highest levels of the ruling Politburo (two of the Chinese firms were run by in-laws of Deng Xiaopeng), Magnequench’s new management shut down its Indiana operations and shipped the processing facilities to China.

Has Molycorp wrestled back into the U.S. control Rare Earths processing facilities lost more than a decade ago to China — or has China pulled into its orbit a chunk of newly-emerging U.S. Rare Earths production?

Welcome to the geo-politics of resource development. Geology and economics may tell us where the metals are and whether they can be profitably brought out of the ground — but politics and the clash of nations will have their say, especially when the resource is scarce and its value, not just to commercial development but to national security, is great.