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Summary

  • Falling average selling price is an issue.
  • Chlor-alkali plant should result in improved manufacturing costs.
  • Efforts at managing the operating costs will start to pay-off.
  • An expected recovery in rare earth materials should enhance the future performance.

Molycorp (NYSE:MCP) is heading down as the company announced its earnings recently. During the last year, the stock fell more than 45% while year-to-date; it is down by approximately 10%. The rare earth materials manufacturer has been going through some problems due to the falling sales volumes and volatile average selling price. As a result, the fall in the stock price is justified in my opinion.

A Glance at the Earnings

Molycorp has seen continued decline in the sales volumes and the fourth quarter sales volumes were down 12% compared to the last quarter - revenues for the quarter were down 17% compared to the third quarter - average selling price also remains a concern. At the end of the fourth quarter, average selling price was $38.68, compared to the full year average selling price of $42.26 per kilogram. Despite falling sales volumes, however, the total revenues for the year were up 5% compared to the last year - full year revenue for the company stood at $554.4 million. For the year, Molycorp reported net loss of $2.21 per share, which included $0.04 per share from the discontinued operations - net loss on non-GAAP basis was $1.09 per share for the year.

Main Problems and Some Positives

First of all, we have the problem of falling average selling price - this factor is out of the control of the company. We have seen a drastic fall in the average selling price over the last year. For 2012, average selling price was $57 per kilogram, which has come down to $42.26 per kilogram during the last year. As a result, the company reported a gross loss of $67 million for the year. Molycorp was able to report gross profit of over $18 million in 2012 due to the higher average selling price.

Further problems for Molycorp come from the operating expenses. Over the last year, we have seen a decrease in both R&D and SG&A expenses. The company decreased the research and development expense by more than 50% during the last year, and it now accounts for just over 4% of the total revenue compared to 9% of the total revenues in 2012. Furthermore, SG&A expenses have also seen a decrease of $7 million over the last year indicating the company is trying to manage its costs. On the other hand, interest and depreciation expenses have gone up for the company, mitigating the impact of the cost reduction in other areas.

Moving on to the balance sheet - the company has improved its cash balances by about $90 million during the last year despite reporting negative cash flows from operations. At the same time, the inventories and receivables have decreased, indicating faster collection of receivables. The most important change in the balance sheet is the long-term debt of about $1.34 billion - the company did not have any long-term debt at the end of 2012; however, the addition of $1.3 billion in long-term debt has resulted in about $68 million in interest expense for the year. The biggest positive for the company is the Chlor-Alkali plant at the company's mountain pass, California facility - the plant can help the company decrease its production costs and enhance the gross profit.

Conclusion

The fundamentals of the market are weak for the company, and it will have to see a substantial recovery in the rare earth materials prices in order to show a sustained recovery. The rare earth materials market is expected to show some recovery over the next twelve months due to the depleting inventories of the manufacturers. Furthermore, the Chlor-Alkali facility will certainly help the company decrease its costs. Shareholders will need to be patient will Molycorp as I believe the market for the rare earth materials will certainly make a recovery. Increasing average selling price with lower production and operating costs should allow the company to enhance its profitability.

Source: What Now For Molycorp?