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Molycorp Blasts Shareholders Instead of Ore

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When investors bemoan the unceremonious slap in the face that they've just received from controversial rare-earth elements developer Molycorp (NASDAQOTH: MCPIQ  ) , interim CEO Constantine Karayannopoulos will say he had no choice. He'd be absolutely right, and I think now we have a much clearer explanation for prior CEO Mark Smith's sudden departure from the project he helped to launch.

Molycorp's shares crumbled by more than 20% Thursday morning after the company slashed 2013 revenue expectations and delayed phase 1 production from the revamped Mountain Pass mine in California until mid-year. Ramp-up delays are commonplace in the mining industry, as for example with the recent delay impacting IAMGOLD's (NYSE: IAG  ) Sadiola expansion. But typically, some indication of a schedule revision is communicated to the market before the previously targeted time frame has expired.

Molycorp investors, of which I am one, rang in the new year with the understanding that phase 1 annual output of 19,050 tons of rare-earth oxide (REO) equivalent from Mountain Pass was already imminent. According to Karayannopoulos: "The targets of achieving full phase-1 run rate by the end of 2012 in my view were too aggressive. The expectation that somehow we would have pushed a button and boom we would have gotten to phase-1 operating rates overnight was not realistic and it should not have been the expectation."

Quite apart from my sense of outrage that investors were ill-informed regarding a realistic timeline for the Mountain Pass mine's historic revival, this development carries with it some very troubling implications regarding the potential need for an additional capital raise during 2013 atop the $414 million raised in mid-2012 that was supposed to carry the project through to fruition. Of all the unsettling news that Molycorp released Thursday, as a shareholder I am most unnerved by the phrase: "... is evaluating its capital needs for 2013". I've watched in dismay as capital cost overruns have ravaged the shares of mine developers from gold majors like Barrick Gold (NYSE: ABX  ) and Kinross Gold (NYSE: KGC  ) , to copper-gold sob story Thompson Creek Metals (NASDAQOTH: TCPTF  ) . It is not a pretty picture.

On the other hand, Molycorp's interim CEO appears committed to pursuing a more measured and staged growth process than that envisaged by his departed predecessor, and his decision to forestall the mine's transition to phase 2 annual output of 40,000 tons REO-equivalent while the company reassesses market conditions and the availability of capital strikes me as a sound move under the circumstances. With those capital outlays now shelved, perhaps Molycorp can still deliver a smooth ramp-up process along the revised timeline and begin to unlock the value of its unparalleled strategic position across the full rare-earth metal supply chain and turn cash flow positive before the funds from that last capital raise are depleted.

In preparation for a premium research report on the company that will soon be available from The Motley Fool, I am diving deep into Molycorp's long-term prospects to emerge as a dominant force in the global market for rare-earth metals, alloys, and specialized downstream product applications. Those prospects, in my view, remain intact, and the potential long-term gains could be substantial. But this remains a high-risk investment vehicle that Fools will wish to approach with appropriate caution. For a mining stock that I consider one of the lowest-risk vehicles in its industry, please access my premium report on Goldcorp today by clicking here.

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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 January 12, 2013, at 6:54 AM, skypilot2005 wrote:

    Sinchi, Here is a “Two for One”; Rare Earths & Uranium Canadian company for your and fellow Fools’ perusal. I’ve “linked” information for them before, on your articles and blog..

    Pele Mountain Resources

    Trading Symbol: TSX Venture : GEM


    Jan. 7, 2013

    “Pele Mountain Resources, a leader in Canadian rare earth development, is focused on the

    sustainable advancement of its 100-percent owned Eco Ridge Mine Rare Earths and

    Uranium Project. Eco Ridge is located in Elliot Lake, the only Canadian mining camp to

    have ever achieved commercial rare earth production. With well-understood geology,

    mineralogy, and metallurgy, excellent regional infrastructure, and strong local support, Eco

    Ridge is an ideal location for a safe, secure, and reliable long-term supply of critical rare

    earth and uranium.”

    Pele Mountain: Leveraging a multi-resource deposit in achieving rare earth production in Canada

    ----Interview with Al Shefsky, President and CEO of Pele Mountain Resources Jan 7, 2013

    Asian Metal: Some mining projects around the world have received backlash or opposition because of uranium and thorium contents of their deposits. What is your position on this matter?

    Shefsky: This is an important point and, we believe, another competitive advantage for Pele. Dealing with the radioactive component of a rare earth deposit is essential and has the potential to delay or derail otherwise viable projects. Clearly, we are dealing with this issue upfront with plans to go through the regulatory and licensing process with the Canadian Nuclear Safety Commission (CNSC) as would any primary uranium operation.

    The key here is that the uranium at Eco Ridge constitutes a primary revenue source and, as such, is a great diversification to hedge against a seemingly unpredictable rare earth market. In pursuing long-term uranium off-take agreements, we could essentially pay the vast majority of our operating costs with uranium revenue and thus insulate the project from periods of weak rare earth prices. This is a sharp contrast to some of our competitors that must ultimately address the handling of radioactive material that is not a revenue source, but is potentially a challenging waste product.”

    “Shefsky: On the demand side, the recent election of a pro-nuclear government in Japan is likely to bring 35 to 40 reactors back into operation this year and there are also more than 60 nuclear reactors currently under construction elsewhere in the world. On the supply side, about 25 million pounds per year of Russian uranium oxide will be withdrawn from the market at year-end. Based on these fundamentals, we believe that uranium prices should recover close to pre-Fukushima levels in 2013 and then move significantly higher in the longer term. The bullish fundamentals for uranium are very supportive for the development of Pele Mountain’s Eco Ridge Mine Rare Earth and Uranium Project in Elliot Lake.”


    2013 Official Web link Assistant to Sinchi in an unofficial capacity.

    Long GEM / GOLDF

    Disclosure: I currently have a predisposition for buying stocks under 10 cents, per share. I like buying 10000 share “blocks” for less than $1,000 USD and I like companies with “royalty plays”. I have entered treatment.

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