Can lightning strike the same place twice?
For Molycorp (NASDAQOTH: MCPIQ ) , lightning last struck in late 2010, when Chinese geopolitical tensions with Japan caused rare earth prices to spike. As the only company with an operating rare earth mine in the U.S., the company rode the subsequent investor optimism to great heights by raising $586 million in common stock and $230 million in convertible notes as its stock rallied to a peak of $79.16.
Four years later, that investor optimism seems misguided. The rare earth bubble that sent rare earth stocks higher has deflated to the harsh reality of high costs and industry oversupply. Shares of fellow rare earth miner Lynas Corporation (NASDAQOTH: LYSCF ) , for example, have dropped 95% from the peak. Shares of Molycorp have done even worse, dropping 96% from the 2011 highs.
The capital Molycorp raised during the bubble is also largely spent. In its latest quarterly earnings filing, Molycorp reported that it had $236 million of cash and cash equivalents left after burning through $78.2 million in cash for the quarter. If the company's cash burn rate continues, Molycorp will only have three to four quarters of runway space left.
To add insult to injury, the geopolitical cause that sparked the rally in the first place -- Chinese export tariffs on rare earths materials -- may soon end. Reuters recently reported that the Chinese government may comply with the World Trade Organization's request to end the rare earth export tariffs it imposed in 2010. If China does not substitute new resource taxes in place of the tariffs, rare earth prices could fall even further.
With that said, will lightning strike twice? Will geopolitical factors bail Molycorp out again?
Some Molycorp bulls believe it could happen. They believe the U.S. government in particular will bail Molycorp out if things become too bad.
There is strategic value in having an operating rare earth mine inside the U.S., after all. Rare earth materials are essential to many advanced technologies of the future. As China is a competitor of the U.S. in manufacturing those technologies, it doesn't make sense for the U.S. to depend on China for 90% of its rare earth materials. Having an operating domestic mine would prevent China from using rare earth metals as a weapon to further its own economy. Keeping a U.S. rare earth mine open also makes more sense politically speaking than importing rare earth materials from Canada, Malaysia, or Australia.
With that said, most market participants don't believe the U.S. government will bail out Molycorp anytime soon. With a market cap of over $600 million, Molycorp can still do secondaries if it needs to -- even if it means significant dilution for shareholders. As long as the company can still raise money from capital markets, the government could care less what Molycorp stock trades for.
Lightning will not strike twice for Molycorp.
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