Molycorp (MCP) announced its second quarter earnings yesterday and the results were a mixed bag. Some parts of the story were positive and others were extremely disappointing. The following are the areas I focused on:
Molycorp's net revenues of $136.9 million were 6.5% off of 1Q 2013's net revenues of $146.4 million. It reflects weakness in both rare earth prices and demand; talk of a rebound in prices are premature for now. To put top line results in context, revenues were only 1.9% above 4Q 2012 results of $134.3 million which shocked investors and led to the company's January 2013 capital raise. The company also achieved a net loss attributable to shareholders of $74.0 million, which compares negatively to the $38.2 million net loss in the previous quarter.
My previous analysis on Molycorp's inventory buildup has been well-documented. At year-end 2012 inventory was almost 60% of tangible GAAP book value. In response, during 1Q 2013 management had apparently sold through $16 million of inventory on hand, despite the increase in revenue. However, management recently alerted shareholders that due to a miscalculation, inventory was understated by $16 million and cost of goods sold overstated by $16 million. That's a long-winded way of saying that the company's inventory was more stale than originally thought. Management did not discuss inventory balances during the 2Q call so I will have to address it in a later post. Rising or declining inventory balances may also have implications about future pricing and demand for Molycorp's product suite.
Corporate Overhead Costs
At 3Q 2012 the company's "corporate & other costs" were $17.2 million. Management eventually announced layoffs that would reduce such corporate overhead. The article, Molycorp: There Will Be Blood, highlighted the beginnings of the corporate bloodletting:
The company followed up on its promise to decrease corporate expenses when it severed ties with John Ashburn Jr., executive VP and general counsel, and John Burba, executive VP and Chief Technology Officer. Both men had also held positions at Chevron (CVX), the predecessor to Molycorp. Each is entitled to receive a one-time payment of $220K and $600K equal to his 2013 target bonus and annual salary, respectively. Molycorp also announced that it had elevated Geoffrey Bedford, former executive VP of Rare Earths and Magnetics, to Executive Vice President and Chief Operating Officer. Bedford had been the COO of Neo since August 2011.
Molycorp no longer breaks out corporate & other costs separately. However, investors should drill down on this expense item as [i] reductions fall directly to the bottom line and [ii] it gives a sense as to whether the new management team can execute on past promises. On the conference call management did not address its progress in this area, simply stating it "will look for additional areas to reduce costs more quickly." Investors should be disappointed by the lack of clarity surrounding the company's cost reduction efforts.
As of July 15, 2013 Molycorp's short interest was 48.8 million shares. Shorts have practically priced in a bankruptcy scenario that based on the company's recent cash flows, may not materialize for a few quarters, if at all. According to Molycorp Is a Bear Trap, at run-rate cash outflows from operations of $37 million and planned capital expenditures of about $69 million to complete its Mountain Pass expansion and Chlor-Alkali plant, the company will not run out of cash prior to 1Q 2014. The following chart illustrates a "base case" projection of the company's cash outflows prior to the 2Q earnings release.
Actual 2Q 2013 cash outflows from operations were $37.4 million, in line with my previous projection. This is extremely positive in terms of the company's ability to stave off bankruptcy. However, Molycorp's cash outflows from investing and financing were $83.8 million and $20.0 million, respectively. Total net change in cash was $140.7 million and the cash balance at the end of the quarter was $264.2 million, down from $404.8 million in Q1 2013. Remaining CapEx for the remainder of 2013 is expected to be approximately $167 million - $150 million for mountain pass and $17 million for maintenance.
Management expects to fund future CapEx from cash on hand and cash flow from operations. The company also intimated that a $125 million revolving credit facility could be completed in October. However, I find spending $84 million in a declining pricing environment, with an uncertain return, to be almost reckless. A prudent management team would have timed CapEx spend with the closing of the revolving credit facility.
Mid-day the stock is down $0.79 (10.7%) to $6.62 on the disappointing results. However, I think the major area of focus is cash outflows from operations, which were very encouraging. The prospects of the company securing the $125 million revolving credit facility and/or modifying CapEx based on cash needs, gives Molycorp the flexibility to stave off bankruptcy for a few more quarters. That said, I expect the stock to rebound in the near-term due to short covering. I currently hold August 17 call options on Molycorp. Said outflows will drive my investment thesis long-term - whether to go long or short, or whether to straddle the stock and play the volatility.