Recently, Molycorp (NASDAQOTH:MCPIQ) – often considered the standard-bearer for the rare-earth-element sector – reported disappointing earnings that sent the stock sliding for its worst day in months. The company's operating loss widened and there was little indication that the prices of rare-earth materials are improving. While this led to a headline story that was negative for both Molycorp and some its competitors, if you really look at the underlying message delivered from management, I believe there is cause for optimism and justification to make a speculative allocation to the stock and the sector.
By the numbers
At the earnings release, Molycorp announced a loss of $0.36 per share on an adjusted basis – this was more than 50% worse than the consensus estimate, helping to explain why the stock dipped by more 15% after the release. Without excluding one-time items, the loss was $0.44 per share on revenue of $136.9 million. The company also restated its first-quarter loss to $0.27 per share, a $0.06 per share improvement over its original statement.
One of the highlights of the call was CEO Constantine Karayannopoulos' update on the Mountain Pass mine. The tenor of the news from Molycorp's hugely important Colorado operation is, I believe, purely a matter of perspective. Karayannopoulos reported that the mine had achieved operating capacity of 15,000 metric tons per year of rare-earth-oxide equivalent. He emphasized both the improvement that the mark represents and how, as the final phase on construction is completed, this level can lead to important cost savings.
The other perspective on Mountain Pass is to note that it has still failed to achieve the capacity of 19,050 metric tons per year that had been originally forecast. Even at current capacity, however, it still represents one of the most significant sources of these materials on earth. Given the stabilizing spread of roughly 40% between the domestic price in China and the export price, a significant source of non-Chinese rare-earth minerals has significant potential.
While the headline numbers for Molycorp, and even the explanation of why they were not stronger, are not comforting, the company's view of the market is encouraging. Karayannopoulos maintains his belief that demand should improve in the second half of the year. In the second quarter, he explained that companies allowed inventories to remain at depleted levels, only buying what was needed to match current production needs. As demand returns and prices strengthen, companies should look to Molycorp to replenish depleted inventories.
One of the drivers of increased demand, according to Karayannopoulos, is improved control by the Chinese government over illegal production, smuggling and environmental practices: "The progress that China is making in this area should help deliver greater stability and predictability to markets which is good for the industry as a whole." This greater stability may have led to a slight uptick in prices recently.
Ultimately, Molycorp looks to be well positioned on a number of fronts and at a sufficiently depressed level to warrant acquiring some shares. The stock remains a speculative play, but with China helping to stabilize the market, demand for finished products that require rare-earth inputs – specifically autos – increasing, and the Mountain Pass mine marching toward completion essentially on budget, there is plenty of upside in the stock. On a risk-adjusted basis, Molycorp looks attractive and could deserve a spot in your portfolio.