Holy Molycorp! That's Some 31% Bounce!

Following earnings results that showed a smaller-than-expected loss in the first quarter, rare-earth minerals miner Molycorp (NYSE: MCP  ) surged 31% high on Friday as investors seemed thankful that the modernization of its main Mountain Pass mine hasn't been derailed. But with the company still reporting losses and the weakness it experienced in 2012 expected to continue well into 2013, should investors really be all that excited?

I'd say no. Until Mountain Pass comes online, the processing it hoped to achieve will have to be cut, and there's the possibility it may have to resort to asset sales to keep the money coming in and to control costs going out. Last year it was all too willing to continuously tap the equity markets to finance its operations but dilute shareholders in the process.

Canadian REE miner Tasman Metals is looking for yttrium prices to fall as low as $20 per kilogram and both lanthanum and cerium to fall as well. Molycorp says those two elements are its main focus (they comprise 83% of bastnasite ore in Mountain Pass), and if prices slide 15%, its cash balances would drop by $30 million. A 15% decline in volumes would mean a 10% drop in cash balances. With Tasman's customers seeing a "vast oversupply" in these metals, we can expect Molycorp's financial situation to degrade.

Moreover, Molycorp estimates are based on a having a Goldilocks environment prevail, in that its cost estimates for its capex program prove correct, it doesn't run into any delays at Mountain Pass, market conditions remain stable (not experiencing those falling prices or volumes), it's able to sell all the REO it produces, and it doesn't have to make any payments on current or future liabilities.

We should probably add in the alignment of the stars, too, because the miner has $28 million in debt payments due in 2013, and while there are only $1.5 million due in 2014 and 2015, it has some heavy lifting to do when 2016 rolls around, as $231 million comes due. That's followed by $417 million in payments the year after.

And to think the ramp at Mountain Pass will run smoothly defies logic, as miners everywhere routinely run into problems that cause delays. Larger, more astute miners such as Barrick Gold (NYSE: ABX  ) , Vale (NYSE: VALE  ) , and Newmont Mining (NYSE: NEM  ) have run aground on delays and pricing issues, and Molycorp itself has been unable to keep its production schedule on track.

Investors might have been happy that modernization at Mountain Pass is moving apace, but the losses at Molycorp are mounting ever higher, widening from under $3.5 million in the first quarter of 2012 to more than $47 million in 2013. And the second quarter's not going to get any better. 

Last, Molycorp is still subject to a number of shareholder lawsuits and SEC investigations related to actions the company took (or didn't take in relation to failing to appropriately publicly disclose information). Those have yet to be resolved, and while the miner has new management in place after its CEO beat feet, there's little reason to think now is the time it will turn.

Alternatives to rare-earth elements are getting developed, and while they'll still have an important role in electronics, automobiles, and defense systems, as more miners like Lynas enter the market we're going to see prices decline further impacting the financial situation at Molycorp.

If you made money on its pop the other day, great! But don't expect that dead cat to bounce much higher for you.

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  • Report this Comment On May 12, 2013, at 4:58 PM, Denverdude123 wrote:

    Mr. Duprey is right to point out that things are unlikely to go perfectly as the buildout at mountain pass is done. At the same time, his scenario of doom for Molycorp is unlikely to be realized. The low pricing existing for RE has some benefits for Molycorp. 1. It makes other mining operations economically unfeasable. 2. It makes substitutions for RE more economically unreasonable. 3. It is placing a lot of pressure upon the Chinese central government to eliminate the smuggling of RE extracted by pirates that deprives their treasury of taxes and results in the savaging of their environment while making legitimate Chinese production unprofitable.

    Molycorp has some competitive advantages over other producers that Mr. Duprey might be unaware of. 1. They have a good probability of selling their substantial Cerium production in patented applications for water treatment. 2. They have a good probability of reducing the need for Dysprosium in magnets with consequent reduced cost for motors and other applications requiring high magnetic strength. This intellectual property is well protected and will be used in the downstream manufacturing capability that other producers completely lack.

  • Report this Comment On May 12, 2013, at 8:12 PM, merechino wrote:

    DOE issued a $120 million grant to study the shortage of domestic REE in Jan 2013. Does that tell you something? The recent collapse of REE prices is a result of Japanese dumping their whord to screw the chinese government. Meanwhile, a major Japanese group engaged in an off-balance sheet jv with MCP.

    Denverdude is obviously an expert in this sector who is pointing out some truth that "analysts" do not have a clue about.

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