Can Shares of Molycorp Rise Again?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recent Moves

Rare earth minerals are vital to the manufacture of a variety of high tech products, including cell phones.  China controls over 90% of the world’s rare earth resources.  When that country began imposing export quotas on these resources in 2010, shares of companies like U.S. based Molycorp (NYSE: MCP) began to rise. 

In a strange turn of events, as the few non-Chinese rare earth miners invested heavily to increase production, prices for rare earth minerals dropped in part due to an anticipation of a supply glut. 

On Dec. 12, Molycorp’s shareholders learned that the CEO was leaving the company.  The Securities and Exchange Commission is investigating irregularities in the company’s financial disclosures. In addition, the company is facing a lawsuit over engineering problems at its mine. Shares dropped 3%, adding to the pain of an overall 58% drop since MCP’s March acquisition of Canada-based Neo Material, a specialty rare earth provider of magnetic powders.

Future Prospects

Several major analysts see the management change as positive for the company going forward.  The shakeup comes as Molycorp is in the midst of completing the revamp of its key Mountain Pass mining operation in California.  The project has been plagued by cost overruns and construction delays.  Some analysts feel a new CEO will be in a better position to get additional financing needed for project completion. 

If you believe the options market is a good indicator of future price performance, you should know options investors are turning bullish on MCP.  According to Schaeffers Investment Research figures from the Intentional Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) show a call to put imbalance (+1.66) of 18,821 open call options on MCP in contrast to only 11,312 put options.

Molycorp vs. the Rest

The table below looks at some key performance metrics for Molycorp and two other US-based rare earth mining companies, Thompson Creek Metals (NYSE: TC) and General Moly Corp. (NYSEMKT: GMO).

<table> <tbody> <tr> <td> <p><strong>Indicator</strong></p> </td> <td> <p><strong> </strong></p> <p><strong>Molycorp Inc.</strong><strong></strong></p> </td> <td> <p><strong>Thompson Creek Metals</strong></p> </td> <td> <p><strong> </strong></p> <p><strong>General Moly</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$1.3 bil</p> </td> <td> <p>$647.9 mil</p> </td> <td> <p>$354.1 mil</p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>57.94</p> </td> <td> <p>11.7</p> </td> <td> <p>--</p> </td> </tr> <tr> <td> <p><strong>P/B Ratio</strong></p> </td> <td> <p>0.8</p> </td> <td> <p>0.3</p> </td> <td> <p>2.6</p> </td> </tr> <tr> <td> <p><strong>EPS Past 5 Years</strong></p> </td> <td> <p>0%</p> </td> <td> <p>-22.18%</p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p><strong>EPS Next 5 Years</strong></p> </td> <td> <p>20%</p> </td> <td> <p>54.5%</p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.7</p> </td> <td> <p>0.35</p> </td> <td> <p>--</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>-5.2%</p> </td> <td> <p>-3.39%</p> </td> <td> <p>-7.7%</p> </td> </tr> </tbody> </table>

Looking only at these measures, the clear winner is not Molycorp, but smaller rival Thompson Creek Metals. The company’s growth prospects as measured by its Forward P/E and earnings forecast over 5 years are substantially better than Molycorp’s prospects.  Thompson Creek is in a better debt position with debt to equity of only 0.35.  If you dig further into Molycorp vs. Thompson, you would find Thompson is already producing and has copper and gold assets in addition to its core rare earth operations.

Foolish Summary

Molycorp is considered by some a classic example of an over-hyped stock that saw a dramatic rise divorced from reality.  As reality set in, the share price collapsed.  MCP investors realized a 650% share price jump going into April of 2011.  With increasing demand for high tech products that need rare earth minerals, companies like Molycorp were constantly in the news. The question now is can a stock trading around $10 ever hope to return to its lofty high of $70 per share.

Commodity prices overall are slowly recovering and demand for rare earths is real.  However, the wild card with a stock like Molycorp is China.  For cautious investors, the stock is highly speculative at best for no other reason than Chinese domination of the market.  What will China do?  China seems to be determined to use the rare-earth materials as a wild card against the rest of the world. The stock looks extremely cheap compared to a year ago, but there is too much uncertainty around. Therefore, Molycorp is a candidate for buying on the dips for those with high-risk tolerance.

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