Molycorp’s below expectations Q2 results reveal silver lining with rising market demand
Molycorp’s stock price was rising about 7% in trading ahead of its quarterly earnings call reaching levels close to its 3-month high of USD$ 8/share (12 month low was USD$ 4.70, recorded last April). It remains to be seen whether the favorable price trend will continue and if the Company’s investors have been able to grasp the long term view outlined during the Q2 results conference call presented by CEO Constantine Karayannopoulos.
Molycorp reported a Q2 loss per share of $ 0.36, which was worse than analysts’ estimates of – $ 0.22/share. Revenue was also lower than predicted at USD$ 136.86 rather than the expected USD$ 157.77 million. Last May, Molycorp delivered a more favorable earnings report (Q1) marked by higher than expected results thanks to 73% higher revenues year-to-year. Molycorp has been a very ‘moody’ stock with equally moody analysts’ reports, making it difficult to find a true consensus. July, however, has seen Molycorp restoring some of Wall Street’s enthusiasm for the company as Byron Capital deemed it a ‘strong buy’ and Goldman Sachs kept it at ‘neutral’ – not bad considering the rollercoaster ride that its investors have endured. Others have rated Molycorp a ‘hold’ such that the average consensus appears to be a ‘buy’.
Molycorp is a producer of light rare earths such as cerium and lanthanum, among others, and the Company wants to expand production to achieve about 20,000 tons, or a sixth of world supply, before 2014 in order to meet US government’s plans to reduce dependence on Chinese imports. Molycorp already has the capacity to produce at a rate of 15,000 tons/year and the final 20,000 tons/year target will be achieved when the new chlor-alkali plant is completed – by the fourth quarter. Indeed, Molycorp expects to improve the situation for the second half of 2013 when sales should increase and the company’s Mountain Pass facility is expected to reach full commercial production in view of the fact that the Company has started to see a return to normal demand, driven especially by automobile catalysts in response to higher vehicle sales in Europe. Recent reports from the areas of the EU that have suffered the most in the latest recession have pointed out that the “bottom has been reached” (according to Italy’s Central Bank) and the higher automotive sales trend should continue. Molycorp has invested USD$ 181.1 to date in 2013 and anticipates further expenditure of $ 250 million in the rest of the year. Molycorp, Inc provides Rare Earths and Molybdenum products and its rare earth products comprise of cerium, europium, lanthanum, neodymium, praseodymium, yttrium, and other lanthanides.
Molycorp’s Q2 losses were offset by a rather ‘confident’ presentation from Mr. Karayannopoulos. The confidence wasn’t so much a matter of the Molycorp CEO downplaying the losses – predictable given the combination of continued investment in upgrades at Mountain Pass and bottom barrel REE prices for at least half the period covered by the Q2 results – it was based on concrete evidence that the Chinese REE production has been tightening. Rare earth prices have not been what one would call ‘terrific’ in recent months; they have fallen as have so many other commodities. Those investors who will inevitably criticize Molycorp for the Q2 losses should also note that the REE recovery has still only managed to partially reverse the losses. The other non-Chinese REE producer, Lynas Corp, in fact, decided to hold back on additional development work for its Duncan deposit at Mt. Weld. Nevertheless, the key factor is that the outlook for REE demand and prices is improving. China is and will remain decisive in the market for rare earths and it will continue to supply some 90% of the world’s production. This means that the behavior of the Chinese REE sector, a quasi-monopoly, will continue to dominate the fate of the 17 rare earth commodities. The current crackdown on illegal and unsafe REE producers cited by Molycorp, therefore, is a very important factor. China has shut down many illegal mines and processing plants in actions coordinated between the central government in Beijing and local governments, which until recently were the ones most reluctant to participate in the fight against REE smuggling. Beijing has long tried to keep the REE under tighter control in order to control prices more effectively. The recent developments suggest that rare earth prices will rise again.
The question is less ‘by how much’ as to ‘for how long’. There is evidence, nevertheless, that a long term increase is possible, or even likely for some rare earths such as praseodymium, neodymium; Goldman Sachs predicts that by 2016, cerium and lanthanum will still draw the most demand, accounting for about two thirds all REE sales. This is good news for Molycorp, which is along with Lynas, the largest producer of such elements outside of China. Molycorp’s observations have further corroborated predictions by REE experts Curtin University Professor Dudley Kingsnorth (and to some extent, with caveats, by Rare Earth industry consultant Jack Lifton) who have predicted that by 2020 REE demand will double from 110,000 tons to between 200,000 and 240,000 tons. There is nothing to indicate that Molycorp will not be part of that increase.
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