Molycorp Making Head-Scratching Deals

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Molycorp (NYSE: MCP  ) continues to sell shares as fast as it can before it churns out any real production. I'm beginning to wonder why management is so eager to sell shares if the company is in such a strong position.

This week it was a $390 million stock sale to Molymet, a processor of molybdenum and rhenium. The company will spin it as a strategic investment, but there weren't any joint ventures announced, so the strategy is foggy at best.

So much cash, nowhere to spend it
Just over four months ago, Molycorp claimed it was fully funded, saying "Molycorp's capital investment needs have been filled, and since it is now producing significant revenue from sales to customers around the world, including Japan, Sumitomo's investment is not necessary for implementation of Molycorp's business plan." That's a confident assessment that the company could easily stand on its own in the future.

On the day that statement was made, the company's stock closed at $53.74. So what's changed in the meantime, and why is an outside investment necessary with the stock trading nearly 50% lower? If management didn't need the cash then, why do they need to cash now?

Desperate for partners
There is one explanation for the investment. Management is nervous that if it has to sell rare-earth minerals on the open market it will find falling prices and the company will be stuck with extra capacity that wasn't needed by the global market. To remedy this, it has gone on a buying spree, purchasing downstream companies to ensure its supply has somewhere to go.

If that's the case, it doesn't bode well for junior miners Rare Element Resources (AMEX: REE  ) and Avalon Rare Metals (AMEX: AVL  ) , which won't begin production until long after Molycorp and Australian miner Lynas are fully ramped up.

Foolish bottom line
I've been saying for over a year now that rare-earth mineral prices were going to fall off a cliff when more supply comes online. Prices are clearly falling, with Lynas' average production composition down nearly 50% since the end of the third quarter. Molycorp looks like a company desperate to squeeze as much out of others as it can until its opens production and we find out it isn't making as much money as we once thought it would. I would stay away from this stock because prices will keep falling as more supply keeps coming on the market.

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Fool contributor Travis Hoium does not have a 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 (3) | Recommend This Article (3)

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 February 06, 2012, at 12:08 PM, jopow wrote:

    Can you further comment on your opinion about this class action suit against management?

    Investor Alert: Kahn Swick & Foti, LLC and Partner Former Louisiana Attorney General Remind Investors With Large Financial Interests of Lead Plaintiff Deadline in Lawsuit Molycorp, Inc.

  • Report this Comment On February 06, 2012, at 3:42 PM, jaredf1969 wrote:

    Come on, man you guys are so negative and you are probably short on this stock. I'm tired of when a stock goes higher you come out with a negative ad trying to improve your position. You should join congress so you can get insider trading info too then post a negative article liek you do. Just ashame! Jared

  • Report this Comment On February 09, 2012, at 3:48 PM, johnnyrolex wrote:

    You have to be kidding me? WTF. You seriously put a negative spin on a company's willingness to spend almost 1/2 billion dollars on MOLYCORP???? That just doesn't make any sense in ANY reality.

    You, and others like you, who are pure and unadulterated morons, have kept this stock down because you've made the average retailer investor very nervous about MCP's future.

    Shame on you.

    Wasn't it one of your croonies who said he would buy this stock when it goes to $10?

    Blooming idiots here. Period.

    I'm in it @ 30.20, so I'm not feeling much pain, but it still doesn't make me happy to see such a negative spin on something that can only be seen as a positive.

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