Molycorp's Future Looking Dimmer

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

How it got here
One single factor can be pointed to as the driver of Molycorp's falling stock price -- rare-earth-mineral prices. Prices peaked last year but since have fallen off the cliff in anticipation of new supply hitting the market. As Lynas and Molycorp expand the problem will only get worse.

Molycorp and Rare Element Resources (Amex: REE) still have made investors a profit since Molycorp went public, but they've fallen dramatically from their peaks. Avalon Rare Metals hasn't been so lucky, falling 50% over the same timeframe.

MCP Chart

MCP data by YCharts

The chart below shows just how fast prices can change in the rare-earth market. These are the market prices for oxides and a weighted average price based on Lynas' mine composition. As you can see, prices have fallen nearly in half in just the last quarter.

  2010 Q4 2011 Q1 2012 7/23/2012
Lanthium Oxide $22.40 $66.46 $42.31 $20.00
Cerium Oxide $21.60 $59.31 $37.92 $21.00
Neodymium Oxide $49.50 $244.23 $177.31 $105.00
Avg Mount Weld Composition $31.35 $123.69 $92.20 $53.90

Source: Lynas Corporation

Since the rare-earth-mineral market is very small, when the two mines add supply it floods the market, pushing prices lower. This is why I predicted the bubble would pop in the fall of last year, and it has crushed stocks right on time.

What's next?
Molycorp's stock can go as low as rare-earth-mineral prices, and we already know that can be very low. In 2009, Lynas' Mount Weld composition price was $10.32, which is one-fifth of the price today. The mine Molycorp is building has also gone belly up once before, so there is precedent here.

I think Molycorp has potential to make a lot of money in the future but right now the market dynamics don't look to be in its favor. Supply is just starting to hit the market and I think prices will continue to fall even lower.

The CAPS Community appears to agree, giving the stock a two-star rating with 119 underperform calls. The stock went to extreme highs last year, but when the price bubble burst all momentum was left behind. The company reports earnings on August 2, so I would wait to make a bet one way or the other until then. Just don't expect to hear any good news about prices as the company ramps up production.

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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Read/Post Comments (3) | Recommend This Article (4)

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  • Report this Comment On July 24, 2012, at 6:11 PM, JoeGancher wrote:

    Have to strongly disagree. MCP just bought Neo Materials to create a 'Mines to Magnets" enterprise which was highly praised and reported. It effectively hedges MCP against falling rare earth prices since the manufacturing arm benefits by falling prices whereas the mining arm benefits by rising prices. Seems like a lot of people are sleeping through this fact. MCP is, at today's prices, a screaming buy.

  • Report this Comment On July 25, 2012, at 10:22 AM, gumballking wrote:

    JoeGancher is correct!

    Neo Materials was a great company on its own.

    It had a huge profit margin and ROIC.

    With cheap feedstock, it will get even better!

  • Report this Comment On July 25, 2012, at 10:58 AM, JackLifton wrote:

    Molycorp acquired NEO at the peak of the rare earth pricing "bubble." It therefore most likely overpaid. Those readers who say that the company will benefit by the added margin brought by this downstream value adding fail to note that selling prices of bonded magnets-the specialty of Neo, which comprice only 10% of the rare earth permanent magnet market, are also falling while Neo's fixed costs are not. All of this was entirely predictable and foreseeable. The Neo management are to be saluted by the :T. Boone Pickens" followers who recite that only metric for good management is the "maximization of shareholder value."

    China is "restructuring" its rare earth industry. This manifests itself in a reduction of production. But China is a lso building a stockpile so that its industry can maintain its production levels of end-user products while the restructuring is going on. This is known and startegic stockpiling for industry. It foretells that once the Chinese rare earth industry is restructured it will come back into whatever production level the central planners find that they need for ALL purposes. This in the long term is good news for non Chinese miners in case China deceds only to suppport its domestic industries but in the short term it can benefit solely those non Chinese miners who can produce heavy rare earths of which even the Chinese are in short supply.

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