Molycorp (MCP) reported its third quarter earnings yesterday and as usual, the negatives outweighed the positives. I focused on the following areas:
Molycorp's net revenues of $149.1 million increased 8.9% over 2Q 2013 net revenues of $136.9 million. Total volume of 3,620 metric tons (MT) represents a 19% increase over 2Q 2013, at an average selling price (ASP) of $41.18/kg. However, net revenues were flat compared to 1Q 2013, implying that long term, Molycorp's top line has been treading water. The company suffered a $72.8 million net loss to shareholders, in line with the $74.0 million net loss it achieved in 2Q 2013. The loss was driven by approximately $26.5 million of extraordinary losses during the quarter; about $20.3 million was attributed to write-offs at its Mountain Pass facility, the majority related to cerium.
Molycorp experienced cash flows from operations of negative $16.0, cash flows from investing of negative $70.0 million and cash flows from financing of negative $4.5 million. Total change in cash during the quarter was negative $90.2 million, leaving Molycorp with cash on hand of $173.9 million. Cash out flows were positively impacted by a $247.5 million capital raise during the quarter. Management represented that ((i)) it expects to spend $65.0 million - $70.0 million in capital expenditures for 4Q 2013 and ((ii)) it expects its most recent capital raise to last until the company turns cash flow positive. However, given the deterioration in rare earth prices and the company's commitment to completing its Mountain Pass facility in advance of any improvement in operating results, the past is probably prologue. Investors should brace themselves for another dilutive event in case management's projections fall short.
Revolving Credit Facility
During the 2Q earnings call, management represented it was close to securing a $125 million revolving credit facility. I have always looked askance upon the prospects of a credit facility based upon the company's accounts receivable and inventory. Molycorp's accounts receivable have increased from $52 million to $58 million from year-end 2012 to 3Q 2013, despite declining revenues. This trend calls into question both the aging and quality of receivables. Though inventory has declined from $314 million to $208 million over that same period, my assertions that Molycorp's inventory is overvalued have been well documented. That said, it should come as no surprise that the company and potential lenders have not agreed on an asset-based lending facility.
Given the company's anemic revenue growth, I do not expect Molycorp to generate operating income or turn cash flow positive in the near term. However, its capital raise has bought it enough time to restructure the business long term, secure a revolving credit facility or coax equity investors to provide the company another lifeline. That said, I rate the company a hold.