After very fast 2010-2011 initial boom of this generational bull market, Rare Earths are coming back on the radar screens. China is the world market leader. Molycorp (NYSE:MCP) is the largest holder of rare-earth deposits outside of China.
It’s a leading producer of highly sought-after metals such as niobium and tantalum. Although these metals are not known by the general public, they are essential building blocks in many key industries such as defense and aerospace.
Prices of MCP have plummeted during the summer. Indeed, prices dropped from $22 per share in the middle of June to $9.90 in the middle of August. All in all, the stock is down 48 percent over the last month, 54 percent over the last three months and a whopping 58 percent year-to-date.
In fact, the stock price is 83 percent off its 52-week high, a stunning drawback for this once-high-flying stock. Why has the market seemingly lost confidence in MCP, and what can we expect from the company going forward?
Here are a few reasons for MCP’s price drop.
As the eurozone crisis raged on, it began having an effect on global economic output, which pushed down prices of niobium, tantalum and other key metals that make up the core product base of Molycorp.
MCP embarked on an expensive acquisition in Canada in a new company renamed Molycorp Canada. This acquisition saddled the company with heavy debts, and it was also burdened with legacy debts that were on the balance sheet of its newly acquired company; namely, $230 million in convertible notes. Molycorp acquired Neo Materials for approximately CDN $1.3 billion.
This will create one of the most technologically advanced, vertically integrated rare earth companies in the world. “This transaction will link two unique companies – one with a world-class, high-quality resource, and the other with world-class rare earth product design and processing capabilities”
The company embarked on an aggressive capital expenditure program to develop its mine and trophy asset located in Mountain Pass, Calif. The capital-expenditure costs weighed heavily on the company’s balance sheet, which required it to go to the market to raise capital.
The revamping of operations in Mountain Pass is estimated to cost $900 million, a huge number for a company with less than $400 million in total revenues (2011 figures).
As a result, MCP went to the market for a financing package worth almost $500 million. The big problem here, though, is that this round of financing turned out to be extremely dilutive for existing shareholders. Specifically, the financing round included $120 million in straight equity priced at $10 per share, and senior convertible bonds with a $12 conversion price due in 2017 with a 6 percent clip.
The events of the last year don’t instill confidence in MCP or its management team’s ability in terms of good corporate governance, business acumen, negotiating ability or strategic vision. If prices for rare-earth metals don’t rebound significantly, then MCP will be facing decreasing revenues and weakening earnings.
If construction and capex costs don’t adhere to strict and conservative budget parameters, then MCP will be struggling to pay down its large amounts of debt. And if MCP isn’t able to generate the synergies it claims to be able to achieve from its recent acquisitions, it won’t be able to generate any shareholder value from these recent moves. One more bad move could cause it to go belly up, declaring bankruptcy protection is a very real possibility here.
Molycorp Inc. announced the start-up of its new Project Phoenix heavy rare earth concentrate facilities at Mountain Pass, California after the bell Monday. The stock is now up 0.50 on 312K shares up 5%. Molycorp said it is on schedule to reach its phase 1 target production level of 19,500 tons by the end of this year. The company’s phase 2 production target of 40,000 tons is expected by mid-2013.
China has recently set a new quota for rare earths exports of just under 31,000 tons a year. Last year China exported less than 19,000 tons even though the quota was slightly more than 31,000 tons. When Molycorp reaches full production in the middle of next year, there will be more than twice the amount of rare earths on the market as there is right now. And prices are lower now than they were a year ago.