Molycorp Making Head-Scratching Deals
Molycorp (NYS: MCP) continues to sell shares as fast as it can before it churns out any real production. I'm beginning to wonder why management is so eager to sell shares if the company is in such a strong position.
This week it was a $390 million stock sale to Molymet, a processor of molybdenum and rhenium. The company will spin it as a strategic investment, but there weren't any joint ventures announced, so the strategy is foggy at best.
So much cash, nowhere to spend it
Just over four months ago, Molycorp claimed it was fully funded, saying "Molycorp's capital investment needs have been filled, and since it is now producing significant revenue from sales to customers around the world, including Japan, Sumitomo's investment is not necessary for implementation of Molycorp's business plan." That's a confident assessment that the company could easily stand on its own in the future.
On the day that statement was made, the company's stock closed at $53.74. So what's changed in the meantime, and why is an outside investment necessary with the stock trading nearly 50% lower? If management didn't need the cash then, why do they need to cash now?
Desperate for partners
There is one explanation for the investment. Management is nervous that if it has to sell rare-earth minerals on the open market it will find falling prices and the company will be stuck with extra capacity that wasn't needed by the global market. To remedy this, it has gone on a buying spree, purchasing downstream companies to ensure its supply has somewhere to go.
If that's the case, it doesn't bode well for junior miners Rare Element Resources (ASE: REE) and Avalon Rare Metals (ASE: AVL) , which won't begin production until long after Molycorp and Australian miner Lynas are fully ramped up.
Foolish bottom line
I've been saying for over a year now that rare-earth mineral prices were going to fall off a cliff when more supply comes online. Prices are clearly falling, with Lynas' average production composition down nearly 50% since the end of the third quarter. Molycorp looks like a company desperate to squeeze as much out of others as it can until its opens production and we find out it isn't making as much money as we once thought it would. I would stay away from this stock because prices will keep falling as more supply keeps coming on the market.
At the time this article was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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