How Low Will Molycorp Go?

Shares of Molycorp (NYSE: MCP  ) hit a 52-week low yesterday. Let's look at how it got here and whether more clouds are ahead.

How it got here
Shares of Molycorp have fallen dramatically over the past year in the lead-up to the company ramping up to full production. Falling rare-earth prices have been the driver of the fall as investors become uncertain where prices will go when Molycorp and Lynas reach full production on two massive rare-earth-mineral mines.

Molycorp has tried to ease some of the worry by buying downstream companies, but it has come at a large cost. The latest deal to buy Neo Material Technologies will cost $1.3 billion in cash and stock, and the cash needed for the deal didn't come cheap. Recently issued senior secured notes commanded a 10% yield, indicating that investors see Molycorp as a very risky bet.

The fall in rare-earth-mineral companies hasn't been limited to Molycorp. Avalon Rare Metals (NYSE: AVL  ) and Rare Element Resources (NYSE: REE  ) have crashed over the last year as well and have underperformed Molycorp since its IPO. These companies' long-term prospects are starting to look dim in the face of falling prices.

MCP Chart

MCP data by YCharts

Here is a table of important prices in the most recent quarter, prices that have continued to fall since the end of the first quarter. As you can see, momentum isn't on Molycorp's side.

 

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.

There's simply a lot of uncertainty surrounding the company's future, just at the time when revenue should begin shooting through the roof.

What's next?
A bet on Molycorp is really a bet on rare-earth prices, and I'm not prepared to bet that they won't continue to fall. The company's sole mine is enough to supply the U.S.' entire rare-earth-mineral needs, and when combined with Lynas, the two companies will flood the market with their respective products.

This isn't to say that Molycorp couldn't be profitable. Management thinks they can produce minerals for an average cost of $2.77 per kilogram, and if that's the case, there will definitely be a profit. I'm just not going to bet on how large those profits will be until the industry reaches some sort of steady state.

CAPS members are skeptical as well, giving the company a two-star ranking. On CAPS, 122 players have made an underperform call compared to 366 players thinking the stock will outperform the market.

If you want to speculate on rare-earth minerals, this is the best bet. It's just too risky for me until I see where prices are going to go in the next six to 12 months.

Interested in reading more about Molycorp? Click here to add it to My Watchlist, and My Watchlist 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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  • Report this Comment On May 22, 2012, at 9:48 PM, Rk703 wrote:

    Another view is the fear of a global economic slowdown and uncertainty in demand is weighing on most commodity prices. MCP has a very low cost structure and operates in a stable environment with strong built in demand, ree's will become a strategic resource. It's being priced as if demand and pricing will never pick up. With an increase in product demand and development in nano tech, medical devices, green energy, technology, etc.. Added to the growth in demand from hi population emerg. market countries in the years ahead, bode well for rare earth miners. Even if prices for ree's remain depressed, which I think is unlikely in future years, MCP will generate excellent profits at good margins. As much wiser folk then I have said, often the best time to buy is at the point of maximum pessimism.

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