It's been an up-and-down year for Molycorp (NYSE: MCP) in 2011. The company ended 2010 on a high note as one of the year's best IPOs. But this year, the stock is down 32.2%, and there is a lot less optimism that rare earth mineral prices will continue rising indefinitely.
So how did Molycorp get to this point? Here is a review of 2011.
Speeding up Phoenix
With rare earth mineral prices rising through the third quarter of 2011, Molycorp decided to spend an additional $114 million to accelerate the start-up of its Project Phoenix. That moved up phase 1 production at a rate of 19,050 metric tons per year up three months, anticipating 8,000 to 10,000 metric tons of production in 2012.
With only Lynas in Australia adding significant supply to the market in the short term and with China still restricting exports, the move was a no-brainer. The faster Molycorp can start cashing in on high rare earth mineral prices, the better for shareholders.
Expansion beyond mining
Molycorp also took some big steps beyond just mining this year. In April, the company bought rare earth metal and alloy manufacturer Santoku America for $17.5 million. It also purchased AS Silmet, which owns a rare earth processing facility in Europe.
But the biggest move Molycorp made to expand its reach this year was a $35 million acquisition of Boulder Wind Power. The company makes dysprosium-free rare earth magnets and is hoping to become a major player in the market.
I have to give the company credit for seeing opportunities to expand beyond relying on a single mine and volatile rare earth prices to expand its business in 2011.
Turning a profit
This year's big turning point for Molycorp was the company turning solidly into profitability on very little mining production. By the second quarter, Molycorp reported $0.52 in earnings per share and increased that to $0.67 per share in the third quarter.
The profits were driven by extremely high rare earth mineral prices, and that's where the future gets to be a bit murky. Later in 2011, there were signs we may have already reached peak prices for rare earth minerals.
Prices peak
What really drove Molycorp's stock price down in 2011 -- along with competitors like Rare Element Resources (AMEX: REE) and Avalon Rare Metals (AMEX: AVL), which aren't yet mining -- was falling rare earth prices.
The rocketlike trajectory that rare earth mineral prices were on couldn't last forever, and not only did an increase in supply hurt, but industry also started looking for alternatives.
Prices began falling when competitor Lynas' mine came on line, adding 22,000 metric tons annually to supply. Lynas saw the average composition of its Mount Weld deposits fall from $193.21/kg in the third quarter to $122.07/kg in December. To end the year, prices are falling almost as fast as they rose in the first place.
Some customers also began looking to reduce their exposure on rare earth minerals. Toyota (NYSE: TM), General Electric (NYSE: GE), and Tesla Motors (Nasdaq: TSLA) all announced plans to look into electric motors that didn't use rare earth minerals. And the ripple effect extended to Seagate Technology (Nasdaq: STX), where high rare earth prices were blamed for falling margins.
Many questions ending 2011
As we sit right now, Molycorp is still dependent on rare earth mineral prices to maintain profitability and to make Project Phoenix a success. Right now, the trends aren't moving in its favor and when Molycorp's mine comes online it will put more pressure on prices.
Check back later this week for my predictions about Molycorp heading into 2012.
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