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Molycorp rocked again, -18% as J.P. Morgan piles on with downgrade

  • Molycorp (MCP -18.6%) shares plunge for a second straight day after Q1 results brought another substantial loss, marked by a deteriorating liquidity position and lower prices for rare earth metals, and little reason to suggest that operations would turn cash flow positive any time soon.
  • Today, analysts at J.P. Morgan pile on by downgrading the stock to Underweight from Neutral, expecting another capital raise this year - logical timing, considering the rate MCP is burning through cash - made all the more urgent as the Mountain Pass ramp is happening more slowly than expected.
  • Shares have lost a third of their market cap in two days.
Comments (18)
  • Richard0623
    , contributor
    Comments (105) | Send Message
     
    No doubt a troubled company full of delusional executives, but this extreme move lower seems overblown
    9 May, 03:31 PM Reply Like
  • Nostradavis
    , contributor
    Comments (140) | Send Message
     
    It's not.
    9 May, 06:36 PM Reply Like
  • 1GreatCFA
    , contributor
    Comments (820) | Send Message
     
    I recall seeing a very whats the word Polished [i.e. good shave, good suit shirt tie combo] i-banker talking about this company a while back. He was essentially framing these guys as the next Apple. Hahaha...may-be in 30 years. Anyways, my point is that this just goes to show you that buyside PMs will [always] be better stock pickers than i-bankers.
    9 May, 03:49 PM Reply Like
  • tiger8896
    , contributor
    Comments (574) | Send Message
     
    The SA authors haven't been much better. Some write really long, compelling articles on why you should buy the MCP stock or the convertibles. I-bankers are mostly motivated to pitch a stock to get the company's business (secondaries, debt) they really aren't stock pickers.
    9 May, 04:09 PM Reply Like
  • iBot Vested
    , contributor
    Comments (74) | Send Message
     
    Ya, April came in at 520 mt which is well below the 1,900 mt they must avg each month to hit the 23,000 mt annual run rate. I have been waiting to buy more shares until the volume picks up. Q2 may give a more clear picture of what H2 2014 is going to look like, but they are probably going to be raising cash at this point either way and with shares going for $2-$3 in the coming months, I would say it's going to be a big dilution to raise the needed funds. They may opt for some kind of equipment financing, which would be better in my opinion. I would hold off until Q3 release before biting into this stock. There is plenty of room to run with this stock if they clear all the hurdles. Just be patient.
    9 May, 03:58 PM Reply Like
  • brilliantstorm
    , contributor
    Comments (26) | Send Message
     
    I have a kind of 'hunch' the RSI for these shares is at 12 !!! Ya very rarely ever see an RSI so low...I can't imagine these shares falling too much further---if at all...in addition to the fact there is a Company wide Investor's Conference scheduled for Monday, May 12th, 2014. I will be listening in to that. I have just begun to re-establish a Long Position in MCP as of about mid-day today. I think the shares will surprise on the upside---from here!

     

    Best of Good Fortune to All!
    9 May, 04:48 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (17737) | Send Message
     
    brilliant, the thing looks like a zero.
    9 May, 08:46 PM Reply Like
  • tiger8896
    , contributor
    Comments (574) | Send Message
     
    No question investors are looking at a bankrupt company here. I doubt they can do another capital raise and without that they're history.

     

    I don't even think investors can expect the periodic rallies that can sometimes double the share prices of low priced stocks like MCP before they declare their bankruptcy. I would avoid MCP like the plague.
    10 May, 06:03 PM Reply Like
  • RM13
    , contributor
    Comments (710) | Send Message
     
    Just go long leaps, at reasonable price - it's a gamble, but gamble which is really cheap:)
    9 May, 05:24 PM Reply Like
  • MEKhoury
    , contributor
    Comments (190) | Send Message
     
    Agree -- low risk with potential asymmetric upside. I like the optionality here.
    9 May, 06:40 PM Reply Like
  • slyolefox
    , contributor
    Comments (8) | Send Message
     
    I'm beginning to believe that I invested in a rock mine. (well I did) They could probably make more money selling crushed rock. I am about to throw in the towel now.
    Sorry guys, this company is not going to make any profit soon. I been waiting 3 years now and keep hearing each quarter the excuses and how they will improve.
    Everything they say is forward looking.
    9 May, 07:09 PM Reply Like
  • rjroberts
    , contributor
    Comments (129) | Send Message
     
    slyolefox,
    I know how you feel. It happened with my investing in BWEN starting in 2010. Wow, what a ride through the pain of contracting revs, shareholder lawsuits, plus the new CEO inheriting so many expansion mistakes from his predecessors in a contracting economy. On top of that, hearing all the bashers saying their going bankrupt. Today they are up and coming and will do well if the general economy does well. The turn around, I would say, is 75% complete. I see MCP as having turned the corner and bottoming in their business in this first quarter. Stock prices may go much lower, but the business model is just beginning to rise.
    9 May, 11:31 PM Reply Like
  • RobbyRob
    , contributor
    Comments (358) | Send Message
     
    Are the problems management-related or fundamental to the industry? Any chance that this becomes a takeover target by NEM/FCX or other mining company? Market cap is about 750mm. REs are still in demand.
    10 May, 09:26 AM Reply Like
  • New Low Observer
    , contributor
    Comments (2030) | Send Message
     
    RobbyRob,

     

    "Are the problems management-related or fundamental to the industry?"

