On a day that the Dow Jones Industrial Average set another new record high, shares of Molycorp (OTC:MCPIQ) hit a new 52-week low, closing just $0.12 above its lowest point in the last year. The company has suffered from falling rare-earth prices and the inevitable problem of operating in a market that is 90% controlled by China. Prices for the substances that form the company's stock and trade have seen falling demand as the initial hype over those products has waned in the weak economy.
While there are no obvious catalysts on the horizon, the question for Molycorp has become one of whether the stock is cheap enough to warrant a long-term play. Trying to call a bottom is risky business and not really the Foolish way. With that in mind, I believe shares of Molycorp look attractive between $4 and $5 per share. Essentially then, despite the new low, the stock has room to fall further before it is time to establish a position.
How did we get here?
In the middle of March, Molycorp had two significant events that affected the stock in opposite ways. On the positive side, the company announced a five-year exclusive agreement between Molycorp Advanced Water Technologies and a subsidiary of Univar. Although the specific financial details of the transaction weren't disclosed, the arrangement involves having Univar act as a distributor of SorbX-100, a cerium-based product used in water treatment; the product is sold to North American industrial and municipal wastewater treatment facilities.
The announcement led Brian Lee, an analyst at Goldman Sachs, to comment that the deal "should help quell some investor concerns around excess cerium capacity." He believes the relationship will allow Molycorp to sell the entirety of its phase 1 cerium production by 2015. The announcement led to a 4% pop in the stock.
Unfortunately for shareholders, the news wasn't sufficient to keep the stock headed higher. A disappointing earnings report, made worse by the fact that the company requested additional time before it was ready to report, has weighed on shares. In January, the company told the market that it was significantly lowering its revenue and cash flow projections for the first half of the year; additional stock and bonds would be sold to meet the expected $250 million deficiency in the company's cash needs.
When earnings were finally released, the company reported a net loss of $359.6 million, or $2.91 per share, compared with $0.26 EPS, or $26.6 million, a year earlier. For the most recent quarter, analysts had predicted a loss, after excluding writedowns and one-time items, of $264.3 million, or $0.30 per share. Excluding the charges, actual results were a loss of $0.45 per share.
One of the factors that led Molycorp to lower its revenue projections was inventories, both internally and with end users; depressed prices have not only created a glut in several key rare-earth materials, but the lack of sales has also hampered price discovery. In an interview, Chief Executive Officer Constantine Karayannopoulos said: "Until the inventories are exhausted and customers have the confidence they can start buying rare-earths from a reliable producer with some visibility on prices, I don't think we'll see large-scale return into the markets." The new CEO, who was hired after a probe by the SEC was announced under former CEO Mark Smith's watch, has helped to begin to restore the company's credibility with investors. He expects that customers will make a meaningful return to the market in the third quarter, making one wonder whether an allocation of capital to Molycorp shares should be considered dead money until then.
One of the drawbacks of investing in commodity companies is that they're subject to the vagaries of the commodities markets as much as to those of the stock market. Unlike gold and silver, which are viewed as safe havens in times of economic turmoil, rare earths remain at the fringe of the market. As such, there is a real chance that the stock will remain stagnant for an extended period. The offsetting consideration is that if Molycorp, and rare earths in general, reverse course, the return potential is dramatic.
While Molycorp may be the standard-bearer for the rare-earth industry, its competitors are facing similar problems. Rare Element Resources (UNKNOWN:REE.DL) is also trading just above its 52-week low as well. Unlike Molycorp, however, this company recently supported a strong cash position to go with an significant increase in rare-earth resources available. Avalon Rare Elements (OTC:AVLNF), also just above its 52-week low, faces the same struggles that have been created by low rare-earth material prices.
Ultimately, there is a fair element of risk involved in buying shares of Molycorp, but if the stock dips much lower, the potential reward may justify a small allocation. The factor you should remember is that these materials will remain relevant and will eventually return to prominence. It may be early to invest, but over the medium and longer terms, the potential is there.