Molycorp (MCP) Tanks on Production Problems, Share Buyback

Michael Teague |

Shares for industrial metals and mineral producer Molycorp Inc. (MCP) had capitulated halfway through Tuesday trading after the company announced that its cash flow for the first 9 months of 2013 had fallen short of expectations.

Cash flow has not been Molycorp’s only problem of late, however. Production at the company’s rare-earth oxide mine in California has only sporadically managed an annualized output rate of 15,000 metric tons, while capacity had been projected at a rate of nearly 20,000.

The cash flow problem may not be as important as what is going on at the company’s Mountain Pass mine/production facility, however. Rare earth metals are the unheralded new resource that various world powers are quietly coveting for the time being. Their worth is derived from the fact that they are used in a wide variety of industries, including medicine, defense and technology, particularly in cell phones and other mobile devices.

Unfortunately for Molycorp, the cerium being extracted from the Mountain Pass mine is of much lower quality than had been expected. Just under 50 percent of what the mine produces is actually cerium, which is currently one of the 17 rare earths with the lowest demand.

Furthermore, the company’s projections for 2014 are based on some very tenuous assumptions, in particular one that shows the company able to sell a significant portion of its cerium stockpile, which is by no means a given.

The final result was that the company also announced a stock buyback worth some $200 million, a sign that so far has been interpreted by investors as an indication of a desperate, distressed company. Shares for Molycorp were down nearly 20 percent to $5.70 a piece heading towards the closing bell.

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