     

    It is an industry problem and relates to the fact that "rare" earth isn't as special as some would like to believe. These same "rare" materials have been available and easily accessible for a long time as indicated from this 1965 Barron's quote:

     

    "Actually, the term 'rare earths' is a misnomer, since most of these elements are quite abundant in nature. In fact, cerium, the most plentiful, is more abundant than beryllium, cobalt, germanium, lead, tin or uranium. Even thulium, which is the least abundant, is more plentiful than cadmium, gold, silver or platinum." (source: Sherman, Joseph V. "Cerium to Yttrium: Science and Industry Are Finding Fresh Uses for Rare Earth." Barron's. April 19, 1965. page 9.)

     

    RE will always be in demand, its just that the companies in the industry are price takers and not price makers. We've negative on the stock since early 2012. The stock may be a great speculation at $3.00 and below. However, any money put to MCP at this time should be considered a total loss.

     

    Regards.
    10 May, 11:05 AM Reply Like
  • deercreekvols
    , contributor
    Comments (5127) | Send Message
     
    Keeping an eye on JPM and every other institutional group who downgrades (MCP) and if they are buying.
    Neat trick to downgrade and they buy millions of shares. It happened with (NOK), it will happen again.
    Is (MCP) the next one?
    10 May, 10:04 AM Reply Like
  • pollyserial
    , contributor
    Comments (1055) | Send Message
     
    deer creek I've been thinking the same thing. of course if it's like Nokia there's about three more months of pain for shareholders ahead. otoh I think the long run upside could be higher. we'll see.
    10 May, 11:14 AM Reply Like
  • Moon Kil Woong
    , contributor
    Comments (11011) | Send Message
     
    This company remains driven by paranoid proclamations the US must mass produce RE at a premium (and currently a loss) to insure China (which produces most of it because of such weak environmental laws they allow dumping billions of gallons of polluted runoff into rivers a year) doesn't get a chokehold on producing it. I still contend this is a terrible investment unless they can get massive taxpayer funding to keep their executives well paid and cover their losses.

     

    Even gold producers have a hard time staying in operation in the US due to environmental requirements.
    10 May, 09:21 PM Reply Like
  • Growfast
    , contributor
    Comments (273) | Send Message
     
    I listened to the earnings conference call as well as read the 10Q. Here are some of the key elements I get out of the company:

     

    1) Management says they have been working on optimization, debottlenecking and transforming to continuous processing of the Mountain Pass facility and looking to boost volume production significantly. Some product produced here is sold to end customers ($3.1MM external revenue this last quarter; $12MM received from intercompany transfers). Appears they are operating MP facility as a profit center to provide raw materials for many of the custom products they create for customers out of other facilities around the world (they price the product for intercompany transfer). Management says the plant is to supply lower cost materials to feed production processes globally.
    > I would like to see how prices of product produced from the facility at intercompany transfer prices compares to market prices from other feedstock producers. Is it really going to provide a lower cost inventory in the future?
    > Average Selling Prices (ASPs) dropped 31% for this segment of the business in the last year. Also, there was a 1 time write down of inventories in this segment that should not be there in future quarters.
    > 10Q says other producing plants have been working through high cost feedstock inventory. If this is true, this should help go forward margins in the other segments, but will be interesting to see if pricing will improve for this Resources segment.

     

    2) Chemicals and Oxides segment - sales volume grew 3% YoY; ASP's fell 30%! This segment showed decent OIBDA (Operating Income before Depreciation and Amortization).
    > China facilities have worked through all their high cost inventory. This seems to suggest margins will improve - that does assume ASP's remain flat or improve.

     

    3) Magnetic Metals and Alloys segment - sales volume increased 9% and ASP's decreased by 6%. OIBDA from this unit was solid. Q1 is always a seasonally soft period and other quarters should improve demand. If company executes, that should translate to increasing sales volumes. With prices more stable, this unit may perform well during the remainder of the year.

     

    4) Rare metals segment - Sales volumes increased by 25% YoY and ASP's decreased by a whopping 38% resulting in negative OIBDA.

     

    MCP is hurting significantly and this would be a difficult environment for anyone to operate in this business environment considering ASP's in all but 1 segment dropped by over 30%, and in the best performing unit, dropped by 6%. The company has reduced SG&A costs, shut down a Canadian plant, but interest expense increased significantly as well.

     

    Summary:
    - Selling prices in 3 business segments decreased more than 30% YoY. If prices stabilize (management says they have) or improve, this could be good for go forward performance.
    - High cost inventory has been mostly turned over and written down which should improve margins
    - Increasing production volumes should help the performance of Mountain Pass contributions, although this will only benefit the company if it does in fact help reduce costs of feedstock in other segments and/or allows it to increase sales of product to external customers
    - Pricing and sales/production volumes are going to be key to performance. With improved pricing and margins, along with better performance, perhaps it is possible the company will not be required to raise more funds from equity offerings later this year. The CEO had stated at the end of last fiscal year that they expected to be cash flow positive in 2014. But, that likely is based on some pricing assumptions.
    Stable to improved pricing could drive strong performance and stock price movement up from these levels over the remainder of the year. But, if prices don't improve or keep deteriorating, this could get very ugly for MCP very quickly.

     

    If ASP's for these products ever begin a long-term upwards trajectory, MCP and shareholders could potentially gain very significant returns. Many risks in 2014, but also, much potential upside over a long-term view, I would think.
    11 May, 02:50 PM Reply Like
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