If I told you that a company operated one of the largest rare earth elements mines in the world, was modernizing that mine to make it one of the world's most efficient, and was ramping up production there to 20,000 tonnes per year, you would probably think that sounded like a good investment. And you wouldn't be alone either. Regis Philbin has been building a position in this stock for years and publicly sings its praises.
The company is Molycorp (NYSE: MCP), and as it turns out, the firm is struggling mightily. Here's your lifeline to help you make an informed decision about the stock.
In 2010, China, the world's largest producer of REEs by far and also the country with the world's largest reserves, implemented strict export quotas to secure supplies for domestic firms. This sent prices skyrocketing for about a year and a half. During that time, other countries increased their production of REEs, so much so that supply outstripped demand and prices collapsed precipitously.
Molycorp's stock has been one of the hardest-hit companies in the industry since mid-2011. Its closing price of $2.18 on Monday, July 14 is a little less than 3% of its historical high of $77.97 on May 4, 2011. Let's get into some of the specific factors making Molycorp struggle.
Worst metals for this economic environment
Source: Molycorp website
While Molycorp operates Mountain Pass, one of the world's top-producing mines for REEs, the metals that are most abundant there happen to be the worst to have in this economic environment. Cerium and lanthanum generally fetch the lowest prices of the REEs. In this way, geology has been unkind to Molycorp. If the mine deposits had a different composition with more heavier elements that fetch higher prices, perhaps Molycorp could have better weathered the storm of crashing prices in recent years.
Continual losses
Molycorp has suffered continual losses quarter after quarter.
| Metric | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 |
| Gross Profit | (18,735) | (17,362) | (26,766) | (23,094) |
| Operating Income/Loss | (59,882) | (57,995) | (193,343) | (51,017) |
| Total Cash Flow from Operating Activities | (37,413) | (15,972) | (64,338) | (45,785) |
* figures in thousands.
The REE price crash is contributing heavily to Molycorp's troublesome financials. Falling prices are the reason why, despite increased sales volume in Q1 2014 compared to Q1 2013, the company's Q1 2014 revenue was lower and its operating loss greater than in Q1 2013.
Molycorp is not generating enough cash to cover its expenses, and is actually losing money from its operations. Q1 2014 was its ninth unprofitable quarter in a row. While this could be excusable for a brief period of time -- in the midst of expansions or acquisitions -- seeing it repeatedly is alarming. Molycorp's inability to to get enough cash flowing in through its operations has led the company to try to raise funds through financing activities to stay afloat.
Debt and equity offerings
At the end of Q1 2014, Molycorp had total debt and capital lease obligations of about $1.39 billion, of which $1.37 billion was non-current and $16.9 million was current. In 2012 and 2013, the company embarked on convertible senior note and secondary stock offerings that allowed the company to remain in operation, but significantly added to its debt load and diluted value for existing shareholders. These moves are band-aids, not solutions.
Better options
Investing in REEs can be a punishing experience. Although the space won't stay in a rut forever, those interested in REEs could do two things besides investing in a pure-play rare earth company: invest in an ETF focused on REEs, and/or invest in a larger mining company that is not solely reliant on the materials.
For the first option, investors could consider the Market Vectors Rare Earth/Strategic Metals ETF (REMX +3.98%). It offers exposure to Chinese firms, Australian firms, established and emerging American firms, and other global players. When you are interested in making a play on a particular sector or industry to take advantage of a trend, going for an ETF can be a better choice than picking one or more individual companies to add to your portfolio.
For the second option, Brazilian mining company Vale (VALE +2.68%) is worth a look. Vale discovered REE deposits at its Salobo copper mine in 2011. The company has expressed interest in mining REEs and is likely sitting on its reserves until it becomes more economical to produce them.
Foolish bottom line
Molycorp could be a great stock given its impressive production capacity at Mountain Pass, efficient operations, and proprietary water treatment products. As it stands now, however, the company is teetering on the edge of bankruptcy. Low REE prices, the composition of its mines, and the heavy debt load it has taken on to merely continue operating all combine to make Molycorp an unattractive investment.
For now, Regis, my final answer is, "Avoid Molycorp."
