I see a lot of mixed feelings on Molycorp (MCP) lately. It is important to look at the facts and NOT let emotions get involved on an investment decision, especially when deciding to take a short position. I am not talking about a short-trade but a larger portfolio position. I have been a corporate portfolio manager for over 34 years and I usually work with large portfolio positions, rather than a trading style position or the so-called daytrader.
Now, MCP at this level has a very high short interest of approximately 24.49% with 19.48 days-to-cover, in which could be a catalyst (not by itself) for a short squeeze and cause a pop in the PPS short term. I will look at some facts that might help shed some light on what approach to take. But, now buying married puts in or out of the money to me is a safer approach (Limit Risk) at this level since the PPS dropped $2.06 to $3.09 since 25 April 2014. The shorts probably increased their position on the way down creating a higher short % which will create more days-to-cover.
Molycorp, Inc. (MCP) is working diligently on their operations strategies and cost cutting factors, but I believe management can do a better job and is a little weak and creating uncertainty. The area they are creating the most uncertainty is with their long-term financial contingency plan, as in their earnings release conference call were Mike Doolan EVP/CFO didn't fully make it clear (danced around) what plans they have (if any) in case operations don't go as plan. This is ONE AREA that a seasoned short player or professional trader looks for (WEAKNESS) to identify an opportunity to go short as a trade or take on a short position. There are several other factors, but I am just identifying this because of the opportunity & info from their earnings release CC. Short term and for the rest of 2014 MCP has enough cash on hand to cover the cost of operations across its entire organization (per CC) with $231 million and estimated 2014 cost of $61 million and they will probably be ok into the 2nd quarter of 2015. This is one reason why a short term squeeze is likely and possible as I don't see them going into bankruptcy.
Options vs. Short: I would feel much safer limiting my risk by using options because of the 19.48 days to cover can cause a short squeeze with a short-term run in the PPS. This along with MCP having a lot of retail interest that would give support with buys could help a short squeeze. And, we would jump in on that run too!
Because of the answers (weakness) in the conference call and uncertainty I believe that was instrumental for the JP Morgan downgrade. Mike Doolan EVP/CFO could NOT even give Mike Gambardella (JP Morgan) a STRAIGHT answer. I would downgrade them too! I am glad we hedged our position with married puts as we are meeting to reevaluate our long position with Molycorp. From ending 31 December 2013 to ending 31 March 2014 institutions went down from 351 firms having positions to 101 firms and now I see why.
His answer and I HIGHLIGHTED the UNCERTAINTY/WEAKNESS:
MG: My question is regarding the cash burn. It seems like the cash burn in the first quarter was more than you expected and more than expected. And since on the last call you said you discontinued your talks for bank credit facility, you don't have a bank credit facility and the cash burn was greater in the first quarter. I mean, what's the contingency if things don't improve? I mean, quite frankly you guys have thought that production was going to be ramping up quicker for several quarters now. Well, what if it doesn't or what if prices start to go down when you bring the production on, and your cash burn continues, are you forced to raise equity again?
MD answer: I think first of all from a cash burn point of view from our perspective, the volume that we were anticipating didn't come to fruition, so that was the issue why we saw less of a cash positive impact than we're HOPPING. I think that's really what we're talking about here. So the cash position really comes down to the shape and scale of the ramp, which is what we continue to work on. As far as sort of alternatives, if and when we need them, quite frankly WE ARE A PUBLIC COMPANY. we think that we have alternatives available to us if we need them, and those alternatives and how we access them will really as I said sort of follow along with the ramp production and how quickly we could do that, and we still are very committed to seeing significantly higher volumes in the second half, so that's WHAT WE ARE WORKING TOWARDS.
BOTTOM LINE: This is one of the weakest conference calls I have heard in awhile. They displayed weakness and created uncertainty, so I am not surprised that JPM downgraded them. This is very poor management! A company should have their financing in-place and a contingency plan as strong management will always have a contingency plan. THESE GUYS DO NOT! With comments like 1.) WE ARE A PUBLIC COMPANY 2.) HOPE that things will do well or 3.) they are WORKING TOWARDS HIGHER VOLUMES. What a joke? This is just my opinion but as we can see other firms concur with a downgrade. Only positive I see (Financially Speaking) is the cash-on-hand of $236 million and they stated it will cost $61 million across the entire organization to cover costs for 2014. Shorts go after weak companies that do not have strong management and display weakness in their entire strategic business plan. This also can explain the high short interest! If you goto StockTwits (Tomstocks) I posted a link to the biweekly shorting of MCP. I am doing this for 34 years and wish I had a nickel for every time I have seen this. Good Luck! AGAIN: THIS IS JUST MY OPINION! Thank you, Tom
Disclosure: I am long MCP.
Additional disclosure: We sometimes use options strategies to hedge our long positions in our portfolios. We have a long position in MCP and hedged with options in which we might Buy/Sell these options at anytime.