morongobill's  Instablog

What will China do? That is the big problem facing Molycorp as she attempts to complete her transition from just a rare earth miner to a fully vertically integrated mine to magnets strategic producer.

China in the past ramped up her production at such cheap costs that it put Molycorp out of business, could she do it again? Or will the vagaries of the market doom the company? Investor sentiment has been bearish for a long time and having taken off my rose colored blinders, this blogger sees no reason to be bullish in the short to midterm. It has just been announced that Germany, Japan and the U.S. GDPs have contracted- there goes a lot of demand for rare earths. Sure, China is going like gangbusters but she doesn't supply all the demand for the rare earths.

There is a lot of talk in the press about the just starting consolidation in the Chinese rare earth mining and processing businesses, and that it might lead to an increase in the rare earth commodity pricing. It might, but somehow I just don't believe that the effect will leave China's sphere of influence. China is going to do what will help China, period. If you don't remember anything else from this post, remember that. Whatever will help China meet her goal of providing jobs for her hundreds of millions of workers, she will do.

I am sure that the senior management at Molycorp understands this, as well as management at their largest shareholder, Molymet. However, I am not so sure that they get just how badly that they have gotten burned in the market with their business strategy of creating the vertically integrated production at the top of the speculative bubble in the rare earths, which has long since deflated. Timing, they say, is everything and doubly so in this case.

These latest attempts at secondary financing, while understandable, seem doomed to failure in that they may succeed in building out the 2nd phase of their Phoenix Project, but then only to have the market continuing to pound down the share price and leading to the demise of the company as it now exists- maybe even unwound with the Estonian and Canadian divisions sold off and leaving only the pit at Mountain Pass, as the new and reinvented Molycorp.

I am not so sure that is a bad idea. It is probably going to happen anyway, maybe it should be done now. Cut your losses now and quit pissing away investor money.

Let me put on my prognostication hat now. Molycorp cannot continue along her present path. The market doesn't believe in her strategy anymore, and surely recognizes that China can singlehandedly dash her plans at anytime by ramping up production and flooding the market with cheap rare earths. The large institutional investors holding huge stakes in Molycorp I doubt are willing to continue let management roll the dice with their money much longer.

There is talk that Molycorp could secure her future by teaming up with one of the potential heavy rare earth junior exploration companies out there, such as Ucore. I would like to point out that despite all the hype and smoke and mirrors emanating from the penny stock chatrooms, that all the companies being bandied about as potential acquisitions hold leases on mining resources which have no guarantee of economic viability, as their legal statements on file with government regulators point out in great detail. You see what I am saying now about rolling the dice? Buttressing one speculative play with another does not seem wise to me at this time. Maybe at the time of the bubble, yes, but not now after it has crashed.

It seems to me that now is the exact time for this company's management to fish or cut bait. And I believe that they should cut bait. Finish out the 2nd phase of the PP that directly effects the production of the ore dug up at Mountain Pass, and start thinking about spinning off the rest of the operation that isn't directly involved with the Mountain Pass property, the crown jewel. This means selling off Moly Canada, Con K's former company, as well as Estonia. It also means keeping Moly operations in China as well as closer cooperation with China. The answer to the what will China do conundrum would be solved by closer ties with the future of the global industry, and with who this blogger believes will be running the global show, sooner rather than later, in any case.

I understand that I have caused quite a few folks' blood pressure to skyrocket with that last paragraph and before I am shouted down, may I just point out that the future of American manufacturing lies with the heavy rare earth minerals, as some influential observers have long noted, and Mountain Pass has virtually none of those heavy rare earth elements? Besides, where are all those folks now when the company has one foot on a banana peel and the other right at the steep edge of that giant pit at Mountain Pass? One misstep and she's over the side, look out below!

Here is another prediction. I doubt that Molymet would be too concerned with the scenario that I have laid out above. Having sunk about $400 million in the company, they might feel that having the pit and the facilities at Mountain Pass is all that they want and need. In fact, I believe that they intend to make a run at acquiring this company, and it makes no sense for them to buy the whole overpriced enchilada, when they can get the crown jewel only, cheaper.

Whatever it takes and however it is done, it needs to be done. Molycorp needs to be slimmed down, she needs to pare off the extra assets and get back to the business of digging the proven reserves out of the ground at Mountain Pass, processing them, and selling them, most likely to China. And the sooner, the better. If this requires a strategic entry into the federal bankruptcy system, call the attorneys now. Get it over with. If it means investors already in get screwed, so be it. Anybody with half a brain could see that the wheels were coming off the rails here and there is no time better to get started on correcting past management mistakes than the present. So in my opinion, it is time to get out of this stock and lick your wounds if you feel a bankruptcy is in the offing. If you feel a Molymet takeover is in the works, you might want to hang on and see which way things shake out. But I believe that I can confidently predict that they are not going to try and buy the whole kit and caboodle, they would be damned fools to buy this overpriced and bloated mess that Molycorp currently is, and I don't think that they are fools.

I really don't see how anybody in their right mind and with fiduciary responsibility to shareholders would even consider buying this company as currently constituted and valued. With the extraneous assets and operations spun off, leaving only the Mountain Pass operation, yes, but not with the rest of the overpriced intangibles and operations.
My guess is that interested potential buyers are willing to sit back and wait for the inevitable dismemberment of the company, and go for the core operation once all the lanthanide dust blows off.

Miss Moly and her board and senior management, if they don't want to deploy their golden parachutes, need to recognize that events and the market are not going to allow for the fruition of their mines to magnets strategy as originally envisioned and they are just going to have to accept a lesser role in events to unfold, still the largest western hemispheric supplier of rare earth materials, but not the global giant as envisioned by Mark Smith and others.

Time and China just are not going to allow it to happen as planned. It is high time that management took the hint and started the restructuring required for the company's continued existence, as a company that profits, and as one of, if not, the lowest cost suppliers in the world, once the high priced assets are spun off, along with the delusions of grandeur from the past.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.