Rare-Earth Market Continues to Crumble

The rare-earth bubble has burst, and it has left Molycorp (NYSE: MCP  ) with not only a falling stock price, but now a big loss as well. When the company reported earnings late last week, the results weren't pretty.

The falling average sales price of the company's product is the biggest driver of its disappointing results, and it will only get worse as the company ramps up production. This quarter, the company's average sales price per kilogram of rare-earth oxide equivalent fell to $52 from $95 last quarter and $97 during 2011. This led to a small rise in revenue to $104.6 million, despite increased production, and drove the company's $71.1 million loss.

The company is hoping downstream products will mitigate the reduction in prices, but so far that hasn't helped. The company bought Neo Materials earlier this year and will turn it into a division called Molycorp Canada. But for shareholders, the $1.3 billion purchase of Neo Materials hasn't helped the stock price, and Molycorp's own market cap is now less than what it paid for Neo Materials.

The trajectory of prices is only downward right now, although management thinks the rate of decline is slowing. But considering the quantity of rare-earth material Lynas and Molycorp will put on the market by the end of this year (with more to be added next year), I don't see any reason to think prices will improve.

The decline may keep rare-earth hopefuls like Avalon Rare Metals (NYSE: AVL  ) and Rare Element Resources (NYSE: REE  ) from ever seeing the light of day. The question for these two may be one of survival.

Foolish bottom line
With Molycorp swinging to a loss just as production is starting to pick up, I still have concerns about how much money the company will make in the future. Until the company gets into full production and prices stabilize, I will stay away from the stock. I think there's still a lot of downward pressure on rare-earth mineral prices now that China isn't the only game in town, and let's remember: This mine has already gone under once before.

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 (4) | Recommend This Article (2)

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  • Report this Comment On August 08, 2012, at 11:53 AM, JoeGancher wrote:

    Listen, Neo is obviously helped when their feedstock prices drop. What you haven't realized is that Neo's contributions to MCP's balance sheet has not yet been integrated as the takeover is technically only a couple of months old. None of these reports are going to matter much until we see both companies effect on the balance sheet.

  • Report this Comment On August 09, 2012, at 3:51 AM, TedKane wrote:

    Remember guys, "Motley Fool" was verrry bullish on US Steel last year. Most of their writerrs (like this one) are very young an inexperienced. I'd pretty much do the opposite of what their writers suggest and you'll make money.

  • Report this Comment On August 16, 2012, at 1:26 PM, TMFFlushDraw wrote:

    @TedKane

    Well I have never been bullish on US Steel but I have been bearish on MCP since I started with The Motley Fool. I've gotten that one right.

    As for my experience, I've been investing for 17 years I have a BS is Mechanical Engineering, an MBA, and I worked for a time at a hedge fund before starting here.

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    Travis Hoium

  • Report this Comment On August 24, 2012, at 11:56 AM, onasharp wrote:

    My friends uncle just received his BS in Mechanical Engineering and he is planning to work as a Mechanical Engineer in Calgary, Canada. I think he would love to read something like this and stay posted with all the recent comments. Thanks again for this information! -Fiona

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