With two mines in British Columbia and one in Idaho, Thompson Creek Metals (TCPTF) is one of the largest molybdenum producers in the world. Also more than 80% below its peak, Molycorp (NYSE: MCP) is the only U.S-based company that is fully integrated across the rare earth mine-to-magnets supply chain. Once upon a time, investors were quite excited about the rare earth story.
What is molybdenum anyway?
Wherever and whenever steel faces tough and challenging conditions such as offshore drilling rigs, power plants, turbine engines, and desalination plants, molybdenum is normally by steel's side. Molybdenum helps make steel stronger and more resistant to corrosion. Breaking molybdenum down per largest uses looks like this: 40% construction and engineering steels, 20% stainless steel, and 14% alloys.
Despite the name, Molycorp has shed from its molybdenum skin. While still a miner, its suite of rare earth metals sell into slightly more sexy end markets like defense technologies and advanced vehicles.
Exploring for a bottom in prices
Molybdenum oxide prices are far from the $25 to $40 highs achieved during 2004 and 2008. Over the past few years, prices have been trying to find a bottom between $8 and $10 per pound.
A producer like Thompson Creek has marched down toward penny stock territory in the process. Molycorp's story up to this point, including construction, operation, and financial challenges, isn't much different. Although it has spiced things up with a lawsuit or two, Molycorp was able to time capital raises with rare earth stock euphoria on at least one occasion.
Under-promising and over-delivering doesn't apply here. Notable investors, too many to name, have been burned (at least on paper) trying to pick bottoms for two years now. Apparently oblivious to the involvement of sophisticated investors, Thompson Creek and Molycorp continue making new all-time lows.
Let's assume that all or nearly all known negatives have been factored into the share prices of Molycorp and Thompson Creek. Looking out five or ten years, at least one cycle worth, do you expect worldwide economies will be demanding more steel for construction and engineering projects? Or less?
How about rare earth metals? Defense departments across the world have hoarded stockpiles during different points in history. Most experts wouldn't diminish the importance and strategic nature of rare earth metals. Rightly or wrongly, the majority would be too fearful to buy Molycorp's stock given its deep discount (terrible performance).
Assuming Thompson Creek and Molycorp can hang around until the cycle swings back into favor, each of them should catch molybdenum oxide and rare earth prices on the upswing. Playing out that way, renewed investor appetite and invigoration for the sectors wouldn't be far behind. In cyclical businesses, today's net losses can turn into tomorrow's profitability faster than most realize.
Thomson Creek has a gold kicker, although half of it will be streaming to Royal Gold (RGLD -0.48%). A leading royalty company with a strong balance sheet (as opposed to Thompson and Molycorp), Royal Gold owns 52% of Mt. Milligan's life of mine gold production. Just five months old, Royal Gold and Thompson Creek are expecting the mine and mill facilities to ramp up through the first half of 2014. In years one through six, Thompson Creek is aiming for Mt. Milligan's gold-only production to be 262,000 ounces per year. Royal Gold has hinted that Mt. Milligan could equate to half of its gold credits within the next twelve months.
Walking the talk
Being greedy when others are fearful is more easily said than done. It almost always requires buying patiently when others are more aggressively selling. Shopping from the deeply discounted sale rack can be frowned upon, perhaps even considered embarrassing to others (I don't include myself in that group). If and when you ever buy stocks from there, know that you could be getting damaged goods. CIBC World Markets recently predicted Thompson Creek would need to restructure its debt if metals prices don't improve by 30%; Molycorp could be in the same boat.