The rare-earth bubble has burst, and it has left Molycorp (NYSE: MCP) with not only a falling stock price, but now a big loss as well. When the company reported earnings late last week, the results weren't pretty.
The falling average sales price of the company's product is the biggest driver of its disappointing results, and it will only get worse as the company ramps up production. This quarter, the company's average sales price per kilogram of rare-earth oxide equivalent fell to $52 from $95 last quarter and $97 during 2011. This led to a small rise in revenue to $104.6 million, despite increased production, and drove the company's $71.1 million loss.
The company is hoping downstream products will mitigate the reduction in prices, but so far that hasn't helped. The company bought Neo Materials earlier this year and will turn it into a division called Molycorp Canada. But for shareholders, the $1.3 billion purchase of Neo Materials hasn't helped the stock price, and Molycorp's own market cap is now less than what it paid for Neo Materials.
The trajectory of prices is only downward right now, although management thinks the rate of decline is slowing. But considering the quantity of rare-earth material Lynas and Molycorp will put on the market by the end of this year (with more to be added next year), I don't see any reason to think prices will improve.
The decline may keep rare-earth hopefuls like Avalon Rare Metals (NYSE: AVL) and Rare Element Resources (NYSE: REE) from ever seeing the light of day. The question for these two may be one of survival.
Foolish bottom line
With Molycorp swinging to a loss just as production is starting to pick up, I still have concerns about how much money the company will make in the future. Until the company gets into full production and prices stabilize, I will stay away from the stock. I think there's still a lot of downward pressure on rare-earth mineral prices now that China isn't the only game in town, and let's remember: This mine has already gone under once before.
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