Can Molycorp's Hot Hand Continue?

The rare-earth metals industry has come a long way since Molycorp (NYSE: MCP  ) hit the public market. We've seen China cut exports and prices skyrocket, and soon we'll see some significant production from outside of China come on the market.

Right now, Molycorp looks like it's going to be a hit when full-scale production begins later this year. During the fourth quarter, with just 3,050 metric tons of sales volume, the company reported $396.8 million in revenue and $169.1 million in GAAP earnings. During the fourth quarter alone, adjusted earnings per share hit $0.41, capping a year with $1.73 of earnings per share.

The company has worked hard to push up its Project Phoenix and now expects to complete phase 1 and 19,050 metric tons of annual rare-earth oxide production by the end of the third quarter. Phase 2, which will approximately double production, is expected to reach mechanical completion by the end of this year with production soon after.

If rare-earth mineral prices stay where they are, the company could see earnings explode. But will they?

Now the fun begins
Prices are sky-high because China is limiting exports to around 30,000 metric tons per year. This accounts for almost all of the rare-earth minerals that are used outside of China.

But Molycorp is bringing 19,050 metric tons of annual supply online in the third quarter and 40,000 metric tons in 2013. Combine that with the 22,000 metric tons of supply from Lynas Corp. (OTC: LYSCF) that is coming on line around the same time, and the market could be flooded; 62,000 metric tons of annual production from these two companies is double the entire exports of China.

This doesn't include any potential production in the future from Rare Element Resources (AMEX: REE  ) , Avalon Rare Metals (AMEX: AVL  ) , or any number of competitors that are working to open mines worldwide.

Prices are already starting to indicate the party may soon be over. Lynas' Mount Weld composition pricing per kilogram has fallen from $193.21 in the third quarter to $123.69 in the fourth quarter and $91.05 today. And this is before either Lynas or Molycorp really hits the market with supply.

The big unknown
So will prices remain high, giving Molycorp strong margins and profits into next year? Let me know what you think in our comments section below.

Interested in reading more about Molycorp? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

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 (6) | Recommend This Article (1)

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 24, 2012, at 1:34 PM, LouNg wrote:

    Lynas production is till a year or two away, and REE & AVL's are even longer. So, for the next two years, supplies are tight; in addition MCP vertical integration will increase its earning power even further.

  • Report this Comment On February 24, 2012, at 9:19 PM, aquaregia67 wrote:

    Incorrect Lou, Lynas will be producing within the next 4 months at a rate if 11000 tonnes per year. This situation indicates how foolish MCP was to go to a stage 2 at a massive 40000 tonnes per year, almost all of which is the "rubbish Rees" of Ce and La ... That's presuming MCP will deliver on schedule which any sensible investor should be highly skeptical about. Ironically construction delays may be just what MCP needs right now...

  • Report this Comment On February 26, 2012, at 12:03 AM, rru2s wrote:

    Nope, aquaregia, Lynas is embroiled in a legal battle before they can do anything in Malaysia. MCP is ahead of the pack with startup of Mountain Pass ahead of schedule.

  • Report this Comment On February 26, 2012, at 12:27 AM, zbtoly wrote:

    No consideration for demand destruction? The limited amount of rare earths on the market have limited the demand by the market. Look at the benefits of a magnet 10 time lighter than a similar magnet with the same magnetic moment (Dysprosium), the use of Cerium as a hydrocarbon cracking… that isn't happening because there is isn't any Cerium… Think about the Erbium that can be used in single mode (155nM) laser fiber optics lasers that actually accelerate the light while diminishing modal distortion… The stuff isn't here yet...

    The market is there it is just subject to the unusual fact that demand is driving supply… BTW the basket price of a kg hovers just under $100, doing just fine...

  • Report this Comment On February 27, 2012, at 11:58 PM, Rk703 wrote:

    Did the china note say they are increasing outside quotas (again) or simply expect "to meet quotas this year" due to increasing demand. That was how I read it... Increased demand sounds good, thou pricing pressure not so good. Long MCP at 30 and feeling the pain.

  • Report this Comment On March 14, 2012, at 2:26 PM, rughetta wrote:

    I agree that MCP is a speculative play but two reports give some reason to consider it. First, a report (I can't recall the citation) that mentioned that there is increasing pressure in China to address environmental polution at their REE mining and processing sites, which is slowing production, and a concomittant crackdown on bootleggers, which reduces the revenue to the government. Knowing China's past history of environmental faux pas, I am skeptical of any expensive reforms but when bootleggers start to chisel out of the government's revenue, that could cause a supply crackdown. Second, the reported price per metric ton is expected to be significantly lower for MCP than Lynas or even the Chinese due to their on-site power generation and on-site chlor-alkali facility. Additionally the serendipidous environmental and waste expenses are minimized with the chlor-alkali facility, which recycles the hydrochloric acid back into the refining process. These factors should allow MCP to have a margin advantage over Lynas. However, the Chinese government could always subsidize their companies to increase their margins. A third point is that AVL, REE, and any other late-comer to this commodity are not a problem. They will be the first to go bankrupt if the prices of REEs drop, thus lessening the oversupply problem. Actually, if free market forces are allowed to govern the trade of REEs, MCP with its higher margin process should rise to the top. The only reasons to hold companies like AVL REE, UURAF.PK, etc. is because their assets may be purchased by either MCP, Lynas, or one of the Chinese REE producer. But dont buy those now. Wait until MCP begins production and see if the price drop (yes, there will be a price drop) causes the minor players' stocks to collapse. I won't be a buyer (too risky) but someone with money for scary speculation could possibly make a lot provided that they know a LOT about how to evaluate the quality of ore veins and the logistics of developing mines.

    CAVU,

    Rughetta

    Disclosure: I own positions in MCP at $32 and $24.

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