Molycorp's Rise Heralds a Coming Collapse

The stock of the rare earths miner may have jumped yesterday, but there's reason to believe it will wither once again.

Jun 5, 2014 at 9:54AM

Img

Cerium production unit, Mountain Pass mine. Source: Molycorp

Shares of rare earths miner Molycorp (NYSE:MCP) surged nearly 12% higher yesterday after Bloomberg News reported that China is considering dropping tariffs and export quotas on the minerals following a World Trade Organization panel's declaration that such measures were discriminatory.

That hardly seems a cause for celebration among investors, as it was only the quotas on exports from China that propped up global pricing of the minerals (and even then, it was a fairly weak support system as prices have collapsed 50% to 70% from their highs). The free flow of rare earth minerals out of the country should have a deleterious effect on their future valuation. 

Inner Mongolia Baotou Steel Rare-Earth Group, the favored, government-owned rare-earths miner, reported in April that first-quarter sales tumbled 53% year over year. It cast aspersions on the WTO ruling in March as contributing to the decline. However, considering the decision was handed down only a week or so before the end of the quarter, it seems doubtful it played any real part in the poor performance; it also suggests that eliminating the quotas will not improve the situation whatsoever.

Rather, it may be the persistent presence of buyout rumors that is fueling Molycorp's rise. Just the other day, stock in industry peer Lynas (NASDAQOTH:LYSCF)surged by a similar percentage on chatter that Chinese buyers might be sniffing around the company. But Molycorp might be the better bet for them.

Two years ago, the miner bought Canadian rare earth elements processor Neo Material Technologies for C$1.3 billion, giving it a gateway to Asian markets as Neo processes rare earth minerals at facilities in China and Thailand. While China produces almost 90% of the world's rare earth minerals, it also consumes 70% of them. Of course, there might be a bit of a problem in selling the sole U.S. producer of rare earth minerals to the Chinese when it was their strategic value to aerospace, defense, and technology that served as the impetus for the renewed interest in the minerals in the first place.

Some have questioned the wisdom of the purchase as it necessitates Molycorp mining the minerals at its Mountain Pass, Calif., mine first before shipping them abroad to Neo for processing, raising its costs.

Furthermore, Neo, or Molycorp Minerals Canada as it's now known, next month faces expiration of its most important patent covering bonded magnets made with its Neo Powders. While it has other patents that extend beyond 2014, Molycorp admitted "none are of an equally essential nature as Molycorp Canada's fundamental patents and exclusive rights." As a result, Molycorp's entire competitive position is called into question as new rivals may enter the market at will and undermine whatever limited pricing power it has. Still, a locally situated processor could be of significant value to a Chinese company. The quotas that had been in effect were of little relevance to the processing facility, and now that they're being eliminated, its ability to ship rare earth products into China becomes even easier.

With questions remaining about Molycorp's financial wherewithal, a buyout offer might be a welcome advance. But Molycorp has often been subject to rumor and speculation only to see nothing materialize, and that's hardly a prudent way to invest. More worrisome should be the looming patent expiration. Adding in all the other troubles this miner has weathered and still faces, it remains a high-risk investment that at best deserves placement in only the smallest corner of your portfolio.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers