Is Molycorp Showing Signs of Life?

With shares of Molycorp (NYSE:MCP) trading at around $5.83, is MCP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Bankruptcy? A deep-pocketed partner? Consistent insider buying! Revenue increases! Electric vehicles! These are just a few questions and points that are often made about Molycorp. It has been an atrocious performer over the past year, and this has been while the market is hitting all-time highs. On the other hand, the stock has performed well over the past month. Is it possible that the stock has bottomed? If so, why?

Let’s take a look at the negatives first. The big problem is pretty basic, which is increased supply and weak demand for rare earths. Molycorp has seen significant price declines, which is never a good sign. It’s also bleeding money, and cash flows and margins are weak. In addition to that, the short position has increased over the past month. This likely has to do with the recent rise in the stock price. It has also made for an interesting situation. If the longs are correct and the stock moves higher, it will be aided by a short squeeze. On the other hand, even if the longs are correct about the company’s potential, what happens if the broader market comes back down to realistic levels? Molycorp isn’t likely to perform well in that type of environment.

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Molycorp operates in four segments: Resources, Chemicals & Oxides, Magnetic Materials & Alloys, and Rare Metals. There is obviously a lot of potential, but it has been nothing but potential for quite some time now. In addition to having to deal with weak demand, Molycorp must figure out how to best navigate the supply chain.

It should be noted that Molycorp is a highly innovative company. It’s just that many of these innovations might be too early, poorly timed based on demand, and too costly. That said, we should at least take a quick look. Unfortunately, not many people bother going to Molycorp’s website. Don’t worry; you still don’t have to visit the site. Their innovations are covered below.

Ore Milling & Processing

Molycorp’s new facility incorporates a variety of operational improvements to dramatically increase rare earth recovery rates, which will extend the life of the resource.

Chemical Reagent Use

Molycorp’s new facility will recycle salt water produced in the operation and use it as a feedstock to produce new chemical reagents in a continuous closed recycling loop.

Power Generation & Use

The on-site natural gas-fired combined heat and power (CHP) plant at the new facility will provide high quality power and steam, increasing system efficiency and greatly cutting production costs.  Other combustion operations across the new facility will use cleaner-burning natural gas.

Fresh Water Use

Molycorp’s new facility will recycle process water used in the operation, dramatically reducing the need for fresh water.

Waste Water Production

The new plant at Mountain Pass will be a near-zero wastewater disposal facility, recycling virtually all process water.

Evaporation Ponds

Molycorp’s new facility will recycle process wastewater, eliminating the need for over 120 acres of evaporation ponds.

Tailings Dams

Molycorp’s new facility will form a paste by removing most of the water from tailings. The water will be recycled and the paste will be deposited in successive layers that achieve structural integrity in a short time period, eliminating the need for a tailings dam.

Air Emissions

Molycorp’s new processes will increase overall system efficiency and reduce air emissions – including CO2 – as compared to the business-as-usual technology approach.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Molycorp, Rare Element Resources Ltd. (AMEX:REE), and Avalon Rare Metals Inc. (AMEX:AVL). Molycorp has a market cap of $1.10 billion, Rare Element Resources has a market cap of $82.26 million, and Avalon Rare Metals has a market cap of $113.01 million.

MCP

REE

AVL

Trailing   P/E

N/A

N/A

N/A

Forward   P/E

26.54

N/A

N/A

Profit   Margin

-85.00%

N/A

N/A

ROE

-42.00%

N/A

-8.37%

Operating   Cash Flow

 -$89.64 Million

 -$24.79 Million

 -$5.74 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

N/A

2.00%

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak        

The debt-to-equity ratio for Molycorp is weaker than the industry average of 0.40.

Debt-To-Equity

Cash

Long-Term Debt

MCP

0.98

$227.79 Million

$1.23 Billion

REE

0.00

$47.36 Million

$0

AVL

0.00

$20.36 Million

$0

 

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T = Technicals Are Improving  

Molycorp has been one of the weakest performers throughout the broader market over the past year. However, this was an industry-wide trend. The past month has been much better. Is this upward move sustainable?

1 Month

Year-To-Date

1 Year

3 Year

MCP

11.47%

-38.24%

-78.08%

N/A

REE

-10.63%

-45.59%

-62.70%

-40.23%

AVL

6.86%

-19.85%

-53.02%

-53.62%

 

At $5.83, Molycorp is trading above its 50-day SMA, but below its 100-day SMA and 200-day SMA.

50-Day   SMA

5.69

100-Day   SMA

7.24

200-Day   SMA

9.33

 

E = Earnings Have Been Weak                              

Earnings are the problem. If Molycorp can get back to showing a profit, it would be a home run. Revenue growth has been good.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

N/A

7.09

35.16

396.83

528.91

Diluted   EPS ($)

N/A

-0.72

-0.81

1.27

-4.31

 

When we look at the previous quarter on a year-over-year basis, we see an in increase in revenue and a decline in earnings.

 12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

123.90

84.47

104.58

205.60

134.26

Diluted   EPS ($)

0.31

-0.07

-0.71

-0.19

-2.88

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Companies throughout the industry are going to have a difficult time raising capital to finance exploration. There has also been increased supply and decreased demand, which has led to price deterioration. The industry will shrink, but nobody knows which companies will survive.

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Conclusion

The Molycorp picture isn’t a pretty one. There is potential if everything falls into place at the right time, but the odds of this happening aren’t very good. At this level, Molycorp is a WAIT AND SEE. The May 9 earnings announcement should paint a much clearer picture.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.