Molycorp, Inc. (MCP) engages in the production and sale of rare earth oxides, and currently it is the second largest producer of rare earth minerals outside China. The company's rare earth products include oxides, metals, alloys, and magnets for various inputs in existing and emerging applications comprising clean energy technologies, multiple high-tech uses, defense applications, and water treatment technology. Last year was not good for Molycorp and the stock lost substantial value, and the decline has not stopped. Molycorp stock has lost about 38% since the start of the year.
The company reported fourth-quarter and full year earnings on Thursday, and the results were not pretty. Rare earth metals market has suffered mainly due to low prices, and the prices are not expected to recover soon. As a result, companies operating in the market will have to suffer for at least a year. In this article, I have tried to analyze the financial position of the company along with the future prospects of rare earth metals market. First of all, I will look at the earnings and financial position of the company.
Financial Position and Earnings
Molycorp reported a loss in its most recent earnings announcement. Molycorp reported full year revenue of $528.9 million, a 33% increase from the last year. However, these revenue figures also included six months revenue from Neo Material Technologies, the company Molycorp acquired last year. So, growth in revenue mainly came from the acquisition. Fourth quarter was disappointing as it showed only 1% year-over-year increase in revenue and 35% decrease from the previous quarter.
Net loss for the full year stood at $460.9 million after-tax, or $4.31 per share. However, net loss figures included substantial non-cash and one-time items. One-time loss or income items are usually ignored by analysts in order to gauge the true performance of the operations of the company. Net loss included $258.3 million goodwill impairment charge mainly arising from the acquisition of Neo Material. Furthermore, revaluation of long-lived assets also resulted in an impairment charge of $11.9 million. Molycorp's net loss after adjusting for non-cash and non-recurring items stood at $0.37 per share.
Cash flows from operating activities were negative $89.6 million for the full year, and the company had $227.8 million in cash and cash equivalents at the end of the year. Total capital expenditures were $791.5 million. Capital expenditures for the next year will be around $450 million. However, $60 million in capital expenditures will be for the capacity expansion of Molycorp Mountain Pass facility, which may be treated as discretionary.
Rare earth metal prices are expected to remain low during the current year. At the moment, the market is facing the problem of oversupply and poor demand. Market for cerium, lanthanum and neodymium is extremely volatile. However, the company expects the demand and supply situation to get slightly better during the current year. These minerals are used for a selection of applications, including magnets for electrical and electronic equipment from tumble dryers to smartphones. China controls over 90% of the global rare earth metals market, and stricter environmental policies by the Chinese government might support prices. However, there is not a major rise in prices expected during the current year.
Rare earth metals are extremely important for the U.S. due to the use of these materials in different defense applications. As a result, the company will have support from the U.S. government as U.S. will not want China to have sole control of the market. However, the recovery in stock price will not be possible without a balance in demand and supply of rare earth metals.
Furthermore, the company is also facing rising costs. As a result of low prices of its core products and rising costs, the net cash position of the company suffered heavily. As a result, Molycorp had to raise cash through debt and equity twice over the last twelve months. Last year, Molycorp priced convertible notes worth $414 million, and 13,800,000 shares at $10 per share. Furthermore, the company announced pricing of stock and convertible notes offering at the end of January this year. Molycorp announced to sell about 43,125,000 shares at $6 per share, and $172.5 million in convertible notes. Due to a decline in the net cash position, the company has now decided to reduce the capital expenditures, which may cause the company to fall behind in its targets.
Prices for most of Molycorp's core products have halved over the past year. Furthermore, the costs are rising. The company has announced job cuts to decrease costs. It is unclear how many jobs will be cut; however, it will certainly have a positive impact on earnings and bottom line may improve over the next year. We are not likely to see a substantial increase in the rare earth metal prices in the short term. However, in the long term, the market will recover as the demand increases due to heavy use of rare earth metals in a number of applications and products.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.