Molycorp (MCP) announced 1Q 2013 earnings yesterday after hours, and both longs and shorts were waiting with bated breath. When I finally got my hands on the earnings release, the first two metrics I saw were "revenues up 9% versus 4Q 2012" and "cash out flows of $36.6 million." I immediately figured there would be "pain ahead" for shorts. According to the article, "Molycorp Earnings Preview: What To Look For" :
The company's run-rate cash outflows have been in the $45 million - $50 million range ... Longs are betting that the company will have enough cash to survive long enough to take advantage of a second half turnaround in prices. If 1Q cash outflow from operations is in the $50 million - $60 million range, it may be a bullish sign for the stock. However, if its run-rate outflow come in around $75 million or more, it may signal that Molycorp won't have enough cash on hand to fund operations and complete its Mountain Pass mine expansion, leading to potential bankruptcy or another capital raise.
Below are the company's 1Q 2013 results, in comparison to 3Q 2012 and 4Q 2012.
- The company generated revenue of $146.4 million for 1Q 2013, up 9.0% versus 4Q 2012. However, revenue was down 28.8% compared to 3Q 2012; this should give investors a proxy for how far revenue has to increase before operations return to "normalized" levels.
- Molycorp achieved a gross loss of $20.5 million and a loss attributable to shareholders of $47.2 million. The gross loss of $20.5 million was on par with 4Q 2012 results.
Below are results by segment for the past three quarters. Segment data for 3Q 2012 and 1Q 2013 are actual results; segment results for 4Q 2012 were based upon previous estimates.
- The Magnetic Materials & Alloys division, which houses the Molycorp Canada operations, generated income before taxes of $16.9 million. Rare Metals generated income before taxes of $3.7 million, while Resources and Chemicals & Oxides achieved pretax losses of $55.6 million and $2.9 million, respectively.
- Corporate and other costs of $33.0 million compares negatively to the $17.2 million the company incurred in 3Q 2012. I am not sure what is driving the increase other than severance costs related to layoffs. Management did not discuss specifics on the conference call.
Intangibles at quarter-end were $681.4 million, which included goodwill of $239.7 million and other intangibles of $441.7. The lion's share of Molycorp's intangibles are related to its acquisition of Neo Materials Technologies, since renamed "Molycorp Canada". The division which houses Molycorp Canada's operations, Magnetic Materials and Alloys, earned a gross profit during the quarter of $6.8 million. On the surface, Magnetic Materials' run-rate gross profit of $25 million - $30 million does not appear robust enough to justify intangibles of $681 million.
The inventory balance was $256.5 million, down from $313.5 million at year-end. Inventory declined $57.0 million despite revenue increasing over last quarter. I like this trend. The company wrote down $40.1 million of overvalued inventory during the quarter which implies that inventory declined by $16.9 million due to lower production. That represents $16.9 million of positive cash flow for Molycorp.
According to management, approximately $37 million of the write-down was at Mountain Pass. Given its fixed cost base and production levels, the write-down was warranted as rare earth prices have declined. The write-downs were mainly due to decreases in prices for cerium and lanthanum. Management represented that until the company gets back to Phase 1 production rates, it will probably experience more inventory write-downs. The "Catch 22" is that it with less inventory, the pending capital raise from its asset-based revolving line of credit will also be lower.
As I stated earlier, cash outflows from operations were $36.6 million, which is actually in line with previous quarters and much less than the $50 million - $60 million I was expecting. The company invested about $181.1 million in capital expenditures, mostly related to the Mountain Pass expansion. Management expects total capital expenditures of about $250 million for 2013. However, interim CEO Constantine Karayannopoulos was adamant that he would not continue expansion efforts - including the completion of its Chlor-Alkali plant - unless business volume justified it. His main focus is on alleviating unnecessary cash burn. After cash outflow from operations ($36.6 million), cash outflow from investing ($184.6 million), cash from financing ($398.4 million), and cash on hand at year-end ($227.8), the company had cash on hand of $404.8 million at the end of the quarter.
Corporate and Other Costs
Mr. Karayannopoulos confirmed there will be blood in the form of layoffs, pay cuts and reductions in overhead. I was keen to hear about the progress Mr. Karayannopoulos was making on reducing "corporate and other costs." However, management did not drill down on the components of the $33.0 million corporate and other costs incurred during the quarter, or the expense level it was targeting going forward. I would like to get more clarity from management on this issue next quarter.
Molycorp's revenue increase and lower than expected negative cash flows from operations were positive signs for the stock. Management's near term focus is on alleviating cash burn and is willing to forego planned capital expenditures if necessary. Given more potential operating losses and asset write-downs, I rate the company a "sell." However, at quarterly cash outflow from operations of about $37 million and management's ability to temper capital expenditures, I don't expect the company to run out of cash until the first quarter of 2014, if at all. In the meantime, there will be "pain ahead" for short sellers in the form of potential losses and the cost of carrying their trades for an extended period.
Disclosure: I am short MCP. 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. I own June puts and May calls on Molycorp. I recently covered the downside on my puts.