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Summary

  • Q1 2014 $78 million cash burn cause for concern.
  • At run-rate cash burn, Molycorp will exhaust cash reserves over four quarters.
  • Shares declined 33% in two days, and could go lower.

Molycorp (NYSE:MCP) reported Q1 2014 earnings last week, and it disappointed on several fronts. Sure, product sales of 3,518 metric tons (MT) were a 10% increase over Q4 2013. However, net revenues declined 4.3% to 118.5 million versus Q4 2013 revenues of $123.8 million. Its most glaring problems have been cash burn and lack of management credibility. That said, Wall Street analysts and investors have turned sour on the company, pummeling the stock price.

Lack of Operating Leverage

With net revenues reeling from declining rare earth prices, Molycorp's costs of sales have exceeded net revenues. In other words, it has been selling rare earth products at a loss. The company achieved a gross loss of $23.1 million and $27.0 million in Q1 2014 and Q4 2013, respectively.

Cash Burn

The company's declining revenues have left it unable to cover operating expenses, leading to cash out flows of $78.3 million during its most recent quarter. With $314.3 million in cash on hand and its current run-rate of outflows, the company could go approximately four quarters before depleting its cash hoard. With the $125 million revolving credit facility off the table, I expect significant volatility in the stock as it seeks a solution to its cash flow problems. This is particularly disappointing after announcing a $200 million capital raise in Q3 2013.

Wall Street Turns Sour, Shares Plummet 33% In Two Days

Wall Street has supported the Molycorp story, and has generated significant fee income from having helped the company raise over $3 billion since its 2010 IPO. In Q3 2013, JPMorgan analysts projected the company would be cash flow-positive by March 2014. When that did not occur, JPMorgan downgraded the stock from neutral to underweight, citing the probability of another capital raise this year. In turn, the stock has declined precipitously:

  • May 7th - The shares traded at $4.55. Earnings announced after the close.
  • May 8th - Shares close at $3.71.
  • May 9th - JPMorgan downgrades the stock. Shares close at 3.05, a decline of approximately 33% in two days.

Conclusion

With worse-than-expected earnings and cash burn, the window is closing on Molycorp's turnaround story. Given the fact that losses are not expected to abate in the near future and Wall Street has soured on the company, investing now would be the equivalent of trying to "catch a falling knife." That said, I rate the company a sell.

Source: Molycorp: Catching A Falling Knife?