By Doug Ehrman, The Motley Fool
Filed under: Investing
On a day that the Dow Jones Industrial Average set another new record high, shares of Molycorp hit a new 52-week low, closing just $0.12 above its lowest point in the last year. The company has suffered from falling rare-earth prices and the inevitable problem of operating in a market that is 90% controlled by China. Prices for the substances that form the company’s stock and trade have seen falling demand as the initial hype over those products has waned in the weak economy.
While there are no obvious catalysts on the horizon, the question for Molycorp has become one of whether the stock is cheap enough to warrant a long-term play. Trying to call a bottom is risky business and not really the Foolish way. With that in mind, I believe shares of Molycorp look attractive between $4 and $5 per share. Essentially then, despite the new low, the stock has room to fall further before it is time to establish a position.
How did we get here?
In the middle of March, Molycorp had two significant events that affected the stock in opposite ways. On the positive side, the company announced a five-year exclusive agreement between Molycorp Advanced Water Technologies and a subsidiary of Univar. Although the specific financial details of the transaction weren’t disclosed, the arrangement involves having Univar act as a distributor of SorbX-100, a cerium-based product used in water treatment; the product is sold to North American industrial and municipal wastewater treatment facilities.
The announcement led Brian Lee, an analyst at Goldman Sachs, to comment that the deal “should help quell some investor concerns around excess cerium capacity.” He believes the relationship will allow Molycorp to sell the entirety of its phase 1 cerium production by 2015. The announcement led to a 4% pop in the stock.
Unfortunately for shareholders, the news wasn’t sufficient to keep the stock headed higher. A disappointing earnings report, made worse by the fact that the company requested additional time before it was ready to report, has weighed on shares. In January, the company told the market that it was significantly lowering its revenue and cash flow projections for the first half of the year; additional stock and bonds would be sold to meet the expected $250 million deficiency in the company’s cash needs.
When earnings were finally released, the company reported a net loss of $359.6 million, or $2.91 per share, compared with $0.26 EPS, or $26.6 million, a year earlier. For the most recent quarter, analysts had predicted a loss, after excluding writedowns and one-time items, of $264.3 million, or $0.30 per share. Excluding the charges, actual results were a loss of $0.45 per share.
Looking ahead
One of the factors that led Molycorp to lower its revenue projections was inventories, both internally and with end users; depressed prices have not only created a glut in several key rare-earth materials, but the lack of sales has also hampered price …read more
Source: FULL ARTICLE at DailyFinance