Molycorp: Have We Seen the Bottom for Its Stock, and Rare Earth Prices?
Molycorp’s (MCP) core products – cerium or neodymium, say, or lanthanum – are hardly household names, but they are essential ingredients in all kinds of devices we take for granted, including smartphones and hybrid cars, so the likes of Apple (AAPL) and Toyota (TM) care about rare earths supplies and prices.
And these rare earths, sadly for Molycorp, aren’t living up to their moniker. A relaxation of former Chinese restrictions on output just as demand has slumped this year has driven prices sharply lower, erasing any gains recorded by Molycorp during a surge in those prices in 2011, when China cracked down on exports.
Those fundamentals are reflected in the sharp decline in Molycorp’s earnings over the last year, even as the company has been able to continue to increase its revenues. It also partly explains the plunge in the company’s share price, from $35 this spring to only just north of $10 currently, a not-so-pretty stock chart.
Now, however, there is news that may revive some optimism for the company’s beleaguered stock. Molycorp announced yesterday that its CEO, Mark Smith, has resigned and that he will be succeeded – at least on a temporary basis – by Constantine Karyannoupoulos, the company’s executive vice-chairman. Karyannoupoulos ran Neo Materials Technologies before selling the company to Molycorp earlier this year. There is reason to hope that the management shakeup will help the company resolve the other big black cloud hanging overhead: an SEC investigation into what Molycorp described as “among other things, the accuracy of the Company’s public disclosures.” No details have been forthcoming, although Smith had made some statements indicating success of a new rare earth mining project in recent months.
Odds are that under a new leader Molycorp will find it easier to resolve the SEC investigation, to the extent that the worst possible scenario isn’t already priced into the company’s depressed stock price. Then the question becomes whether the rare earths mining business is approaching the end of its cyclical downturn.
Certainly, Molycorp has suffered as it has kept capital spending high in order to bring new mines on stream. (China has insisted that it doesn’t manipulate rare earths prices, which also are used for defense technology products.) Some observers suggest that demand may well pick up if the economy does, or that customers that stockpiled these materials last year as prices seemed likely to keep climbing may soon approach the point where their inventories are depleted. Either scenario would be good news for Molycorp, as one of the major non-Chinese producers of these rare earths.
There’s nothing amiss in Molycorp’s vision. Of late, the company has set out to integrate itself vertically, acquiring companies like Neo Material in order to control the markets for its products once they are mined and purified. The company’s chairman, Ross Bhappu, said at the time he announced Smith’s departure that Molycorp is at an “inflection point”, as it makes the transition from being a development company to one focusing on effectively managing its much-enlarged operations, including the expanded and modernized Mountain Pass project in California. Along the way, Molycorp acquired several businesses, including Neo Material in June, to further cement the company's mines-to-magnets strategy, giving the company full control of rare-earth mining and the eventual sale of those finished purified products to clients.
The wild card remains China, which effectively sets pricing by its decision on export permitting for its own rare earths output. That’s something over which Molycorp will continue to have no control. Taking a flyer on Molycorp shares at the current levels may be a risky bet, given the new level of uncertainty created by Smith’s departure, but at current prices and in the absence of a “black swan” event, the stock could be coming close to setting its lows.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.