Molycorp’s Pop Isn’t a Sign of Hope — It’s an Escape Hatch

by James Brumley | May 15, 2013 9:47 am

Congratulations to anyone who had a position in Molycorp (NYSE:MCP[1]) before the close of business last Thursday. The stock soared 31% the next day on the heels of encouraging quarterly results and some well-articulated optimism about the company’s future.

Now it’s time to get out.

Yes, you read that right: The Molycorp party will end almost as quickly as it started.

It’s admittedly tough to jump off what seems like a rising star … but that rising star only does you any good if it’s going to continue rising. And that just doesn’t seem to be in the cards.

The Good News

Technically speaking, Molycorp’s first quarter was a pleasant surprise. The company “only” lost 15 cents per share on an operating basis, vs. estimates of a 31-cent loss. Revenue was up by 9%, reaching $146.4 million vs. an estimate of $135.6 million.

Molycorp added that the redevelopment work at its Mountain Pass mine in California is also on schedule, and the processing plant under construction near the mine should also be up and running by the fourth quarter of this year.

Throw in the fact that Molycorp said demand for rare-earth metals is stabilizing, and it’s easy to see why the market would come to a bullish conclusion and send the stock higher. Yet, there still might be more vulnerabilities than upsides waiting in Molycorp’s path … vulnerabilities that could — and likely will — work against the stock.

Stumbling Blocks

Despite the knee-jerk bullishness to Molycorp’s good news, the company’s management team has yet to adequately plan for and/or circumvent three specific liabilities:

Cost Overruns/Asset Sales: While Molycorp doesn’t foresee the need to ask the market for more money, it didn’t foresee the cost overruns already incurred[2] with the re-opening work at Mountain Pass, either. So, who’s to say it won’t happen again? Indeed, while the company is speaking bullishly of itself, it’s a little alarming that CEO Constantine Karayannopoulos made a point of putting on record:

“I’m not saying this is what we are going to be doing but … you should not be surprised if you find out that in the next few months, as our ongoing evaluation continues, we are slowing down, shutting down, or disposing of assets … It is imperative that we closely manage our cash flows. After we achieve our full production run rate, it may make sense to dial back production until we can run the facility at a lower cost.”

A pre-emptive warning to soften the blow when the possibility becomes reality.

Weakening Prices: Remember, the sole reason the Mountain Pass mine closed in the first place was excessive Chinese competition that kept rare-earth prices at unprofitable (for Molycorp) levels. That dilemma was abated in 2010 when prices of neodymium, lanthanum, molybdenum and other rare-earth metals skyrocketed; REE mining in the United States could be done profitably again.

Problem is, rare-earth prices have fallen back out of the stratosphere during the past two years (about 20% in the past six months alone) and are still hitting new multiyear lows. Although prices still might be strong enough to keep Molycorp’s mine technically profitable — for the time being — there’s no bottom in sight for rare-earth element prices. Mountain Pass might well end up becoming an unprofitable venture for Molycorp.

Budding Competition: Somewhat related to the problem of tepid rare-earth prices is the introduction of new rare-earth mining competition (which will put even more pressure on REE pricing, and Molycorp’s bottom line).

There’s a huge rare-earth element deposit in eastern Russia, and the operator has just secured funding[3]. Japan ran across a huge stash of REEs as well[4]. Oh, and despite China’s effort to limit the global supply of rare-earth oxides, and thereby keep prices high, the country’s black market (read: illegal) REE market is alive and kicking[5], keeping prices low.

Bottom Line

There’s no way to deny that rare-earth metals will play a role in the future. In fact, their usage in the manufacture of wind turbines, consumer electronics, electric vehicles and more means rare-earth minerals will largely usher in the future.

The fiscal metrics, however, don’t bode well for Molycorp. Too many miners, a flimsy market (when it comes to price) and the potential need to sell assets just to reach its production endzone stack the deck against the company … at least in the near-term, and perhaps into the distant future.

Tread lightly here. You might even want to use the recent pop as an exit point.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCP
  2. foresee the cost overruns already incurred: http://www.denverpost.com/business/ci_21968518/sec-questions-molycorp-public-disclosures
  3. has just secured funding: http://www.mining.com/russia-wakes-sleeping-rare-earth-giant-17116/
  4. huge stash of REEs as well: http://www.forbes.com/sites/timworstall/2013/03/25/japans-new-rare-earth-discovery-thats-chinas-monopoly-entirely-blown/
  5. black market (read: illegal) REE market is alive and kicking: http://www.mining.com/illegal-rare-earth-production-in-china-keeps-global-prices-low-vice-minister-70473/

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