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 (MS -1.38%), 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 (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.
