The Mountain Pass Mine in California, operated by Molycorp Inc. (Source)
After watching the 60 Minutes report on Molycorp (NYSE: MCP) recently, I posted the following tweet:
It may be that Ive been studying the rare earth space for the past several years and many of the arguments and points put forth were old news to me, but I thought the report was more notable for what it left out rather than what it discussed.
Here is the real tragedy: MCPs performance (see below against the SPX since 2010) and consistent ability to overpromise and under deliver has done significant damage to investor perception of the non-Chinese REE space. This damage, at the end of the day, is what really matters.
With 12 straight quarterly losses and a tag from its auditors questioning its ability to operate as a going concern, MCPs solvency is an increasingly relevant issue. There are those investors who have watched MCPs share price performance and who listened to the companys most recent earnings call (which was disconcerting, to say the least) and are now skeptical of the prospects for the REE sector over the next few years. Serious contenders to future REE supply chains such as Tasman Metals (NYSE MKT: TAS | TSXV: TSM), Ucore Rare Metals (TSXV: UCU | OTCQX: UURAF), Rare Element Resources (NYSE MKT: REE | TSXV: RES), or Namibia Rare Earths (OTCBB: NMREF | TSX: NRE) will have more hurdles to clear because of MCPs collapse. This is despite healthy demand projections for select REEs.
Another interesting angle 60 Minutes could have taken would have been to discuss what went wrong. How could a company positioned as this prized strategic asset lose almost 100% of its value in the equity market? Was DoD support not there? Was it the collapse in REE prices? How responsible is previous management for this debacle? The story of foreign dependence on REEs between 2010 and now hasnt changed. So what has? Why do so few of us still seem to care?
During the past two years, MCP produced a product for which demand was uncertain. The company hasnt been able to lower costs to the point where sustained profitability is a reality. To be fair, Im simplifying the analysis, but MCPs financial performance really speaks for itself. The key now is to find those opportunities which can produce a product that the market needs in a quantity it can bear. Many REE junior mining companies have realized this and have adjusted their future potential production levels accordingly. In many cases, the levels have been adjusted downwards, but this is the market speaking loud and clear.
Yet another question to ponder: what will MCP will look like in one year from now? If its cash burn continues and operational results fail to impress, will the US Government ride to the rescue? I seriously doubt it .and furthermore, they shouldnt. Why should MCP be treated any differently than any other publicly traded entity? Isnt creative destruction one of the central tenets of capitalism?
My sense is that MCP will be split up but not before some of the huge debt pile suffocating the company is renegotiated. If junior bond holders are forced to swap their debt for equity, get ready for a share nose dive as these holders will almost certainly sell to preserve some of their capital. Thats when a potential death spiral could begin. Any remaining equity holders will almost certainly be wiped out. Should this happen, it will add another chapter to the sad history of the company.
Fortunately, MCPs current Chairman is one of the best in the business. The decisions that company management and the Board of Directors will make going forward are not just crucial for MCP, but are important for emerging REE plays as well.
Lest you think Im kicking a horse when its down, I have no axe to grind here. I have never owned a share of MCP. The rare earth sector is fascinating and will only become more important in the future as technology, urbanization, innovation, and demographics all converge across the globe. However, I just never understood how a company was going to produce 50,000 tonnes of material in a 120,000 tonne market (at the time) dominated by a single country (China). It appears that my skepticism has been validated.
I see a lot of the same froth in lithium currently which I why I expect the number of players in that sector to contract between now and 2017.
The performance of MCP has forced a re-think of how to build a profitable REE enterprise and is, I think, an incredibly valuable learning experience for us all. MCP was priced for perfection and thus far hasnt met expectations. At the end of the day it was really always about economics. The Molycorp case, or How to Build a Viable Rare Earth Company will be a great business school case study some day.
Chris Berry
President of House Mountain Partners LLC and Co-Editor of Disruptive Discoveries Journal
Chris Berry is a well-known writer, speaker, and analyst. He focuses much of his time on Energy Metals those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence emanating from the Emerging World and believes it will have profound effects across the globe in the coming years. Active on the speaking circuit throughout the world and frequently quoted in the press, Chris spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his financial destiny.He is also a Senior Editor at Investor Intel. He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute. Please visit www.discoveryinvesting.com and www.house-mountain.com for more information and registration for free newsletter as well as his disclaimer.