Molycorp losing the Investor Confidence?

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

Molycorp, Inc. (NYSE: MCP), a leading manufacturer of rare earth and rare metal products announced the financial results for the year 2012 on March 14th. The company reported annual revenue of $528.9 million and a loss of $460.9 million or $4.31 per share. Loss has been primarily due to $258 million write-down on the acquisition of Neo Materials.

High loss and weak outlook suggests that Molycorp is no longer an attractive investment destination as it used to be. Will Molycorp be able to regain its past glory or fade out among other stocks? Let’s find out...

SWOT Analysis

<table> <thead> <tr><th> <p>Strengths</p> <ul> <li>Proven Source of Rare Earth Element</li> <li>Well positioned to capitalize on the tightening position of global supply & demand of rare earth elements</li> <li>Highly experienced management team</li> </ul> </th><th> <p>Weakness</p> <ul> <li>Dependence on limited customers for significant portion of revenues</li> <li>High Losses</li> <li>Lack of modernization and</li> <li>Production delays and falling prices</li> <li>High Costs</li> </ul> <p> </p> </th></tr> <tr> <td> <p><strong>Opportunities</strong></p> <ul> <li><strong>Complete modernization and expansion efforts to enhance production capacity</strong></li> <li><strong>Improve operating efficiency with technically advanced manufacturing techniques</strong></li> <li><strong>Achieve cost competitiveness</strong></li> <li><strong>Secure customer commitments to provide a stable revenue stream</strong></li> <li><strong>Integrate downstream to profitably capture the full value chain</strong></li> <li><strong>Develop new higher margin products</strong></li> </ul> <p><strong> </strong></p> </td> <td> <p><strong>Threats</strong></p> <ul> <li><strong>High capital requirement for modernization</strong></li> <li><strong>Fluctuations in demand for, and prices of, rare earth products</strong></li> <li><strong>High Competition</strong></li> <li><strong>Lack of development of new uses and markets for rare earth products</strong></li> <li><strong>Customers pursuing rare earth alternatives or products that do not rely on rare earth products</strong></li> </ul> <p><strong> </strong></p> <p><strong> </strong></p> </td> </tr> </thead> </table>

Competition Scenario

Lynas Corporation Limited (ASX: LYC), Avalon Rare Metals, Inc. (NYSEMKT: AVL) and Rare Element Resources Ltd. (NYSEMKT: REE) are among the major competitors of Molycorp.

Lynas is based in Australia and was once considered at par with Molycorp in rare earth production. The company has started a plant in Malaysia and is expecting to double its rare earth production capacity. It has reported net loss of A$ 59.1 million and A$ 88.8 million in FY11 and FY12 respectively.

Avalon is focusing majorly on the rare earth deposits in Canada. It also expects to start a rare earth separation unit in the US by 2016. It reported net loss of C$ 8.7 million and C$ 11.2 million during FY11 and FY12 respectively.

Rare Element Resources reported net loss of $16.7 million and $35.0 million during FY11 and FY12 respectively. The company plans to start production from a high grade rare earth resource in North America.

Outlook and Future Prospects

Molycorp has projected lower revenues for the first quarter of 2013. The revenues are expected to be weaker than third and fourth quarters of 2012. These projections are mainly attributed to low global demand of rare earths and delays in achieving full commercial production at the Mountain Pass facility.

As per the IMCOA projections global demand for rare earths is expected to increase steadily in the coming years after passing through a serious dip during the 2008 crisis. By the second half of 2013, supply and demand levels are expected to achieve a healthy balance.

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Supply from Molycorp is expected to be almost steady for the coming years. This may be a great concern for the investors because the company seems to be lagging behind on the growth front.

Moreover the company experienced at negative cash flow of $89.6 million during 2012 and has put forward a modernization strategy for the coming years which supposedly has high capital requirements.



Molycorp has lost over 90% of its stock value since 2011. The company has been struggling with high costs, production delays, outdated infrastructure and high competition. Moreover fluctuating demands of rare earth is also adding to the chaos. The company is in need of heavy investment to modernize its existing facilities and achieving operating efficiencies to bring down cost.

Long term demand projection for rare earth seems positive, but Molycorp will have to adopt a well balanced strategy to leverage upon growing demands. Moreover investors have lost their confidence in the company and it will be a tough challenge for the company to regain its market value. Both short term and long term investment perspectives seems negative for Molycorp.

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