Leading rare earth producer Molycorp (MCP) announced today that its 2013 revenues and cash flows are expected to fall short of previous forecasts. Order delays and weakening prices for rare-earth minerals led to the lower estimates. According to the Associated Press, the company is on track to produce 19,050 metric tons annually at its Mountain Pass mine by June 2013. However, the company decided to scrap Phase 2 of its $1.25 billion modernization and expansion of Mountain Pass until rare-earth conditions improve. At mid-day the stock was down $2.42 (22.4%) to $8.37.
Rare-Earth Price Erosion Continues
In "Molycorp and The Pain Ahead," I highlighted the eroding pricing power in the rare-earth industry and was later derided by longs for bringing up "old news." However, the price erosion in rare-earths continues. According to the company's third quarter 2012 10-Q:
- Resources (10% of revenue) - Average prices for the primary products in this segment (cerium, lanthanum, neodymium and praseodymium), declined 80% in comparison to third quarter 2011.
- Chemicals and Oxides (45% of revenue) - Average prices declined 13% versus third quarter 2011.
- Magnetic Materials and Alloys (34% of revenue) - Average prices declined 23% versus third quarter 2011.
- Rare Metals (12% of revenue) - Average prices increased 78% versus third quarter 2011, partially offsetting price erosion in other segments.
Mountain Pass Delay
The plant modernizing and expansion efforts for Mountain Pass included achieving an annual production capacity of 19,050 metric tons ("Project Phoenix Phase 1"), and capacity expansion to 40,000 metric tons ("Project Phoenix Phase 2"). The estimated costs for both phases are approximately $1.25 billion. Given weak market demand, Phase 2 has been scrapped by the company. Future negative cash flows may force Molycorp to seek additional debt and/or equity financing to complete Phase 2 once demand warrants. That said, current shareholders may be diluted if management decides another round of equity capital is needed to fund Phase 2, or sustain Molycorp's long-term viability.
Quality Management Team
Management's decision to reopen the Mountain Pass mine in 2010 was a calculated gamble that paid off handsomely for earlier investors. Management has proven a willingness to make difficult choices for the long-term viability of the company, including diluting the stock with a $150 million common equity raise in the third quarter of 2012. The move prompted analysts to downgrade the stock from "buy" to "hold," but it was the right thing to do. Today management delivered more unfavorable news. However, the news was timely and honest and allowed shareholders to make an informed decision on whether to remain along for the ride.
Molycorp Key to U.S. National Security
Rare earth minerals are needed in the manufacture of high-tech equipment like hybrid cars, smart phones, computer screens and military equipment. Molycorp's main asset, the Mountain Pass mine, is the only major rare earth mine in the U.S. Therefore, one could argue that Molycorp is key to our national security. Its existence also alleviates the need for the U.S. to "kowtow" to China for rare earth supplies, in the manner that Japan has had to recently. That said, the national security angle may offer a "synthetic floor" to the stock.
High Beta Stock
Declining rare-earth prices and numerous setbacks befalling the company have driven the stock price from a peak of $74.22/share in April 2011, to as low as $5.75/share in November 2012. Industry-specific and company specific events, coupled with the pain ahead for the U.S. economy, equates to a volatile ride for Molycorp. For current shareholders, I rate the stock a "hold." However, for those looking to buy into the stock, I suggest you wait on the sidelines for ((A)) more negative news to materialize or ((B)) a dilutive event to create a lower entry point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.