Exercise Caution With Molycorp Inc for Now

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The recent ruling by the World Trade Organization against China and its export restrictions may drive the price of rare earths even lower and hurt rare earth miner Molycorp (NASDAQOTH: MCPIQ  ) . The WTO deemed that China had been using export taxes and quotas to achieve industrial policy goals instead of preserving natural resources as China had claimed. While some analysts believe that the impact on the rare earth market will be negligible since China has not met its export quota the last several years, others believe that an increase in exports will depress rare earth prices even further.

Rare earth's wild ride
Molycorp's shares have been stung hard by the sharp drop in rare earth prices from their highs in 2011. The shortage of rare earths created by the Chinese government's continued export restrictions led to a price spike which saw the average price of U.S. rare earth imports from China rise from $5,589 in January 2010 to $158,389 by September 2011. Over the next few months, rare earth prices collapsed. Prices fell roughly 70% due to a sharp drop in foreign demand that was caused caused some foreign manufacturing that used rare earths moving to China, the drawing down of rare earth inventories, and companies switching to alternative materials.

During 2011 when rare earth prices reached an all-time high, many mining companies sought to enter the rare earth market. In 2011, Vale (NYSE: VALE  ) discovered rare earths at one of its copper deposits, and for a while Vale and Petrobas (NYSE: PBR  ) were in talks for a supply deal that would have seen Vale supply lanthanum oxide to Petrobas at a much cheaper price that Petrobas was paying to the Chinese.

Molycorp's mixed bag
Molycorp reported a 2013 net loss of $376.9 million due to large capital expenditures related to the expansion and modernization of Mountain Pass coupled with lower rare earth prices in 2013. Net revenues were $554.4 million, a 5% increase over 2012; this was mainly due to increased sales volumes within its Magnetic Materials, Alloys, and Rare Metals segments. Molycorp reported negative cash flows from operating activities of $154.4 million during 2013.

For 2013, Molycorp sold 13,118 metric tons of product at an average sale price of $42.26 per kilogram, generating a gross loss of $67.2 million. This compares to sales of 9,207 metric tons of product at an average sale price of $57.00 per kilogram and a gross profit of $18.8 million for 2012. Molycorp is projecting that Mountain Pass will be capable of producing 19,000 metric tons of rare earth oxides per year once it fully optimizes its operations. This will be a substantial increase as Molycorp only produced 1,000 metric tons in the fourth quarter of 2013.

Molycorp recently announced that it had completed operational start-up of the Chlor-Alkali plant at its Mountain Pass facility; this will increase production volumes at lower costs. Molycorp President and CEO Geoff Bedford told investors, "it will play a key role in helping us achieve operating break-even cash flow, before interest, this year." Molycorp believes that this will significantly drive down the cost of production and will make the company competitive with the lowest cost producers worldwide.

Foolish takeaway
The WTO ruling may drive rare earth prices even lower in 2014 and could cause an increase in exports. With both Molycorp and Australia's Lynas Corp expected to boost output at their mines this year, the market may be faced with excess supply. This will likely put more downward pressure on rare earth prices. Such pressure could in turn cause Chinese miners to undercut each other, putting further downward pressure on rare earth prices.

Investors will want to wait and see if Molycorp's Chlor-Alkali plant generates the cost savings that the company is projecting before investing. If rare earth prices can stabilize and Molycorp can optimize its production and cost savings, the company may be able to turn the corner. For now, it looks like it is better to stay on the sidelines.

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2014, at 4:23 PM, stevebry56 wrote:

    Why be so optimistic? The company has reported negative earnings for the last five

    quarters and yet again they have missed Estimates. Their revenues have decreased 7.5% in 4QFY13 compared to the same quarter last year.

  • Report this Comment On April 08, 2014, at 4:27 PM, davidscott1 wrote:

    Well, to see the other side of it, the company has recorded strong growth in revenues for the past three years. The only problem is that their expenses are more than their Revenues which is why their Earnings have been negative for year 2012-13.

  • Report this Comment On April 08, 2014, at 4:30 PM, stevebry56 wrote:

    But moving forward, these three factors mentioned might be a savior for the company

    since their financial position has not been great. Right now, they cannot afford to invest in CAPEX since their Net Income is negative. But they will have to do serious big measures to improve their Fundamentals.

  • Report this Comment On April 09, 2014, at 9:27 AM, captainccs wrote:

    >>>Exercise Caution With Molycorp Inc for Now<<<

    You can be reckless later on. LOL

    Long MCP

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Charles Sherwood

Charles is a long term buy and hold investor who is fascinated with investing and the marketplace.

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