Molycorp Rare Earths Quality Confession Worse Than Secondary Offering

24/7 Wall St.

Molycorp Inc. (MCP) is showing its new shareholders buying into the rare earths trade late in the game that it still has a tendency to shaft the value of their investment in the company. This stock already was trading low at $7.10 on Monday, but news of a secondary stock offering is another reminder that it will punish shareholders if need be. What is worse is the disclosure from the filings about the quality and expectations of the rare earth materials and the quality as well.

On the heels of a new chief executive, Molycorp now has projected that it will run at negative cash flows and will have to raise additional capital. The company announced that it will sell up to $200 million of its common stock, subject to market and other conditions.

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Molycorp disclosed that it plans to use the net proceeds received from this offering to fund its current needs for capital expenditures and other cash requirements at its Mountain Pass, Calif., facility. The joint book runners for the offering will include Morgan Stanley, Goldman Sachs and J.P. Morgan Securities.

The company's SEC filing disclosure said, "Subsequent to January 2013, a number of developments have occurred that have reduced our cash cushion to a level below what we view as sufficient to ensure we will have no substantial concern about our ability to finance ourselves."

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What the filing really shows is that Molycorp's rare earths might not be the great source that investors thought the company had. Molycorp projected that approximately 48.8% of the rare earth material contained in the Mountain Pass facility bastnasite ore is cerium, which is considered a lower demand product.

The company has said that it anticipates that SorbXTM can help stimulate demand for cerium in the longer term, but it also disclosed that cerium sales from the facility have not been meaningful in the past several quarters. More importantly, Molycorp is confessing that this trend is expected to continue for some time, until SorbXTM achieves greater market penetration.

Another risk here is that Molycorp's new budget reflects an assumption that it will be able to sell a substantial portion of its cerium beginning in the first quarter of 2014, once its current SorbXTM testing for various uses is completed and as the company qualifies its cerium for use in other products. That being said, it also projected that it will be unable to sell a substantial portion of its cerium production during 2014.

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The disclosures and projections on other aspects of the rare earths and the Mountain Pass facility are lacking heavily as well. In fact, Molycorp's projections for rare earth investors look as though things are going from bad to far worse. There are too many to recite, but the SEC filing summary here shows just how bad things are.

Molycorp shares were trading down a whopping 18% to $5.84, against a 52-week range of $4.70 to $11.89. Yahoo! Finance showed the market cap after the drop as $1.1 billion, and that is prior to determining whether to use new shares in the calculation.

Things just went from bad to worse for Molycorp. It turns out that having a huge deposit of rare earth materials has to be qualified into good rare earths and bad rare earths. Imagine that.

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