Has Molycorp reached the ‘amputation’ stage yet?
The rare earth metals producer Molycorp (NYSE: MCP) has issued plenty of warnings about a significant decline in revenue and cash flow in the first quarter 2013. In addition, the company warned that it could end up with a cash deficit of about USD$ 250 million. The market responded as expected and its shares dropped 11% on Thursday. In fact, Molycorp’s shares have dropped 61% in 2012 over lower than expected rare earth prices in general, demand concerns and an SEC investigation. Molycorp has also been guilty of over-promising and under delivering, given some production problems causing delays in achieving its target of 19,050 tons a year of REO’s from its Mountain Pass facility in California.
Molycorp said that its fourth quarter 2012 revenue and cash flow were much lower than expected – and there are few favorable prospects on the horizon. However, the company remains active and still expects the first phase of commercial production at a rate of 19,050 metric tons of rare earth products to be achieved about mid-2013. Molycorp had hoped to achieve this milestone in late 2012. If these burdens are not enough, Molycorp also has to deal with the expansion and modernization of the plant requiring several hundred million dollars in capital expenditure on the plant. Molycorp announced that it shares with a value of 200, and will sell bonds worth 100 million dollars to pay the capital costs.
The question for those who have been following Molycorp and waiting for some good news is why Molycorp doesn’t simply divest itself from the Mountain Pass mine, which as noted above has been a veritable money pit. That would leave the ‘Molycorp Canada’ the former Neo Materials, which Molycorp purchased last year to gain access to its processing technologies in powders used in sophisticated high-performance bonded magnets. Nevertheless, the divestment argument is not entirely convincing even if it makes considerable sense. In medical terns, a doctor does not amputate his patient’s arm simply because it was broken during a fall; Molycorp has not reached the ‘amputation’ stage – yet.
Molycorp started 2013 with rumors of a takeover and in theory the Company has some basic takeover appeal; it is producing rare earths, the Mountain Pass mine was once the world’s largest producer of rare earths and the uses for rare earths increase by the day with new applications and discoveries. The United States moreover, as stated by President Obama during his inauguration speech and as expressed in the Smart Sale Act (SSA), is keen to develop strategic natural and manufactured resources at home. China is one of the targets of the SSA and, while much of the speculation over a possible buyer for Molycorp has focused on China, the US Government would be very reluctant to allow it. For all of the challenges, Molycorp is still the main supplier of rare earth oxides outside of China and has been producing rare earths since the 1950’s and it still has the opportunity to become a major producer once (or if?) the expanded facility is in place. At the same time, the time for the takeover is now, or while share price is well below expectations.
The intensification of the Senkaku/Diaoyu dispute between China and Japan has already determined a vast reduction of Chinese rare earth exports to Japan. The dispute was also the spark that prompted the re-launch of the Mountain Pass mine after a ten year closure. It would be illogical for the US to allow China to buy Mountain Pass in the midst of a renewed and likely prolonged Sino-Japanese quarrel (it already tried to buy Mountain Pass in 2005 only to be blocked by Congress) while Congress is debating the SSA, a legislative proposal that has been praised by the Strategic Materials Advisory Council. The buyers would have to come from countries that are close US allies. Molycorp, therefore, for all its issues might still appeal to a large manufacturer that needs to obtain guaranteed access to critical metals. Surely, the buyers (probably automobile manufacturers with large commercial needs for battery and electric motor materials) do not need to get their own rare earth supply, but by controlling raw materials, they also control their competitors’ access to such materials: and therein lies the appeal. Toyota, for example bought the Salar de Olaroz lithium mine (developed by Orocobre, Toyota Tsusho and Jujuy Province mining and Energy company) just to ensure it had enough lithium to make its electric vehicles. Therefore, a logical case can be made for a big investor to take a serious gander at Molycorp, which means this possibility (if not probability) should make Molycorp one of the more interesting companies to watch this year. For those in a very speculative mood, the question might be whether or not the would-be buyer wants the Mountain Pass mine alone or the entire company including Molycorp Canada’s processing facility.
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