Molycorp's Future Looking Dimmer


Shares of Molycorp (NYS: MCP) hit a 52-week low yesterday. Let's look at how it got here and whether clouds are ahead.

How it got here
One single factor can be pointed to as the driver of Molycorp's falling stock price -- rare-earth-mineral prices. Prices peaked last year but since have fallen off the cliff in anticipation of new supply hitting the market. As Lynas and Molycorp expand the problem will only get worse.

Molycorp and Rare Element Resources (Amex: REE) still have made investors a profit since Molycorp went public, but they've fallen dramatically from their peaks. Avalon Rare Metals hasn't been so lucky, falling 50% over the same timeframe.

MCP Chart
MCP Chart

MCP data by YCharts

The chart below shows just how fast prices can change in the rare-earth market. These are the market prices for oxides and a weighted average price based on Lynas' mine composition. As you can see, prices have fallen nearly in half in just the last quarter.


Q4 2011

Q1 2012


Lanthium Oxide





Cerium Oxide





Neodymium Oxide





Avg Mount Weld Composition





Source: Lynas Corporation

Since the rare-earth-mineral market is very small, when the two mines add supply it floods the market, pushing prices lower. This is why I predicted the bubble would pop in the fall of last year, and it has crushed stocks right on time.

What's next?
Molycorp's stock can go as low as rare-earth-mineral prices, and we already know that can be very low. In 2009, Lynas' Mount Weld composition price was $10.32, which is one-fifth of the price today. The mine Molycorp is building has also gone belly up once before, so there is precedent here.

I think Molycorp has potential to make a lot of money in the future but right now the market dynamics don't look to be in its favor. Supply is just starting to hit the market and I think prices will continue to fall even lower.

The CAPS Community appears to agree, giving the stock a two-star rating with 119 underperform calls. The stock went to extreme highs last year, but when the price bubble burst all momentum was left behind. The company reports earnings on August 2, so I would wait to make a bet one way or the other until then. Just don't expect to hear any good news about prices as the company ramps up production.

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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.The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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