As an investment, Molycorp (NYSE: MCP) may have been set up to fail from the start. The rare-earth-mineral bubble made the company look so good to investors that everyone from management on down bought into the thought that rare earth minerals would be a hot commodity for years to come.
The reality was that in 2010, when China cut back on rare earth exports, the world went into a panic. Anyone who could get his hands on rare earth minerals stockpiled them as if they were going out of style, causing prices to explode at an unsustainable pace. Companies such as Molycorp and Lynas spent hundreds of millions of dollars quickly building plants to supply to world with rare earth minerals, driven by incredibly high prices caused by the supply constraints.
The problem is that supply in rare earth minerals is relatively small, and so is demand. So, if you bring a 20,000-metric-ton mine online it will flood the market, causing prices to plummet. Bring two online -- as Lynas and Molycorp did -- and you supply so much product that neither mine is financially viable.
That's the problem facing Molycorp today. Prices for cerium and lanthanum oxides, which make up most of Mountain Pass' production, have plummeted over the past two years, and the company can't make a profit on what it sells.
In the third quarter, despite increasing production 19% sequentially to 3,620 metric tons, the company lost $65.6 million. Costs excluding depreciation and amortization were even above revenue.
Is a turnaround ahead?
The question is whether demand and prices will eventually rise to the point where Molycorp can make a profit. Management seems to think demand and prices are stabilizing, a theme we've heard for more than a year now.
The problem is, as Molycorp's own supply to the market increases over the next year, it will exacerbate the pricing problem. There's not infinite demand for rare earth minerals, and after the scare from China there's become an overabundance of suppliers.
Investors need to keep in mind that losses are mounting, and the macro environment doesn't look to be getting better. The Mountain Pass mine went out of business in 2002 for a reason. It's tough to make money in rare earth minerals long term. Molycorp is finding that out the hard way.
