I'm not sure if it went down like this, but I picture him riding off on horseback as he heads over the mountain pass and out into California's Mojave Desert. When the dust settled Wednesday morning from CEO Mark Smith's surprise departure, announced after the close on Tuesday, Molycorp's (NYSE: MCP) stock cowboyed-up to continue its ongoing rally shortly after the open.
Of course, any attempt to discern the precise circumstances surrounding his sudden departure may prove harder than a trek through the desert. According to The Wall Street Journal, Smith was ousted by Molycorp's board. According to a Molycorp spokesman, the decision was mutual. While it may be reasonable to speculate on a connection between the move and some of the confidence-crushing developments that knocked Molycorp's shares all the way down to $5.75 last month, our Foolish efforts might be better spent evaluating the resulting management structure at this key moment in Molycorp's long-awaited return to commercial production at its Mountain Pass mine.
Mark Smith's enduring legacy
Before we do, however, let's take a moment to recognize some of the major achievements realized under Smith's watch. Smith's involvement with the Mountain Pass operation stretches back to the 1980s, as manager of Unocal's mining unit when that company owned Mountain Pass. When Chevron (CVX 1.55%) acquired Unocal in 2005, Smith was appointed CEO of Chevron's mining subsidiary; though, at the time Mountain Pass was in a barely active state. In 2008, Smith spearheaded the ongoing effort to revive Mountain Pass as a world-class, rare-earth element supplier by acquiring the property from Chevron Mining and launching the corporate predecessor to today's Molycorp. Four years, one high-profile IPO, and several bouts of financing later, the appropriately named Project Phoenix is on the verge of achieving phase 1 production at Mountain Pass before the end of this month.
While the imminent rebirth of Mountain Pass is a cornerstone of Smith's legacy at Molycorp, I believe that the trio of strategic acquisitions completed along the way will generate meaningful shareholder value over the years to come. The full value of the acquisitions may not be immediately apparent as Molycorp's ramp-up collides with relatively weak near-term market conditions, but I believe that a disciplined long-term investment in the company will ultimately prevail in profit as the company's vertically integrated "mine-to-magnetics" business model bears fruit.
Evaluating Molycorp's resulting management team
Fortunately for Molycorp shareholders, the transformational acquisition of Neo Materials Technologies earlier this year materially strengthened the depth of Molycorp's senior leadership. Former Neo Materials president and CEO Constantine Karayannopoulos joined Molycorp's board as a result of the transaction, and now leads the combined company through this pivotal period as interim CEO while the board seeks Smith's permanent replacement. Molycorp's CFO, Michael Doolan, likewise held the corresponding CFO post at Neo Materials from 2005-2012, and also at former Canadian miner Falconbridge prior to that. Importantly, Molycorp also retained two key division heads from Neo Materials to lead their corresponding business units at Molycorp.
The way I see it, in the absence of Mark Smith, Molycorp is still beautifully positioned to usher rare-earth materials mined from Mountain Pass through a unique value-added supply chain with a global footprint consisting of 26 operations in 11 countries (including China)! At the same time, however, I don't believe it's possible to portray the company's exciting strategic position in any other way than as a legacy of Smith's substantial achievements. The route for Molycorp's share price may not have been pretty since the 2011 peak above $75, but the majority of that post-IPO spike must be properly seen as a rash of excessive speculative fervor in the first place. Accordingly, I think Smith can hang his hat with pride.
On the future of Molycorp
Molycorp stands at a fascinating intersection between relatively anemic near-term market conditions that will surely stress the company's liquidity heading into 2013, and its unrivaled strategic position across the global supply chain for rare-earth and related metals, alloys, powders, magnets, etc. I have conducted substantial due diligence on the company in recent weeks, and encourage Fools to watch for the release of my premium research report which will soon be made available at The Motley Fool.
In a nutshell, the crux of Molycorp's near-term challenge -- and first on the list of priorities for interim CEO Karayannopoulos -- comes down to delivering on its promise to achieve industry-leading operating costs at Mountain Pass within a reasonable period from the onset of commercial production. Given China's existing stranglehold on the raw material segment of the supply chain, an impressively lean cost structure offers the principle means by which Molycorp can sustainably revive the role of Mountain Pass as a leading global supplier through all stages of the rare-earth metals price cycle.
It's a tall order, and it's not likely to occur overnight; but by the time phase 2 production of 40,000 tons per year comes online, Molycorp needs to achieve peer-leading production costs at Mountain Pass. It's a strategic imperative, in fact, that's common to any integrated material producers that face thin margins in an impaired global business environment. I've discussed at length the often unenviable position of major steelmakers like POSCO (PKX 0.61%) when they fall victim to a classic margin squeeze, and it's precisely the sort of predicament that led U.S. Steel (X -0.90%) into the coal mining business more than a century ago. Alcoa (AA) offers another perfect example, where the prevailing cost structure of its alumina and primary aluminum operations offers the company's first defense against margin compression down the supply chain. I recently prepared a premium research report on Alcoa as well, and encourage readers to access the full report here.
With industry-leading production costs in hand, Molycorp's vertically integrated structure will be empowered to capture additional margin as it moves product down the supply chain, and the full potential of Molycorp's alluring business strategy will be realized. Based upon my own bullish outlook for continued global growth in demand for rare-earth elements over the long-term time horizon, and Molycorp's unmatched capacity to capture margin along each step of the supply chain, I recently initiated a share position in Molycorp for my personal stock portfolio that I expect to hold for years to come. I urge readers to watch for the upcoming release of my in-depth report on Molycorp -- as well as my ongoing coverage of the company -- by bookmarking my article list or following me on Twitter.
