The Rare Earth Metal Meltdown in Molycorp

by Jim Woods | March 28, 2013 9:48 am

If you’ve owned shares of Molycorp (NYSE:MCP[1]) anytime over the past two years, I probably don’t need to tell you about the meltdown in this rare earth metals stock. But for those unfamiliar with the company, let’s do a little historical review.

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Since April 2010, the stock has cratered more than 92%, diving from just over $74 to yesterday’s close of $5.45. The decline in MCP shares has been particularly pernicious over the past 52 weeks, with the stock losing 83% of its value. To make matters of late even worse, so far in 2013 the shares have plummeted some 48.5%.

The precipitous decline in Molycorp is a far cry from its brilliant beginnings. The company first began trading in July 2010, and through April 2011 it was a bullish sensation, vaulting some 460% in about nine months.

I can recall the fervor and the extreme optimism associated with the rise of the “rare earths” back in 2010. The investment thesis here was that tremendous demand for items such as cell phones, small electronics, biotech devices and other gadgets that needed these metals to function would cause big global demand for rare earths. By extension, this would create huge revenues and earnings for companies such as Molycorp, as well as other rare earth stocks such as Rare Element Resources (NYSE:REE[2]), Avalon Rare Metals (NYSE:AVL[3]) and even Freeport-McMoRan (NYSE:FCX[4]).

Among the big drivers of demand for rare earths were China and its burgeoning consumer class hungry for devices that use these metals. Then there was the Chinese government, which actually kept supplies low by restricting rare earth exports.

Well, things didn’t quite pan out that way for Molycorp and the rest of the rare earths, and since April 2011 the only thing that’s been rare in these stocks is investors bidding them higher. In the case of MCP, the company has really fallen on hard times, putting in a string of new all-time lows, and sinking well below its IPO debut trading day closing price of $12.34.

Fundamentally speaking, Molycorp has suffered from a huge decline in quarterly earnings. Most recently, the company posted Q4 earnings after a worrisome delay of about two weeks — a delay it said it needed to account for a goodwill impairment charge. That charge came to $258.3 million in the fourth quarter related to the $1.3 billion takeover of rare earth processor Neo Material Technologies.

Excluding the impairment charge, Molycorp reported a loss of $52.7 million, or 45 cents a share, which compares miserably with the adjusted profit of $35.9 million, or 41 cents a share, in the same quarter a year ago.

The latest quarterly loss is symptomatic of current conditions in the rare earth market. The main culprit here is a price collapse in the roughly 17 metals and oxides considered members of the rare earth group. This price collapse began, not coincidentally, in April 2011, right when the rare earth stocks began their big decline.

Up until April, China, the top producer of rare earths, had been restricting exports. That kept prices high, and that caused the share price of domestic producers like Molycorp to soar. Then China decided to ease export controls, and there’s been a virtual meltdown in the sector ever since.

So, is there anything that can cause Molycorp shares to rise?

The way things are now, the answer is likely no. About the only thing that can help this stock go up are bottom feeders looking to take a chance that the fundamentals in the space will turn positive … eventually.

But unless China reinstitutes its export controls on rare earths, my guess is that MCP shares are likely to live around current levels for a very long time.

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

  1. MCP:
  2. REE:
  3. AVL:
  4. FCX:

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