Molycorp Inc (MCP)’s Expansion at the Mercy of a Wary Market

Besides its production woes, Molycorp also had a sudden change of leadership when its board ousted the company’s long standing President and CEO Mark Smith and replaced him with Constantine Karayannopoulos as interim president and CEO. Smith has been spearheading the Mountain Pass rare earths operations for more than a decade. Karayannopoulos used to head Neo Material, which was acquired by Molycorp in March last year for $1.3 billion. Smith’s departure has come because of an SEC investigation into the accuracy of the Molycorp’s public disclosures. Nonetheless, the whole affair does raise question marks over its management. The SEC investigations have been in process since August, but the board decided to sweep the issue under the carpet until the official earnings release three months later in November.

All of this has put further dent on Molycorp’s shares, which, at the beginning of January, were trading at a 19% discount to their book value. This has prompted some analysts, such as Byron Capital Markets Ltd, to speculate that Molycorp could be under the takeover radar of firms such as Nissan or Siemens AG (NYSE:SI).

Although the purchase of Molycorp by an automobile manufacturer seems like an extreme case of vertical integration, this is exactly what Toyota did recently by making a 25% investment in a lithium development project in Salar de Olaroz, Argentina.

The key for Mountain Pass is that it produces a number of the so-called heavy rare earths, including dysprosium, which is in high demand for the motors used in electric vehicles. Heavy rare earths, dysprosium especially, are projected to be in a supply deficit for the next decade, but current prices look to be under heavy pressure still as new mine supply worldwide stimulated by the price bubble is now mixing with uneven near-term demand .

According to Metal Miner, Dysprosium prices are off more than 15% in January and their Rare Earth Index seems to be bottom bouncing.  I would watch Molycorp’s news feed for confirmation that it is able to drum up investor support for expanding Mountain Pass as a sign the market approves the deal.  The rare earth industry looks like it isn’t ready to absorb more potential supply at the moment, and patience would be prudent before jumping in again.

The article Molycorp’s Expansion at the Mercy of a Wary Market originally appeared on Fool.com and is written by Peter Pham.

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