Following earnings results that showed a smaller-than-expected loss in the first quarter, rare-earth minerals miner Molycorp Inc (NYSE:MCP) surged 31% high on Friday as investors seemed thankful that the modernization of its main Mountain Pass mine hasn’t been derailed. But with the company still reporting losses and the weakness it experienced in 2012 expected to continue well into 2013, should investors really be all that excited?
I’d say no. Until Mountain Pass comes online, the processing it hoped to achieve will have to be cut, and there’s the possibility it may have to resort to asset sales to keep the money coming in and to control costs going out. Last year it was all too willing to continuously tap the equity markets to finance its operations but dilute shareholders in the process.
Canadian REE miner Tasman Metals is looking for yttrium prices to fall as low as $20 per kilogram and both lanthanum and cerium to fall as well. Molycorp Inc (NYSE:MCP) says those two elements are its main focus (they comprise 83% of bastnasite ore in Mountain Pass), and if prices slide 15%, its cash balances would drop by $30 million. A 15% decline in volumes would mean a 10% drop in cash balances. With Tasman’s customers seeing a “vast oversupply” in these metals, we can expect Molycorp Inc (NYSE:MCP)’s financial situation to degrade.
Moreover, Molycorp Inc (NYSE:MCP) estimates are based on a having a Goldilocks environment prevail, in that its cost estimates for its capex program prove correct, it doesn’t run into any delays at Mountain Pass, market conditions remain stable (not experiencing those falling prices or volumes), it’s able to sell all the REO it produces, and it doesn’t have to make any payments on current or future liabilities.
We should probably add in the alignment of the stars, too, because the miner has $28 million in debt payments due in 2013, and while there are only $1.5 million due in 2014 and 2015, it has some heavy lifting to do when 2016 rolls around, as $231 million comes due. That’s followed by $417 million in payments the year after.
And to think the ramp at Mountain Pass will run smoothly defies logic, as miners everywhere routinely run into problems that cause delays. Larger, more astute miners such as Barrick Gold Corporation (USA) (NYSE:ABX), Vale SA (ADR) (NYSE:VALE), and Newmont Mining Corp (NYSE:NEM) have run aground on delays and pricing issues, and Molycorp Inc (NYSE:MCP) itself has been unable to keep its production schedule on track.