Molycorp's New Leader Faces an Uphill Climb

Molycorp (NYSE: MCP  ) introduced Geoff Bedford as its CEO yesterday, following the firing Mark Smith late last year. Bedford takes over a company that's gone through a major expansion phase and faces a number of challenges in the future. Molycorp has gone from a market darling in rare earths to new lows in 2013 and can't seem to gain traction on the top or bottom line.

It doesn't appear that the challenges are over either. End markets aren't improving as expected and if they don't the expansion plans put in place will continue to be on hold with equipment sitting idly by.

Is the rare earth market coming back?
Rare earth mineral prices spiked in 2010 and 2011 when China cut down exports to protect its own economic interests. An area of mining few investors had heard of suddenly became a hot investment as prices skyrocketed. But when new supply from Molycorp and Lynas Corp. began coming online demand didn't outstrip supply anymore and prices plunged.

Investors have been looking for an end to the bleeding for two years and Molycorp has dangled some hope. On last quarter's earnings release, interim CEO Constantine Karayannopoulos said there were "bullish signals from customers across several segments", indicating that a turnaround was imminent. Recent data shows some signs for hope but not a full on buy sign yet.  

Below is a table of oxide prices provided by Lynas. It shows the rapid rise in prices when China cut back on exports and the rapid fall in prices now that miners around the world have increased supply.  

 

2010

2011

2012

Q2 2013

Lanthanum Oxide

$22.40

$104.10

$25.20

$8.42

Cerium Oxide

$21.60

$102.00

$24.70

$8.49

Neodymium Oxide

$49.50

$234.40

$123.20

$65.71

Praseodymium Oxide

$48.00

$197.30

$121.00

$77.64

Source: Lynas Corp.

In more recent quotes from Metal Pages, it appears that the decline of lanthanum and cerium oxide prices have continued steep declines during the third quarter. These are the two materials management expects to produce most of from its mine on Mountain Pass.  

On the plus side, neodymium and praseodymium oxide prices appear to be up about 30% since the end of last quarter. That will help revenue because these are high cost items, but they're also only expected to be about 16% to 17% of the distribution of Mountain Pass.  

Mixed signals about Molycorp
If the rare earth mineral market were improving all around it may be easy to predict operational improvement. Revenue would rise without much rise in operating costs and production expansion would add to the company's margins. But one segment is up while another is down, so there may not be a huge jump in revenue outside of increasing production.

That's a problem because Molycorp lost $71.2 million on $136.9 million in revenue last quarter. The company needs strong improvement in prices and sustained demand to make a profit. Until that happens the company and its new CEO face an uphill battle.

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  • Report this Comment On October 11, 2013, at 1:52 PM, monetizeall wrote:

    Omitted from the above: the Neo portion of the company has been using stockpiles feedstock, which was purchased during bubble. As that inventory disappears duringt he second half of 2013, profit margins for Neo sales reappear.

    And the biggest omissions from the above piece: since Q2, Phase 1 has been completed, including cracking facility and chlor alkili facility, drastically lowering costs; a little in Q3 (in part because they cut back on pre-chlor alkili production; a lot in Q4 (2 months of production with Chlor Alkali and updated cracking), when they will get into single digits for production costs; and a tremendous amount in Q1, when they get 3 months of low cost production and ramp up to ideal production amounts.

    As to the halted expansion: when prices and markets demand another rare earths source (e.g., if LAMP were to never quite get there...), MCP would need 6 months and $60 million to finish Phase 2 processing and power plant, while another company would need 5-10 years and $1+ billion dollars. CK made the right decision to stop Phase 2; but having the capacity is a valuable long-term resource.

  • Report this Comment On October 11, 2013, at 8:54 PM, captainccs wrote:

    A downhill climb would be most extraordinary. ;)

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