Why Molycorp Shares Tanked Once Again

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of struggling rare-earth elements producer Molycorp (NYSE: MCP  ) shed a further 10% Wednesday -- on the heels of a devastating 20% collapse just a couple of weeks earlier -- after the company announced plans to raise at least $300 million in capital through a combination of a share offering ($200 million-$230 million) and an offering of convertible senior notes due 2018 ($100 million-$115 million). Additionally, the company proposes to lend $40 million in common stock to Morgan Stanley (NYSE: MS  ) , in order to "facilitate the notes offering" and procure a "nominal lending fee."

So what: Alongside the company's recent admission that the major expansion and modernization initiative at its flagship Mountain Pass mine in California would not achieve phase one commercial production until at least mid-year, Molycorp had warned the market that it was "evaluating its capital needs for 2013." Given the severe weakness in prices for rare-earth products that is expected to remain through at least the first half of the year, however, the scale of this latest offering appears to have unnerved market participants. Along with the $414 million raised last August, the stakes have grown extremely high for a company facing a very difficult market environment, even once it does achieve commercial production.  

Now what: With its observable volatility, challenging market environment, and growing debt burden, Molycorp's shares are quite unsuitable for most risk-averse investors. That being said, the potential payoff -- in the event that rare-earth prices do regain strength and Molycorp can execute more effectively on the remainder of its aggressive growth initiative -- could be truly enormous. It reminds me a bit of how bulk shipper DryShips (NASDAQ: DRYS  ) looked to me back in early 2011 when that company chased aggressive growth in the face of extreme distress in its primary market. Hindsight now informs us that the right play was to steer well clear of that stock. What the right play for Molycorp will prove to be, meanwhile, is anyone's guess. 

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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  • Report this Comment On January 23, 2013, at 10:55 PM, skypilot2005 wrote:

    http://www.pelemountain.com/news-release.php?id=737

    Pele Mountain Achieves Processing Milestone: Mixed Rare Earth Concentrate and Yellow Cake Produced at Eco Ridge

    10/24/12

    Al Shefsky, President of Pele stated, “Our production of mixed rare earth concentrates and yellow cake is an important metallurgical processing milestone and confirms that Pele Mountain is a clear leader in the race to develop secure and reliable supplies of critical rare earths in North America. We have achieved this excellent progress with the help of a very talented and dedicated team including the proactive and very capable personnel at SRC.”

    Eco Ridge has competitive advantages that may enable its development ahead of other rare earth projects, including:

     Its location in Elliot Lake, a proven mining camp with outstanding regional infrastructure including roads, railway, power, natural gas, airport, and deep-water ports. Elliot Lake has produced more than 300-million pounds of U3O8 and is the only Canadian mining camp to have achieved commercial rare earth oxide (“REO”) production.

     Pele’s world-class development team, led by Roger Payne P. Eng., former General Manager for Rio Algom, and includes RPA, SNC-Lavalin Inc., SENES Consultants Limited, and Golder Associates Ltd., all of which have extensive experience in Elliot Lake.

    Sky

  • Report this Comment On January 27, 2013, at 9:22 AM, skypilot2005 wrote:

    Here's an idea:

    http://www.energyfuels.com/_resources/Energy_Fuels_Jan2013_P...

    Sky

    "Glowing Long" Energy Fuels

    I've been long "Nukes" for sometime.

    When enlisted in the service of my country, we had a saying "Nuke Em' till they glow.". Referring to any aggressor foolish enough to attack the U. S.

    Ah, "The good old days.". Ha.

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