The carnage continued for the Molycorp stock on Friday after a week that included nothing but bad news for investors.
Shares closed down 2.9 percent at $5.36 and were off nearly 25 percent from Monday’s close of $7.10. Already one of the wilder rides on Wall Street since the rare-earths miner went public in July 2010 — the stock peaked at $73.30 the following April — the reports of the past week revolved around setbacks that will be difficult to reverse in the near future.
In order to shore up its tight cash flow position, the company announced a stock sale on Tuesday that blindsided investors from two angles even though it had filed a preliminary prospectus more than a year ago. The terms, subject to completing the transaction on Monday, call for selling new shares at $5 each, the lowest price since the all-time low of $4.88 in April.
In addition, the sale will include 45 millions new shares and possibly 51.8 million if underwriters see sufficient demand to exercise their overallotment option. This would pile on more dilution after the number of shares had already jumped by three-fourths in one year to 160.7 million as of June 30.
The company did not comment on the stock sale.
However, the prospectus calculated that Molycorp would net as much as $230 million, critically needed in the face of rising costs to complete the renovation and expansion of the open-pit, rare-earth mine at Mountain Pass, Calif., about 15 miles south of Primm, and slumping sales prospects. During both the third and fourth quarters this year, according to the prospectus, Molycorp expects its cash flow position to deteriorate.
In January, Molycorp had raised $414 million through a stock and debt offering based on the projection that the fresh money, combined with cash flow from operations and certain loans, would “be sufficient to fund operating and capital expenditure needs. Subsequently, a number of events “reduced our cash cushion” below a comfortable level, according to the prospectus.
Nearly half of the rare earth at Mountain Pass is an ore called cerium, which often has a much lower demand than other rare earths. The company has frequently touted a cerium-based water purification product it owns called SorbX as a way to stimulate sales, but so far has met with disappointment.
Even with the company “optimistic” that SorbX will start to catch on with customers, it does not expect to sell a “substantial portion” of its cerium for all of next year, creating a drag on profits and cash flow.
Further, Molycorp started full-fledged production at the start of the year, pointing to a goal of 19,000 metric tons of ore annually. However, the mine has put out only 2,500 metric tons this year.
It has run at a rate of 15,000 metric tons for “brief periods of time,” but could not keep up that pace for “prolonged periods of time.”
In the meantime, cost overruns continue to mount. Through Sept. 30, the company has spent nearly $1.4 billion on Mountain Pass, more than double that $531 million budgeted in 2010 when the mine overhaul began after years of inactivity. A second phase to expand production, set at $250 million, was shelved early this year.
Rare earths are ores that improve the strength and performance of the magnets critical to a wide variety of high tech products, ranging from cell phones to smart bombs to hybrid cars.
Contact reporter Tim O’Reiley at firstname.lastname@example.org or at 702-387-5290.