Rare Earth Metals

[MWM]

Molycorp's (MCP) Ship Might Have Set Sail... Straight for Rougher Waters

August 17, 2012 8:29 AM EDT

Molycorp (NYSE: MCP) investors have had to dig deep recently as shares have continued to tumble lower on news bits, analyst comments, and macro pressure.

Though Molycorp shares are about 81 percent lower than an annual high of $58.74 hit last September, there appears to be little hope for a change in perception. At least, from a near-term perspective.

From a surprise loss issued with second-quarter 2012 results on August 3rd, shares have been unable to get back above the 29 percent drop realized the following session and closed below that level for the first time in eight sessions yesterday.

Weakness Thursday came from a $60 million common stock private placement.

News of the dilution might not come as too much of a surprise to those following the stock. With its quarterly report on August 3rd, Molycorp cautioned that it might move to secure additional funding without giving a specific amount. Following the report, JPMorgan cut its rating on Molycorp from Neutral to Underweight, dropping its price target 41 percent to $11.50 in the process.

August 13th also carried some bad news for Molycorp, with S&P cutting its rating on Molycorp debt from B to CCC+ and placed the ratings on CreditWatch with developing implications.

Today, Dahlman Rose echoed the sentiment following disclosure of the actual offering size Molycorp will be conducting, downgrading shares from Buy to Hold. Dahlman questioned why Molycorp would opt for a dilutive capital raise instead of choosing to finance via lines of credit. On the $450 million size, Dahlman even went as far as to ask whether the Mountain Pass project would be completed on time and within costs.

However, due to strong belief in a rebound for the rare earth industry, Dahlman skipped slapping a Sell rating on Molycorp. The firm commented: "We believe that China will continue to consolidate companies and curtail production. Further, we believe the dramatic fall in prices has decreased substitution and will likely spur research and development in the area, which should lead to higher long-term demand. Finally, we believe that the problems that are occurring at Molycorp should help to prop up prices, as we question whether the company can produce rare earth oxides at anywhere near the $2.77/kg price that management has forecast."

On the call, Dahlman lowered EPS expectations for Molycorp in FY12 and FY13, from $1.70 and $3.50 down to 80 cents and $1.20, respectively.

Shares of Molycorp are down another 7 percent or so in early trading Friday.