Falling Prices Hit Molycorp

I've been saying for more than a year that when Molycorp's (NYSE: MCP  ) mine finally comes online, the impact on prices would be huge. The market has agreed, and just when Molycorp is ramping up to begin real production, prices are falling out from underneath it. But for now, results are looking promising.

In the first quarter of 2012, revenue jumped 221% to $84.5 million, and the company reported a loss of $6.3 million or $0.07 per share. Excluding one-time items, the company says it had a profit of $0.18 per share, topping estimates.

But while the market is enamored with these results, I'm watching the price of Molycorp's products plummet.

Look out below
An increase in average selling price from $38 per kg to $95 per kg sparked the increase in revenue, and if you read news reports, you might think prices are going up quickly. But the truth is that prices have begun to come down to earth from their once-lofty highs. Since topping out at an average selling price of $131.19 in the third quarter of 2011, prices have fallen dramatically, before major production even begins. Let's look at the selling price of three of Molycorp's biggest products, showing the decline we've seen recently.

Product

Q1 2012

Q4 2011

Q1 2011

Didymium Products $159 $197 $98
Lanthanum Products $49 $59 $23
Cerium Products $38 $63 $66
Subtotal REO Equivalent $95 $124 $38

Source: Company press releases.

I like the profits Molycorp is spitting out right now, but it's this drop in prices that has me worried.

Prices put pressure on industry
The increase in supply hitting the market will put pressure on companies that hope to be the next Molycorp. Avalon Rare Metals (NYSE: AVL  ) and Rare Element Resources (NYSE: REE  ) have seen their stock prices plunge in the past year over concerns they won't live up to lofty expectations. If prices fall, I don't see these stocks faring any better.

To buy or not to buy?
Molycorp has done a nice job lining up downstream demand, so the only question outstanding is where prices go. I think this is a risky time to buy into this stock, because prices will probably continue to fall as the company ramps up production. I'll wait out the results and see what the company looks like in a quarter or two before making any big conclusions.

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. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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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 May 11, 2012, at 11:10 PM, Denverdude123 wrote:

    Concern that prices for Rare earths are lower than their peak prices is misplaced. Present prices are far higher than Molycorp's projection of $2.77/kg for production costs. Their costs are substantially lower than those in China which are double this and lower than the projections for Lynas which are four times this.

    The problems experienced by Avalon and Rare Element Resources are of their own making, but are complicated by the lower Rare Earth pricing. Lower Rare Earth pricing will strengthen the hand of the low cost producer. That producer is Molycorp.

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