At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Is Molycorp's misery at an end?
With shares down more than 80% over the past year, it's hard to argue that 2012 has been anything but abysmal for rare-earth-element miner Molycorp (NYSE: MCP ) . But when the sky is darkest, could the sun be about to break over the horizon?
One analyst thinks so. Yesterday, Gabelli & Co. issued what StreetInsider.com calls a "rarer than rare earths" upgrade for the stock. While admitting that investing in an unprofitable company like Molycorp is inherently speculative, Gabelli nonetheless argues that "the long-term prospects for the company remain attractive and that Molycorp is the best vehicle to gain exposure to the rare earth industry."
Give Gabelli some credit: It's at least right about that. If it's profit you're looking for, you won't find it at rivals Avalon Rare Metals (NYSE: AVL ) or Rare Element Resources (NYSE: REE ) . Neither firm is currently profitable. For that matter, neither firm is expected to earn a profit next year, either. At least in the case of Molycorp, most analysts expect to see a return to profitability in 2013. Meanwhile, already-profitable Freeport-McMoRan Copper & Gold (NYSE: FCX ) does some rare-earth mining, but its focus is, and always has been (you guessed it), copper and gold.
Time to focus
Of course, just because Gabelli is right about Molycorp's area of focus doesn't necessarily mean it's right that Molycorp is a good place to put your money. For one thing, even Gabelli admits that the massive exercise in share dilution that Molycorp foisted upon its shareholders earlier this month will only raise enough cash to get the company about halfway through 2013.
For another, the company's announcement earlier this week that its Project Phoenix mining start-up is on time was basically a case of "no (bad) news is good news." The fact that a project hasn't (yet) turned into a disaster hardly seems like a good reason for bidding Molycorp shares up 13%. And again, even the now-bullish Gabelli sounds a worrisome note when it cautions that "rare earth prices remain weak and cost overruns for Project Phoenix remain a risk."
Suffice it to say that higher input costs and low selling prices hardly seem a winning combination for Molycorp. Adding to the risk, Motley Fool Blog Network contributor Douglas Ehrman recently pointed out that China, the country responsible for the bulk of the world's rare-earths production, has just raised its export quotas "for the first time in seven years."
Oh, great. So on top of everything else troubling Molycorp, we now have the risk that China will flood the market with cheap rare earths -- just when Molycorp was hoping to start making a profit!
Where does it end?
Where, then, does this leave Molycorp investors? Sad to say, it leaves them pretty much right back where they started: stuck holding shares of a money-losing, cash-burning enterprise saddled with about $800 million in net debt (and rising) -- an enterprise that may turn profitable next year…or not.
In short, "speculative" doesn't begin to describe it. On the plus side, though, thanks to this week's rally -- and in particular Gabelli's short-spooking upgrade yesterday -- at least Molycorp shares fetch 29% better prices today than they did on Monday. If you're looking for a chance to pare your losses and get out of Molycorp, I think this is your cue. However, if you're looking to get into a miner with a better future, we have a great little gold-mining idea that you just might love. Read all about it in the Fool's new report: "The Tiny Gold Stock Digging Up Massive Profits."