Another Reason to Sell Molycorp

Shares of Molycorp (NYSE: MCP  ) moved higher in early trading Friday after the company reported third-quarter earnings. The market seems to be happy with the company's results beating expectations, but shares plummeted 14% in late trading after an SEC investigation was unearthed. 

First off, what happened this quarter?
Molycorp continues to make progress in expanding production in Mountain Pass. Phase 1 of Project Phoenix is still expected to be up and running this year at a rate of 19,050 metric tons, and they say they're already 80% there. 

But despite a 100% increase in rare earth oxide equivalent production and a 49% increase in revenue, the company still posted a $21.7 million loss in the quarter. Increased production doesn't matter if you're not making money on everything you sell

Same old story
The enduring problem has been falling prices of Molycorp's products at the same time that production is increasing. The price bubble in rare earth minerals is popping, and there's no end in sight. This quarter, the average sale price of rare earth oxide equivalent was $43.45 per kg, down from $52.48 just a quarter ago. This even caused a $41 million inventory writedown.

The one positive is the strength in rare metals pricing, but the company made only 96 metric tons of this in the quarter.

What's up with the SEC investigation?
The bigger problem yesterday was an SEC investigation into the company's public disclosures. Apparently, the SEC began investigating the company in August, and the company didn't feel the need to tell investors until it slipped the nugget into the 10-Q filing. No mention in the earnings press release, the conference call, or any release before that.

When the SEC comes knocking, the best move is to run, and that's exactly what investors did on Friday. 

It doesn't get better from here
I've been negative on Molycorp for a long time, and I really don't see a reason to own the stock until the SEC investigation is resolved, prices stabilize for a long period of time, and we can get an idea what long-term cash generation will look like.

Maybe a better question is how Rare Element Resources (NYSEMKT: REE  ) and Avalon Rare Metals (NYSEMKT: AVL  ) are still in business? If Molycorp can't make money, there's no way these companies can.

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Comments from our Foolish Readers

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 November 11, 2012, at 7:57 AM, BenKeel wrote:

    Travis Hoyum (the genius who wrote this "article") makes it look like Molycorp has been hiding this investigation from shareholders.

    Shame on you Travis, this whole investigation and the allegations have been an open book from day one. Not ethical TRAVIS, to report otherwise.

    For any readers who want to catch up, just google Molycorp shareholder action or SEC investigation.

    I'm not a shareholder but I believe Moly is innocent and is the victim of sour grapes and risk free, high reward wanting investors.

    Regardless, once again, Motley FOOL is going out of their way to support their market position.

  • Report this Comment On November 11, 2012, at 2:41 PM, daicheng0722 wrote:

    This article does not have made much sensible arguement but just spreaded some negative sentiments.

    For example, "When the SEC comes knocking, the best move is to run..", what kind of direction does the author wants to offer? Fear.

    There is reason to believe this is an article written by a short to serve his own interest.

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