by Jeff Siegel
Molycorp, Inc. (NYSE: MCP) — the much anticipated rare earth IPO — debuted last week to a chorus of crickets.
Priced below its planned offering on its first day, the stock sputtered at the starting gate. And of course, it didn't take long for the sharks to circle.
So what happened? After all, given the fact that China controls nearly all of the world's production of rare earth minerals, certainly a rare earth play operating outside of China would garner a lot of positive attention.
I found last year, while attending a modern minerals conference in Toronto, most of the presenting companies were quick to boast that they were not operating in China.
And with rare earths absolutely crucial to the development of our clean energy economy — especially for electric vehicles — the potential of a domestic rare earth operation alone would seem quite promising.
But here's the problem...
Molycorp's been losing a lot of money. And in this market, you better at least have something to parade around if you're not profitable.
Tesla (NASDAQ: TSLA) is the perfect example. I love the company, and I wish nothing but success for this group of Silicon Valley entrepreneurs who had the audacity to show the world that a tiny tech company could build and sell something the major automakers wouldn't.
But despite my love for Tesla, it still went public while losing money.
Of course, showing off those electric wheels to a ravenous media definitely helped the stock shoot north when it went public. It sure as hell wasn't the numbers!
But Molycorp doesn't have a superstar electric car to flaunt all over the media. It does have a pile of losses that no one — especially in this market — is going to ignore. And from what I've been told, the soonest anyone can expect profits will be in 2013.
Of course, this is a mining project, so no one should really be expecting any kind of instant gratification here. But I don't know a single person who was willing to go into this company for $14 a share. Not in this market, and not with a mining project.
Of course, it's not all doom and gloom here, either...
A different kettle of fish
While rare earths are used in things like electric cars and wind turbines, they're also used for military applications, like tank navigation systems, radar, and missiles.
And although some in Washington can't see the urgency of our clean energy transition (it's hard to see over those huge piles of campaign contributions from the oil and coal industries), when it comes to the military... well, that's a whole different kettle of fish.
Earlier this year, Republican Mike Coffman called for the creation of a national security stockpile and for government loan guarantees for companies that want to mine and process rare earth elements in the United States.
And the Congressional Accountability Office released a report in April that took a look at the national security risks associated with our dependence on rare earth materials.
Here are a few key points from that report:
While rare earth ore deposits are geographically diverse, current capabilities to process rare earth metals into finished materials are limited mostly to Chinese sources.
The United States previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position that could affect worldwide supply and prices.
Based on industry estimates, rebuilding a U.S. rare earth supply chain may take up to 15 years and is dependent on several factors, including securing capital investments in processing infrastructure, developing new technologies, and acquiring patents, which are currently held by international companies.
Government and industry officials have identified a wide variety of defense systems and components that are dependent on rare earth materials for functionality and are provided by lower-tier subcontractors in the supply chain.
Defense systems will likely continue to depend on rare earth materials, based on their life cycles and lack of effective substitutes.
Some DOD components, other federal agencies and companies are taking initial steps to limit their reliance on rare earth materials or expand the existing supplier base.
Whether it's “green” energy applications or military applications, there's no doubt in my mind that domestic rare earth operations have a real shot going forward. But Molycorp definitely has a ton of work to do if it wants a piece of this action.
The ball is in its court, and I think it would be naïve to suggest that this company can't pull it off.
Certainly we'll continue to monitor the company's progress. But for the time being, I'm not convinced it will have much luck convincing investors that the stock is worth buying at these levels.
Disclosure: No positions