January 1 was a high point for rare earth metals miner Molycorp (NYSE: MCP). Literally.
Its stock entered the new year riding higher on the wave of woes buffeting its biggest competitor outside of China, cresting at $6.33 per share on the first day of trading in 2014. Since then, however, it's all been one downhill ride, and there doesn't seem to be any way to stop the slide.
Rare earth elements miner Molycorp has dug itself a deep hole that it's finding difficult to climb out of. Photo: Molycorp.
Rival's tragedy is Molycorp's gain
Molycorp's stock was in the midst of one of its free falls last December when Australian rival Lynas (LYSDY -0.77%) suffered a tragic accident at its Malaysian refinery, causing Molycorp shares to bounce higher. The facility was already controversial because Lynas had a long-simmering feud with the local government over permitting questions, and the tragedy was seen as possibly dooming its chances of ever securing them. But that was viewed as potentially good news for Molycorp, and its stock popped 12% higher the same day the accident occurred.
Previously Molycorp had said world markets only had room for maybe one or two heavy rare earth element (REE) mining operations and they could only support two or three light REE projects, or those where lanthanum, cerium, praseodymium, neodymium, and samarium are mined.
Because the raw materials Lynas transports from its Mt. Weld mine in Western Australia to the Malaysian facility are the same light REEs Molycorp produces at its Mountain Pass, CA, project, a setback for Lynas could very well be an advance for Molycorp.
All of which goes to explain why 2014 started out on such a high note for the miner. And at least one analyst concurred, calling Molycorp "uniquely positioned" to be a dominant rare-earth metals supplier.
Bargain basement pricing
The euphoria, however, was short-lived as concerns about weakening rare earth metals prices and how this might undermine an already deteriorating financial condition at Molycorp ultimately overshadowed the nebulous benefits of its rival's setback.
After exploding to stratospheric heights in 2011, REE pricing has largely returned to earth, though certain metals still carry a premium.
China, which supplies almost 90% of the world's REEs, worried about pricing weakness as well. It announced it was consolidating all production from its rare earths industry into the hands of a single, government-controlled operation because illegal mining, global competition, new deposit discoveries, and rare-earth alternatives were taking a toll on the prices it could realize. Centralization might prop them up.
The weak pricing environment is a worry for Molycorp, too, because cerium and lanthanum, the two elements most abundant at its Mountain Pass mine, also happen to be among the least valuable of the 17 different rare-earth elements. And their prices have substantially lagged the modest recovery exhibited by the other elements.
Still going for an extreme discount, Molycorp's most abundant minerals can't gain pricing traction. Data: Molycorp.
A rising tide of red ink
That's taking a toll on Molycorp's financial position. Even though it's been able to increase its sales volume for several quarters, revenues continue to slide because REE prices continue to drop.
Even where Molycorp is seeing prices rise, such as in neodymium and praseodymium, which were up 25% in the second quarter from the year ago period, it wasn't enough to offset the decline in cerium and lanthanum, which fell 32% and 30%, respectively. As a result, net losses widened in the quarter to $84 million from $70 million a year earlier.
Even China's new REE mining monopoly, Inner Mongolia Baotou Steel Rare Earth Group, reported in its quarterly results that profits plunged 72%. And the impact on Molycorp's value was just as dramatic: the stock lost 18% when it reported earnings
Not exactly money in the bank
The twin forces of falling prices and widening losses are causing investors to bet against Molycorp.
Last month, Apollo Global Management purchased more than a fifth of the miner's 3.25% convertible notes due in 2016, a move that was largely viewed as a bet Molycorp would need to restructure its heavy $1.5 billion debt load. It's burning through cash at the rate of about $50 million a quarter, and was estimated to have less than a year's worth of cash on hand if it didn't do any further issuances of debt or equity.
Molycorp's rare earths facility in Mountain Pass, Calif. Photo: Molycorp.
Yet not everyone sees the situation as so dire, or rather that Molycorp isn't worth saving. Oaktree Capital gave the rare earth metals miner something of a vote of confidence last month by securing for Molycorp a commitment for $400 million in financing.
That may not be enough to staunch the loss of value for its stock. The loan is expensive -- Bloomberg estimates interest rates are 12% -- and the private equity firm gets warrants to buy 10% of the miner. Although the alternative meant it might have run out of cash eventually, it's still a steep price to pay. Nor do the economics of the industry suggest it won't simply find itself in the same predicament later on down the road..
Foolish takeaway
In short, Molycorp's woes this year are a combination of still-too-high expectations, a glut of supply and competition, a dearth of demand, and an overall weak financial structure. Despite analysts and pundits saying at numerous times throughout the year that this is the bottom for Molycorp, the rare earths elements miner has managed to find a way to prove them wrong.
A domestic supplier of these strategic elements is essential for our economy, but for investors, Molycorp remains -- as it always has been -- a stock much too risky to place a bet on.
