EDITOR: | March 15th, 2013

Molycorp’s Results: More Good News than Bad.

| March 15, 2013 | No Comments

Constantine-KaryannopoulosMolycorp (NYSE: MCP) released their fourth quarter results on March 14; while the results were not excellent; they were not quite as bad as many had feared. There were even one or two bright spots. The rare earth metals producer earned revenues of USD$ 528 million last year (+33%) and a net loss of USD$ 359 million. The fourth quarter 2012 revenues were $134.3 million. And this was the little bright spot that ‘didn’t break the camel’s back’ for it showed a slight (1% year-over-year) increase. The main reason for the yearly loss surge was a benevolence impairment charge of USD $258.3 million and another USD$ 11.9 million impairment charge for other assets. Despite the losses, the market reacted in a ‘relatively’ favorable way as shares were up 1.8% after the bell opening. At the time of writing, they are trading at anywhere between USD$ 6.20 to USD$ 6.50.

The results and the decision to postpone the announcement allowing for the market to absorb the bad news sooner, reflects a renewed sense of confidence in Molycorp’s management and a change of culture at the company since Constantine Karayannopoulos took over from Mark Smith – whom, incidentally, the Financial Times describes as having being fired. In that respect, the SEC investigation woes will by now have been fully absorbed by the market. Molycorp has also announced a reorganization plan at all locations, which may include job cuts. Molycorp also announced that it has signed a distribution agreement for the SorbX product with Univar USA, a worldwide distributor of chemical products, which would enable the Company to sell much of its cerium production for the year thanks to an exclusive five-year agreement with Molycorp, which, if anything at all suggests a level of confidence in Molycorp’s future.

Let no investor accuse Molycorp of having excessive cerium capacity now…a frequent complaint. As for the other complaint, related to the shortage of HREE; new players will be coming on line with production in the next four years. If there is a message or lesson to the market here, it is that the emerging REE plays should feature a strong HREE potential, because Molycorp could be signing additional Univar type agreements as the company continues along a ‘stabilization’ path, potentially dominating, if not saturating, the LREE market.

Molycorp’s earnings announcement, after some analysis, suggests that there is room for optimism left. The most striking change over the Mark Smith days is the management approach. Karyannopoulos has chosen to promise less, facing bad news head on and even delivering a few pleasant surprises. The increase in production and an expansion of the product range will likely have offset the effects of months of negative campaigning by armchair REE sector analysts and even some professional ones. Molycorp’s results suggest that 2013 should be a year of improvements, especially as its Mountain Pass facility is expected in to achieve full commercial production in the latter half of 2013. Indeed, the Molycorp results may also serve as a sort of barometer for the REE industry as a whole and to this effect Molycorp also expects that the global demand and supply will be balanced in 2013, which represents good news for both suppliers and customers; indeed, if prices were too high – taking a cue from the Saudis at OPEC – the search for REE alternatives would receive a major boost.

Balanced prices make alternatives less desirable. As for alternatives, another favorite reason to peddle industry pessimism by ‘Lazy-boy’ chair REE industry captains, there are no imminent simple solutions that will make LREE’s irrelevant. Each element has specific physical and chemical properties that pose tremendous challenges to scientists studying substitutes. Even then, to develop a substitution at an industrial scale is an altogether more difficult matter and nobody seems to truly believe that we are anything less than twenty years away from prototypes. The world has been talking about oil replacements for decades and today, more oil is produced than ever before.


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