Molycorp Makes a Move but Does it Matter?

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Now that investors got the press-release pump out of their systems they can go back to evaluating rare earth mineral miner Molycorp with an appropriately jaundiced eye.

On Wednesday, the miner created a sensation when it announced its Mountain Pass, Calif., chloralkali plant was mechanically complete and full-scale commissioning operations were commencing. Once it's fully operational and optimized, the plant will help Molycorp achieve its cash production cost targets, making it competitive with the lowest cost producers globally. The chloralkali plant will recycle wastewater and produce hydrochloric acid and caustic soda used as part of the rare earth separations process.

The market reacted with enthusiasm, sending Molycorp shares almost 11% higher, though they gave back a small bit of those gains yesterday.

Still a mountain to climb
Molycorp has been beset by a host of problems that have fatigued its performance over the past few years and ended up having to dilute shareholders twice through share offerings in the past year to pay for cost overruns at Mountain Pass. There's significant doubt about whether the miner can achieve the goals it set since prices for rare earth minerals are falling, demand is slackening, and questionable acquisitions like Neo Material Technologies have taken place. Neo Material Technologies helps make it a one-stop shop for mining and processing but also raises questions about feasibility since it needs to ship the ore to China for processing. 

Toss in a dollop of corporate governance issues, and I've been skeptical of an investment in the company and last year recommended investors keep away from the stock. But what's past is past (well, let's not hope it's prologue), and a new evaluation is necessary.

Unlike Avalon Rare Metals and Rare Element Resources, which remain years away from production, Molycorp is producing now, even if its output is hampered by the market forces described above. But it faces a real crisis in pricing as the metals have plunged in value throughout the year, and rival Lynas has been gaining ground in the interim.

In particular, cerium and lanthanum, the two metals Molycorp says it will focus on most at Mountain Pass because they are most prevalent, have plunged anywhere from 20% to 30% in value since May, which is problematic because the miner has said if they fall by 15% it could lead to a $30 million drop in cash balances.

Also, some metals, such as cerium, are in oversupply globally, so its depressed value could lead to a cash crunch again at Molycorp and perhaps additional dilutive offerings (cerium accounted for 15% of Molycorp's sales last year). But it did sign an agreement with Univar earlier this year that could lead it to sell out almost its entire early cerium production by 2015.

At this time, though, there are still too many variables at play to make an investment decision. It's a volatile situation, and its stock will act accordingly, rising on seemingly positive developments like the facility completion, yet fall back as market conditions for its metals deteriorate. There's still a long road before Molycorp, and though it appears to be working out many of its past problems, only a small portion of the most speculative part of your portfolio should be allocated here.

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