A Light at the End of Tunnel for Molycorp?

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Rare earths miner Molycorp (NASDAQOTH: MCPIQ  ) thinks there may be a light at the end of the tunnel as stability in pricing and demand finally return to the market. Investors are keeping their fingers crossed because for them, the only light they've have seen has been from a successive number of freight trains running them over.

Third quarter results didn't really offer much hope they'd be seeing daylight anytime soon either. Revenue fell 27% to $149 million from $205 million in 2012 generating a loss of $65 million that included the write down of inventory, and CEO Constantine Karayannopoulos told Reuters the situation hasn't bottomed out yet, but it's getting there.

"We haven't gotten what I would consider an historical normal yet," he said, "But it certainly looks and feels like we are on our way toward that."

Molycorp attributes part of its woes to illegal mining in China that has depressed RE pricing, but he also sees the country's crackdown on such operations as a reason for hope. Investors shouldn't get their own hopes up too high. Although China has become more diligent in trying to stamp out the practice, something they've been trying to do for the past few years though, the government is only at the point of drafting rules to combat the problem and the rare earth trade association in China says there's a long way to go before they ever become law.

A bigger problem for the miner might be that nearly half the resource at Molycorp's Mountain Pass mine is cerium, one of the least valuable of the 17 different rare earth elements. 

Birds-Eye Tour of Molycorp's New Rare Earth Processing Facility at Mountain Pass, California from Molycorp, on Vimeo

China currently produces 95% of the world's supply of RE's, and it was the country's clamp down on exports in 2008 with the introduction of quotas in a bid to have greater say on pricing that sent their prices into the stratosphere. While rare earths were suddenly on everyone's tongue and speculators bid up shares of all RE miners, including Molycorp, in hopes the higher prices would spur more production elsewhere, China's been less than diligent in enforcing them. Exports of rare earth ore, metals, and compounds through August were more than 62% higher than they were a year ago.

Prices of the elements have crated since then and while most remain above the levels they traded at just prior to their spike in 2010, cerium and lanthanum -- the other element Molycorp says it's going to focus on because of its abundance -- are the only two that haven't maintained their elevated price points.

Of course, investors in Molycorp have had to contend with more than just pricing over the years. A series of train wrecks that derailed their investments in the miner, including delays in filing results with the SEC, investigations by the regulatory body into its public disclosures, the sudden departure of its CEO, large write downs related to acquisitions, dilutive secondary offerings, and having to address material weaknesses in its financial reports (that still exist) leading it to replace its operations controller at the Mountain Pass mine.

I've warned investors for awhile now to avoid an investment in Molycorp. I don't think the sequential improvement off what its CEO described as the "worst quarter we have seen in recent memory" warrants an investment yet. Mountain Pass is poised to be fully commissioned this quarter, but there's no reason to believe it will ultimately hit the goals it's set for itself.

Rival Lynas has improved its extraction and processing capabilities, China is building a processing plant for rare earth oxides, and other locales are reconsidering their own rare earth resources. Greenland, for example, possesses some of the largest deposits of RE's outside of China, and companies like Tanbreez Mining and London Mining -- a mining operation backed by Chinese steelmakers -- are eying the opportunity to access its RE riches.

Whatever window of opportunity Molycorp has, it could be shuttered quite quickly. With its shares still depressed as a result of the revelations following its second quarter results, and real production still a ways off, I find this railroad crossing still to dangerous to venture with any real money.

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