Molycorp Inc (NYSE:MCP), the rare earth metals company, is down over 50% year to date and also made our list of terrible 20 stocks, given its high short interest and stock price under performance. With the company down drastically and the rising demand for key rare earth component products, such as smartphones and hybrid vehicles, is Molycorp a buying opportunity?
Molycorp’s August announcement of plans to raise $450 million through senior notes and common equity spurred a downgrade by Dahlman Rose & Co. Dahlman’s analyst, Anthony Young, noted that the dilutive nature of such a raise was more than expected and leads the firm to question whether key projects will be completed on time. In 2Q, the company posted a greater than expected EPS loss of $0.71, versus consensus of a $0.53 loss.
Molycorp competes with the likes of the very diversified Mitsubishi Corporation (PINK:MSBHY). The Japanese company operates various segments, but recently announced that earnings might be down as much as 33% from previous estimates for full year 2012, with the fall in commodity prices playing a key role in the weakened guidance. The company was down over 5% on the news, due to its various exposures to commodities. A bearish global outlook should continue to place downward pressure on the company, where it is expected to grow EPS at just a 1.5% clip over the next five years.
Rare Element Resources Ltd. (NYSEAMEX:REE) primarily operates from its key property in Wyoming, both exploring for and developing minerals. Rare Element saw a number of insider sales a few months ago in the range of $4.60 to $5.00, and the stock currently trades around $4.35. Israel Englander, just as with his Avalon position, closed out his Rare Element holdings in 2Q.
Avalon Rare Metals Inc (NYSEAMEX:AVL), another key Molycorp competitor, is a Canadian mineral exploration company. Avalon had little fund interest, including the fact that Israel Englander closed out his entire position. Avalon’s top fund owner, Chilton Investment Company, was downsizing their 1Q position by over 20% in 2Q. Both Rare Element and Avalon are much smaller competitors at market caps of sub-$200 million, and both also have trailing twelve-month net losses of at least $10 million.
The largest rare earth producer, Inner Mongolia Baotou Steel Rare-Earth (SHA:600111), has been under recent pressure as well, being down almost 15% over the last three months. The company announced 3Q profits that were down 90% year over year, citing the drops in rare earth prices as the key reason. The company operates primarily in China, where weak demand has forced prices down. Here is where Molycorp and other producers might have an advantage over Baotou. The positive note for Molycorp is that China has noted it plans to continue to reduce exports of rare earths, leaving companies such as Molycorp to pick up the slack.
However, as major rare earth companies continue to ramp up production, the global supply will continue to increase, meaning continued low prices for commodities. The Bloomberg Rare Earth Mineral Resources Index is down over 40% the last twelve months. This slide comes off a run up in prices over the past couple years as China has slowed exportation of rare earths. China has been said to produce around 95% of global rare earth minerals. Yet, companies like Molycorp and others located in Australia have ramped up production in an effort to make up for a lack of supply.
Molycorp saw interest from John Griffin at Blue Ridge Capital who took a new 2.2 million-share stake in the company, as well as D.E. Shaw, who upped his 1Q stake almost 800% during 2Q. We believe that the surplus of rare earths is still robust and will likely keep commodity prices low. As a result, Molycorp recently saw an 11% jump its number of shares shorted, pushing the short interest over 40% as a percent of float. The company has seen its earnings in steady decline over the last four quarters and we are afraid this trend may well continue. We would rather see the increase in smartphone sales result in actual rare earth supply decrease, making the mineral companies more competitive, before investing in this arena.