Molycorp Investors Suffer a Case of Whiplash


Watching this stock could be hazardous to your health, as the violent volatility is enough to give you whiplash!

Molycorp's stock took a sound beating Thursday morning, opening nearly 9% beneath Wednesday's close -- and striking a brand new 52-week low -- after the company announced a delay to its fourth-quarter earnings release until March 15. The company needs more time to determine the amount by which it will impair goodwill relating to its $1.3 billion acquisition of Neo Material Technologies last year.

By midday, however, the shares recovered most of that gut-wrenching decline. After all, a substantial impairment to the acquired-asset valuation could be seen coming a mile away, as the rug has been ripped out from beneath the rare-earth element industry even in the brief period since the transaction closed. It's a familiar story playing out everywhere in the mining industry right now, with miners of myriad products from Cliffs Natural Resources to Barrick Gold offering poignant examples of recently acquired assets suffering dramatic declines in valuation. With Vale completing the unfortunate triple play this week, each of the world's big-three diversified miners recorded multi-billion-dollar writedowns with their recent earnings releases.

Amid this non-cash slashing of figures on balance sheets, meanwhile, it's all too easy for investors to begin underestimating the strategic significance of an acquisition as utterly transformative as Neo Materials Technologies was to Molycorp. With its worldwide network of rare-earth element processing and refining facilities, Neo Materials granted Molycorp a truly unique competitive position as the world's only fully integrated "mine-to-magnetics" supplier of rare-earth elements and the suite of value-added products derived therefrom.

Analyst Jon Hykawy of Byron Capital Management -- whose firm maintains a buy recommendation on Molycorp with a $15 price target -- reiterated his view that "the mine-to-magnet business model is the correct model in the rare earths space." I agree, and I would add that if this struggling company can succeed, against all apparent odds, in achieving the low-cost production profile envisioned for the Mountain Pass mining complex in California, Molycorp could well morph into one of the mining industry's most fascinating rage-to-riches stories. On second thought, given the enormous speculative fervor that propelled the shares to an all-time high above $79 in 2011, I suppose we'd have to call this a riches-to-rags-to-riches story.

There is no way to sugarcoat it: Molycorp remains a high-risk investment vehicle capable of blasting shareholders with unspeakable volatility. Even the notably bullish analyst cited above is awaiting the March 15 filing to ensure that this looming goodwill impairment will not push Molycorp into a breach of its debt covenants. For those investors who recall the near-demise of Teck Resources back in 2008, and its enormously profitable return from the brink that soon followed, a 9% market reaction to an insignificant development like the delay announced Thursday can serve as an important reducer of risk to a high-risk speculation. For those who can withstand a little whiplash, this stock may yet offer gains in place of pains.

By embracing an alluring strategy of vertical integration combined with a pervasive emphasis upon innovation, Molycorp is taking a page out of the fascinating history of aluminum giant Alcoa. To learn more about Alcoa's efforts to repeat its past success by leveraging those core competencies, please access my premium research report on Alcoa by clicking here.

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Fool contributor Christopher Barker owns shares of Teck Resources Limited (USA). The Motley Fool has no position in any of the stocks mentioned. 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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