Molycorp stock in freefall as falling cash flow forces it to find new financing

How do you catch a falling knife?

By the close on Friday Molycorp was changing hands for $11.49, down $4.58 or more than 28%  as investors digested the company’s Q2 results that saw the company swing into a loss in the second quarter on the back of higher costs, lower sales volumes and significantly lower prices for its rare earth oxides. More than 21 million shares changed hands compared to a daily average of less than 3 million.

What really worries investors though is that management of the Colorado-based company warned that it will need to seek new funding to cover the bulk of the company’s capital expenditures at its Mountain Pass mine in California because it believes cash flow won’t be enough to cover the investments.

The company earlier in the year tapped debt markets for up to $650 million to help fund its $1.3 billion cash-and-stock takeover of Canada’s Neo Material Technologies, a rare earth processor and distributor.

Molycorp – destined to become the number one producer of the 17 elements outside China – announced it is already close to halfway in reaching its ultimate production capacity target of 40,000 tonnes per annum and in 2012 will produce between 8,000 to 10,000 tonnes from Mountain Pass.

However the average realized price per kilogram of the rare earth oxides Molycorp sells fell again to $52 – from $95 a kilogram in Q1 and $120 a kilogram in the final quarter of last year.

JP Morgan was quick to react to the news and downgraded the stock reports Street Insider:

 “While MCP reiterated its capex guidance for Mountain Pass of $895mm (though did state it is encountering cost pressures) with $289mm for the remainder of 2012 on an accrual basis, the company also warned that it will need to secure additional financing for a substantial portion of its remaining capital expenditures and other capital requirements. While the company commented on the call that its models outlined cases where they would require additional funding and where they would not, MCP did not state exactly how much in additional funds they would look to secure. This warning by the company is concerning to us, however, as it is tough to determine whether they will be able to raise enough funds and/or at what cost especially after recent, significant financings.”


Today’s decline brings Molycorp’s losses since hitting a high of $77.54 on May 3 2011 to over 80% giving it a market value of $1.1 billion.

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