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It has been a disastrous year for Molycorp Inc. (MCP) so far. The company’s shares are down more than 50% for the year, continuing their poor run from the last two years. Only a few years ago, Molycorp was expected to become a major player in the mining space. However, that has changed as the company has struggled, primarily due to weakness in the rare earth market. But, recent developments in the rare earth market might help Molycorp. In fact, this might be a good time for investors to revisit Molycorp's prospects again.
The Rare Earth Market
The rare earth market is dominated by just one supplier: China. The world’s second-largest economy accounts for 90% of the global supplies of rare earth minerals, which are used in smartphones, tablets, hybrid cars and wind turbines among other things. It was the increasing use of smartphones and tablets that significantly boosted demand for rare earth elements. However, as demand increased for rare earths, China restricted supplies in 2010 by imposing quotas on exports. As a result, rare earth prices skyrocketed.
China’s actions also sparked concerns among manufacturers. Apart from higher prices, manufacturers had to contend with an unreliable supplier in the form of China. Given that China held an essential monopoly on the market, there was a serious threat to manufacturers’ supply chains.
As a result, companies such as Molycorp began developing rare earth projects outside China. Not surprisingly, investors were bullish on Molycorp’s prospects. The company’s shares, which are currently trading at around $2.50, traded above $70 in 2011. That was in fact the peak for Molycorp shares. Since then, it has been all downhill.
Why Molycorp Has Struggled
Just as the likes of Molycorp and some other companies began developing rare earth projects outside China, prices began to come under pressure. Although China maintained its restrictions, waning demand hurt prices for rare earth. One reason for waning demand was that manufacturers began replacing rare earths with alternatives wherever they could.
Weaker prices for rare earth have hurt the likes of Molycorp badly. In the first quarter of 2014, the company’s net loss widened from $0.29 per share to $0.40 per share. Its revenue also fell 4%. The company noted that softened pricing for rare earths and magnetic powders had a negative impact on its top-line. Apart from disappointing financials, Molycorp has also seen production delays, which has further hurt shares.
In March, the company received more bad news after the World Trade Organization (WTO) ruled against China in a case related to rare earths export restrictions placed by the country. The WTO noted that China’s export quotas were against free and fair trade and urged the country to remove them. The removal of quotas is good news for manufacturers as it will increase global supplies. But for Molycorp, increasing supplies means even lower prices.
However, just as everything was looking downhill for Molycorp, a significant development took place in the rare earth market.
Catalysts for Molycorp
There were reports following the WTO verdict that China would appeal against this. However, later it surfaced that China was in fact planning to impose higher taxes on rare earth producers in the second half of this year. In addition, the taxes would be imposed at the producer level. The move push rare earth prices higher, which is what China wants. Also, China is planning to implement tough environmental laws to curb illegal mining. This move will have an impact on production. With these two measures, China is trying to negate the effect of WTO ruling. In fact, the measures could even push rare earth prices higher, which augur well for Molycorp.
Stronger prices will certainly help Molycorp. In addition, the company said at the time of reporting its first-quarter results that its production ramp-up at Mountain Pass is continuing. In addition, the company is also continuing its process optimization and debottlenecking efforts, which it believes will help strengthen the system, increase recoveries and increase throughput.
Given Molycorp’s efforts to remove production bottlenecks, and possibility of stronger prices for rare earths, this might be a good time to look at the company’s shares once again.