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Molycorp Wilts Under Pressure

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The records weren't enough for Molycorp (NYSE: MCP  ) to keep investors from sending shares tumbling this morning. Never mind that revenue has never been higher, profit was a record, and the company's Project Phoenix is ahead of schedule -- that all wasn't good enough for this once high-flying stock.

The numbers
Revenue during the third quarter was $138.1 million, a 39% jump from the second quarter as the price of rare-earth oxides rose. Gross margin was an incredible 63%, leading to strong adjusted earnings per share of $0.67. But the market was looking for $0.70 in earnings per share, and the stock has taken a beating as a result.

The near-term revenue and earnings picture should be less of a driver for Molycorp than what the company sees when Project Phoenix opens. The expansion to 19,050 metric tons of production is expected to be complete by the end of the third quarter next year, with Phase 2 done by the end of 2012. By mid-2013, Molycorp plans to be producing 40,000 metric tons of rare-earth oxides.

The acceleration of the project would be great for most other businesses, but the rare-earth market is so small that adding 40,000 metric tons may flood the market and send prices for the commodity down rapidly. I've been making this argument for more than a year now, and we saw plenty of evidence when Lynas opened shop and stopped the rising price of rare earths.

That's a challenge not only for Molycorp but also formines that are years from production, such as Avalon Rare Metals (AMEX: AVL  ) and Rare Element Resources (AMEX: REE  ) , which may not ever see mines get off the ground. They're counting on elevated mineral prices to make expansion worthwhile, and with at least 60,000 added metric tons from Molycorp and Lynas, they might not be needed.

Foolish bottom line
The market is starting to realize that the gaudy numbers Molycorp is putting up probably won't last much longer. Revenue will probably spike next year, but it will squeeze less and less profit from each ounce of rare-earth minerals.

I'll keep Molycorp with a red thumb on My CAPS until the company proves that thesis incorrect. Do you agree? Leave your thoughts in the comments section below.

Interested in reading more about Molycorp? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium has no position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2011, at 6:03 PM, LouNg wrote:

    Your analysis is sound. The fear was not top and bottom lines, but rather the further drop in price as Lynas will be in production next year, and Molycop will further ramp up production in the coming months, especially project Phoenix will be in production in 2012. In addition China may lax its export quota. What in play here is Congress already pass a bill direct the DoD to secure rare earth metal supplies. Molycop CEO and others have met with Congress members, and there has been rumor of a US strategic reserve buildup with Molycop and other non-China companies as suppliers. I think the quanlity Molycop sent to Estonia for high-quality refinery is for the DoD reserve buildup. With 17% pullback this week, it is a great entry point for a long-term investor, especially if you believe in US strategic reserve buildup mandate. Rare earth metals, especially heavy ones, have become a national security concerns.

  • Report this Comment On November 11, 2011, at 8:14 PM, hdbishopjr wrote:

    I do not agree with this thesis. The consumption is increasing, not decreasing and China is going to eventually quit exporting rare earths, this is not news. Even at 40K molycorp will sell every ton of rare earth, since the export from China continue to be reduced, prices will only rise, thus reducing Molycorps P/E from 19 to 9. This is time to buy for the long haul, not sell. Do the math.

  • Report this Comment On November 11, 2011, at 8:48 PM, rcd1390 wrote:

    If you listened to the conference call, you might have noticed the JP Morgan guy seemed to be trying to justify his downgrade. It's hard for me to believe such a drastic change in the price, particularly when other companies have marked MCP at outperform. My guess...the shorts are pushing the news, trying to make a fast buck.

  • Report this Comment On November 11, 2011, at 8:57 PM, stevehuda65 wrote:

    I think the stock price of Molycorp will double in the next six months. China is implementing new invoice

    rule starting January, 2012 and they will soon have

    to import rare elements with the growing economy

    even though they control ninety percent of the market.

  • Report this Comment On November 11, 2011, at 10:48 PM, Subtlesledgehmr wrote:

    The author seems ignorant of the subject matter. Comparing Avalon to Moly is absurd. What is true for Molycorp with its relatively ubiquitous LIGHT rare earths is certainly NOT TRUE for the mining companies that have high levels of the FAR MORE profitable heavies. Avalon is, IMO, out of picture due to its location and the lack of any mining for years if ever. One vertically integrated company (mining, separation and processing) that is showing great promise is GREAT WESTERN MINERALS. They will probably even beat Lynas to market! Ucore and Tasman are also promising. Molycorp is a VERY questionable and all the retail investors have been SCREWED by the institutional grifters.

  • Report this Comment On November 12, 2011, at 12:25 PM, artistama wrote:

    I find it very arragant that a1600% increase from same quarter last year is bad mouthed because it doesn't quite meet analysts numbers. 8 mil to 138 mill seems pretty significant to me. As the CEO said in a recent interview... We can sell everything we produce. l The Shorts are behind this whole downgrade BOOOOOO.

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