Molycorp Investors Suffer a Case of Whiplash

Watching this stock could be hazardous to your health, as the violent volatility is enough to give you whiplash!

Molycorp's (NYSE: MCP  ) stock took a sound beating Thursday morning, opening nearly 9% beneath Wednesday's close -- and striking a brand new 52-week low -- after the company announced a delay to its fourth-quarter earnings release until March 15. The company needs more time to determine the amount by which it will impair goodwill relating to its $1.3 billion acquisition of Neo Material Technologies last year.

By midday, however, the shares recovered most of that gut-wrenching decline. After all, a substantial impairment to the acquired-asset valuation could be seen coming a mile away, as the rug has been ripped out from beneath the rare-earth element industry even in the brief period since the transaction closed. It's a familiar story playing out everywhere in the mining industry right now, with miners of myriad products from Cliffs Natural Resources (NYSE: CLF  ) to Barrick Gold (NYSE: ABX  ) offering poignant examples of recently acquired assets suffering dramatic declines in valuation. With Vale (NYSE: VALE  ) completing the unfortunate triple play this week, each of the world's big-three diversified miners recorded multi-billion-dollar writedowns with their recent earnings releases.

Amid this non-cash slashing of figures on balance sheets, meanwhile, it's all too easy for investors to begin underestimating the strategic significance of an acquisition as utterly transformative as Neo Materials Technologies was to Molycorp. With its worldwide network of rare-earth element processing and refining facilities, Neo Materials granted Molycorp a truly unique competitive position as the world's only fully integrated "mine-to-magnetics" supplier of rare-earth elements and the suite of value-added products derived therefrom.

Analyst Jon Hykawy of Byron Capital Management -- whose firm maintains a buy recommendation on Molycorp with a $15 price target -- reiterated his view that "the mine-to-magnet business model is the correct model in the rare earths space." I agree, and I would add that if this struggling company can succeed, against all apparent odds, in achieving the low-cost production profile envisioned for the Mountain Pass mining complex in California, Molycorp could well morph into one of the mining industry's most fascinating rage-to-riches stories. On second thought, given the enormous speculative fervor that propelled the shares to an all-time high above $79 in 2011, I suppose we'd have to call this a riches-to-rags-to-riches story.

There is no way to sugarcoat it: Molycorp remains a high-risk investment vehicle capable of blasting shareholders with unspeakable volatility. Even the notably bullish analyst cited above is awaiting the March 15 filing to ensure that this looming goodwill impairment will not push Molycorp into a breach of its debt covenants. For those investors who recall the near-demise of Teck Resources (NYSE: TCK  ) back in 2008, and its enormously profitable return from the brink that soon followed, a 9% market reaction to an insignificant development like the delay announced Thursday can serve as an important reducer of risk to a high-risk speculation. For those who can withstand a little whiplash, this stock may yet offer gains in place of pains.

By embracing an alluring strategy of vertical integration combined with a pervasive emphasis upon innovation, Molycorp is taking a page out of the fascinating history of aluminum giant Alcoa. To learn more about Alcoa's efforts to repeat its past success by leveraging those core competencies, please access my premium research report on Alcoa by clicking here.


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  • Report this Comment On March 01, 2013, at 7:50 PM, ausheds1 wrote:

    Mines to magnets is a wonderful business plan but is it appropriate to the Mt Pass product suite? With 50% Ce & 32% La relative to 12% Nd & 4% Pr the bulk of Mt Pass production is destined to the low value polishing, autocat & FCC markets with a relatively small 16% available for magnets, and Mt Pass has virtually none of the key, and most valuable, magnet material in Dy. I'd suggest that was one of the reasons Hitachi walked earlier.

    It is difficult to understand how Moly adds value to Neo's JV operations inside China when they are able to purchase Nd at domestic prices $52.88kg v ROW $80kg. Moly needs to ship Nd behind China's quota, tax & tariff barrier and compete at much lower prices. Even with Neo Canada they need to compete with market price and cannot supply the key Dy component.

    To produce meaningful amounts of magnet material Moly have scaled the Mt Pass plant to a colossal 40ktpa at a cost of $1.42B to date, it is not yet complete. That capacity probably exceeds total global RE demand circa 20% ATM, a fact that now has been recognised with the postponement of Phase 2, the second 20ktpa.

    While the key component of Moly's low cost claims, the Chlor Alkali plant, is not yet operational and their tech is unproven the simple fact remains that Mt Pass is massively over capitalised to 82% low value Ce/La & only 16% Nd/Pr, with dubious potential for value add without adding to Neo's cost base.

    To illustrate Moly's dilemma, Mt Pass will produce 10ktpa Ce at the Phase 1 run rate. The major market Japan/Sth Korea is only importing 5ktpa of RE for polishing, and Moly will be competing with Lynas's signed offtake agreement with Japan, & the total US RE market is only 10.5ktpa. Moly recognised this problem at the outset and tried to deal with it's excess Ce through SorbX but this appears to have gone nowhere.

    Moly appears to have vastly over capitalised a low value product suite (at $26kg basket it is the second lowest of 54 recognised deposits) without identifying a market, let alone a profitable one, for the vast bulk of it's production. In trying to band aid the situation with a grab bag of final processing assets, directed at only 16% of production, they have compounded the situation with $1.8B of liabilities plus the recent $300M of dilution & debt.

    Nowhere have I seen a creditable business plan to turn the above into a cash positive operation and with little chance of any near term prices increases anywhere near sufficient to drag them out of the whole they have dug.

    If Moly is able to reach Ph 1 capacity they will produce 2700tpa Nd/Pr by comparison Lynas have built a 22ktpa plant for $800M, with a "soft" loan from the Japanese Govt. of $200M, capable of producing 5400tpa Nd/Pr + 26tpa Dy. Lynas plans to leverage a portion of this through a 45/55% JV with Siemens for magnet production.

    Lynas also has another 5000tpa Nd/Pr + 300tpa Dy potential from it's Duncan deposit.

    With the ROW RE market currently only 35ktpa and weak demand Moly does not have a lot of time to get it's business plan sorted out and present some credible strategy for return to positive cash flow, sans bubble prices.

    A break up between Molymet & a Con K consortium is looking the most likely outcome IMO.

  • Report this Comment On March 06, 2013, at 10:32 PM, skypilot2005 wrote:

    Sinchi,

    Off topic but, my "Value Detector" was ringing this AM.

    I pulled the trigger on HL @ $4.01 today.

    Proposed Aurizon purchase has really driven the shares down.

    Greens Creek & Luck Friday in five years even without Aurizon = Big potential.

    I. M. O.

    Sky

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