Since we last wrote on Molycorp, Inc (MCP), the largest rare earth producer outside China, and discussed how SEC investigation has overshadowed better than expected results, the company's executives and a director have bought shares of MCP.
MCP shares jumped by 20 percent on November 23, the highest intraday gain since the company's IPO in June 2010. As per the filings made on November 21, the company's general counsel and Executive Vice President, John Ashburn, bought 10,000 shares and Charles Henry, a director, bought 45,192 shares. This comes after Mark Smith, the company's CEO, purchased 20,000 shares at a price of $6.20 each.
The rare-earth metals are used in a variety of industries, including electric cars, missile defense systems, unmanned military drones and smartphones. China controls more than 90 per cent, triple its market share of 1990, of the global supply of the valuable rare earths.
Prices for both the metals and stocks have been volatile in the past couple of years. Prices increased by as much as 10 times after Chinese curbed exports in 2010, but since the mid of last year prices have been declining. The year-to-date performance of MCP is down 67 per cent, Rare Element Resources (REE) down 1.4 per cent, and Avalon Rare Metals Inc. (AVL) down 45 per cent. Since its initial public offering in 2010, Molycorp had increased by as much as 500 per cent to $77.5 per share on May 3, 2011, but since then the stock has declined to $8.2 per share, a decline of 90 per cent. On the other hand, Lynas Corporation, the Australian producer of the rare earth elements, has dipped by 73 per cent from its 2011 peak of $2.55.
Japan Diversifying its Suppliers:
Japan's Trade Minister Yukio Edano said on November 12 that the country is looking to diversify its suppliers of rare earth elements. Japan, the biggest importer of rare earth metals, currently imports 90 per cent of its REEs from China, but Edano said that from the middle of next year Japan expects to import half of its REEs from sources other than China. Japan's big auto industry, mobile phones industry and missile guidance systems use the rare earth metals in their products.
Japan's move comes after a recent dispute between the two countries over islands in the East China Sea. Japan fears that China might repeat its actions of 2010 when it stopped shipments of the rare earth metals to Japan over another diplomatic row.
According to the government figures, the annual domestic demand for REEs for the past several years has been in the range of 20,000-30,000 tons. Japan recently signed a memorandum with India to import as much as 20 per cent of its needs from India every year.
Next year, the country plans to import 400 tons from Kazakhstan and 9,000 tons from Australia.
Molycorp Inc is one of the world's leading REEs and products company. It engages in the production and sale of rare earth oxides (REO) in the Western Hemisphere.
MCP reported a third-quarter adjusted loss of 5 cents per share against the Street expectations of 7 cents per share. The sales increased by 49 per cent to $206 million for the quarter. The higher production costs and lower realized prices put a dent on a boost in output for the third quarter.
A $150 million increase in capital expenditures came as a negative surprise to us, but we believe that the surprise is largely priced in the stock. Last month, the company sued a consultant to recover a portion of costs incurred as a result of allegedly faulty engineering services. Although, the company's management doesn't believe the ramp up at its Mountain Pass facility will be impacted by the poor engineering services, but to address the relevant issues the capital expenditure will increase by $150 million. The third quarter's total capex of $241 million was 21 per cent higher than Morgan Stanley (MS) estimates of $200 million. MS now expects a total capex for 4Q to be ~180 million, 10 per cent lower than earlier estimates of $200, and $350 million for 2013, 64 per cent higher than earlier estimates of $214.
As we mentioned in our last article on MCP, the company's better than expected third-quarter results were overshadowed by MCP's disclosure on November 9 that it is being investigated by SEC, among other things, for accuracy of its public disclosures.
The company's stock is trading at $8.2, losing more than 67 percent year-to-date and 34 per cent since its listing in July 2010. MCP has a forward P/E ratio of 39x. MCP has a long-term growth rate of 20 per cent for the next five years.
The company's balance sheet doesn't look pretty either. Its net profit and operating margins are negative (net profit margin -12 percent and operating margin -6.2per cent). The company has a total debt of $1.22 billion against a total cash of 436 million. The company has a negative operating cash flow of $33 million and levered a free cash flow of -$862 million.
Lynas Corporation (LYSCF.PK)
Avalon Rare Metals Inc.
Forward P/E (1 year)
PEG ratio (5 year expected)
Long-term earnings growth rate
Share price Performance (YTD)
Source: Yahoo Finance
MCP's stock performance since listing in 2010 (Source: Yahoo Finance)
We maintain our neutral ratings on the company. The SEC investigation could swing in either way, but the fact that SEC is investigating a key domestic supplier of rare earth elements holds some weight. Although, the last week's actions of the management have send a positive signal to the market and it shows that the executives have confidence in the company's future, but still uncertainty prevails. After the last week's rally, the stock is down again (5 per cent). We advise investors to stay away from this stock until the investigation is over. If the company comes out clean it will provide a great opportunity for investors to buy the stock, but material fines could also be imposed on the company, making it difficult for MCP to operate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.