Molycorp's New Leader Faces an Uphill Climb

Molycorp (NYSE: MCP) introduced Geoff Bedford as its CEO yesterday, following the firing Mark Smith late last year. Bedford takes over a company that's gone through a major expansion phase and faces a number of challenges in the future. Molycorp has gone from a market darling in rare earths to new lows in 2013 and can't seem to gain traction on the top or bottom line.

It doesn't appear that the challenges are over either. End markets aren't improving as expected and if they don't the expansion plans put in place will continue to be on hold with equipment sitting idly by.

Is the rare earth market coming back?
Rare earth mineral prices spiked in 2010 and 2011 when China cut down exports to protect its own economic interests. An area of mining few investors had heard of suddenly became a hot investment as prices skyrocketed. But when new supply from Molycorp and Lynas Corp. began coming online demand didn't outstrip supply anymore and prices plunged.

Investors have been looking for an end to the bleeding for two years and Molycorp has dangled some hope. On last quarter's earnings release, interim CEO Constantine Karayannopoulos said there were "bullish signals from customers across several segments", indicating that a turnaround was imminent. Recent data shows some signs for hope but not a full on buy sign yet.  

Below is a table of oxide prices provided by Lynas. It shows the rapid rise in prices when China cut back on exports and the rapid fall in prices now that miners around the world have increased supply.  

Source: Lynas Corp.

In more recent quotes from Metal Pages, it appears that the decline of lanthanum and cerium oxide prices have continued steep declines during the third quarter. These are the two materials management expects to produce most of from its mine on Mountain Pass.  

On the plus side, neodymium and praseodymium oxide prices appear to be up about 30% since the end of last quarter. That will help revenue because these are high cost items, but they're also only expected to be about 16% to 17% of the distribution of Mountain Pass.  

Mixed signals about Molycorp
If the rare earth mineral market were improving all around it may be easy to predict operational improvement. Revenue would rise without much rise in operating costs and production expansion would add to the company's margins. But one segment is up while another is down, so there may not be a huge jump in revenue outside of increasing production.

That's a problem because Molycorp lost $71.2 million on $136.9 million in revenue last quarter. The company needs strong improvement in prices and sustained demand to make a profit. Until that happens the company and its new CEO face an uphill battle.