The market really doesn't get Molycorp (NASDAQOTH:MCPIQ). The 12% plunge in its stock price following China abandoning export quotas on rare-earth minerals shows just how wide investor misunderstanding is.
A not-so-rare opportunity
First imposed in 2009 to ostensibly control pollution and illegal mining, the export quotas caused rare earth, or RE, prices to soar by as much as 2,400% in some cases. Companies with even the most tangential relationship to the industry saw their stock prices carried skyward because the 17 minerals that make up rare earths are a strategic resource used in everything from powerful magnets and smartphones to electric motors for hybrid cars and even defense weapons systems.
China has around 30% of global rare-earth deposits and accounts for more than 90% of their production, but it also is the source for 70% of rare-earth consumption. The U.S. (and later Europe and Japan), fearful of what the impact would be from being shut off from rare earth, challenged the restrictions before the World Trade Organization saying they were really an unfair attempt at limiting access to supplies.
Molycorp IPO'd at $14 a share in 2010 to cash in on that fear, touting a secure domestic supply at its Mountain Pass, California, mine. Less than a year later the stock was trading hands at $75 a stub.
But China's stranglehold on rare-earth minerals was much less than it seemed as the deposits were more prevalent than their name suggested. According to Germany's Federal Institute for Geosciences and Natural Resources, since export quotas were imposed, some 440 new rare-earth deposits have been discovered around the world. And countries from Mexico and North Korea to Japan and Kazakhstan have either made significant new discoveries or plan to enter the market in a big way.
It didn't take long for Molycorp's stock to crumble. By the end of 2011, it traded for around $23 a share and within two years of going public the stock was below its IPO price. As of late last year, you could start picking up shares for less than a dollar and Molycorp has struggled to stay afloat since the NYSE notified the miner last week that it's stock is in danger of being delisted.
It's not you, it's me
The problem for Molycorp hasn't been China and its restrictions, but rather its own reserves. Among the most valuable rare-earth minerals are terbium and dysprosium, which at their height were valued at $2,300 per kilogram and $1,450 per kilogram, respectively, a 250% and 1,200% increase above their pre-quota prices.
But Molycorp's Mountain Pass, California, mine didn't have those REs in abundance. Its stock in trade is cerium and lanthanum, among the least valuable of the various rare-earth elements. Although they enjoyed some of the greatest price inflation when the export quotas were first imposed, they also suffered some of the worst deflation afterward. And where terbium and dysprosium (and most other rare-earth minerals) remain priced well above their pre-quota levels, cerium and lanthanum have collapsed to their original levels -- or below.
Pricing pressure remains among Molycorp's biggest problems. Its third-quarter earnings report showed greater production and sales of many products, but depressed pricing weighed on costs, with production cash costs doubling from the year-ago period. As a result, losses attributable to shareholders widened 44% to $105 million.
Shooting itself in the foot
Molycorp may also have made its own strategic blunder by acquiring Neo Material Technologies -- now known as Molycorp Minerals Canada -- which on the one hand, gave it a gateway to Asian markets because it processes REs in China and Thailand. On the other hand, this acquisition raised its costs because it has to ship the minerals it mines overseas to be processed. And some of Neo's most important patents expired at the end of 2014.
To gain control over its own rare-earth industry, China forced the consolidation last year of the nation's rare-earth producers into the government-run Inner Mongolia Baotou Steel. The move gave the producer a 51% stake in the nine firms at no cost and was part of a larger process China began several years prior when it ordered the temporary closure of 31 private processors.
After losing its case before the World Trade Organization, China will now simply require miners to obtain an export license with the amount they export no longer being controlled. While that could depress prices further, the country's producers weren't exporting enough as it was to even trigger the quotas. It's why the market punishing Molycorp's stock price after the announcement showed investors haven't been paying attention.
Instead, Molycorp's story should serve as a cautionary tale for investors who jump into hot stocks with little understanding of their business hoping to cash in on the latest hot trends.