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Molycorp Mows Down Investors -- Again

Easy come, easy go. Shares of rare earth minerals miner Molycorp (NASDAQOTH: MCPIQ  ) started October on a high note following news of the completion of its chloralkali plant at its Mountain Pass, Calif., mine, but looks like it will be closing out the month heading down. The company admitted it has had difficulty getting the financing necessary for equipment as prices continue to fall and the need to tap the equity markets with a dilutive offering to raise cash grows stronger.

Cerium Production Unit. Source: Molycorp

Unfortunately, that's just what I warned investors could happen and to ignore the positive news pump Molycorp got from the mineexpansion hullabaloo. The SEC filing Molycorp made surrounding its offering peels back the curtain a bit on just what a risky venture the miner is and why I cautioned only the smallest percentage of the most speculative investment portion of your portfolio should be invested here, if at all. 

Although the Mountain Pass mine has the capacity to produce 19,050 metric tons (MT) of rare earth ore, it's only been able to achieve 15,000 MT of REO "for brief periods" as it keeps encountering mechanical problems that it needs to correct. As a result, it's been producing an estimated 10,600 MT on an annualized basis.

While Molycorp plans on eventually ramping things up, it really all comes down to demand, but over the first three quarters of 2013, it's sold just 2,500 MT. Besides, almost half of what the mine produces is cerium, which it admits is a low demand REO and sales of the metal haven't been meaningful over the past few quarters.

Cerium in particular is plunging in value, falling all the way down to price levels not seen since 2009. In the third quarter alone the price plunged 25% from what it realized in the second, the largest drop experienced by any of the rare earth elements. In fact, cerium and lanthanum, the two that Molycorp says it's going to focus on because of their abundance, are the only two that haven't remained significantly higher than their pre-2010 levels, which were their historic highs.

Sure, the miner says its hopeful that its SorbX advanced water purification technology will help drive cerium sales, but 2014 is pretty much going to be a bust on sales so investors will have to wait for 2015 at the earliest before they see results. That is, if Molycorp can get financing to survive that long.

Because sales have been far below what Molycorp expected, due to a combination of lower production and lower prices, revenues and cash flows have come up short. In fact it expects to generate negative cash flows in the third quarter and after after paying for its debt load it will be negative again in the fourth. Hence, yet another dilutive stock offering, this one for $200 million.

I've been warning investors all along Molycorp is abysmal, that it's proven all too willing to dilute shareholders time and again, and earlier this year said it needed a "Goldilocks environment" to play out otherwise it would tap the equity markets once more. And here we are with the bears coming home and finding Molycorp napping in their beds. Its stock has lost nearly a quarter of its value this month.

It does have a backup plan if the offering fails, and that's to have Chilean molybdenum processor Molymet purchase up to $50 million in company stock. Molymet has bought shares before, just last year it bought $390 million worth, when the stock ws trading at around $54 a share. Ouch! It can't be very happy with its investment, and likely explains why it's only willing to buy a fraction of that amount this time.

Molycorp also needs to contend with the fact that there's a limited market for the metals it will mine at the same time Lynas (NASDAQOTH: LYSDY  ) is already out there producing them in Malaysia, let alone what China itself is bringing to the market. To think it can substantially crack the market at a profitable price in sufficient quantities, even if it does become a low (or the lowest) cost producer, is wishful thinking of the highest order.

This miner will continue to disappoint -- and dilute! -- shareholders. Speculative probably does not do justice to the risk that accompanies Molycorp and prudent investors will simply sit on the sidelines with this stock. 

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