Wall Street hates uncertainty, but rare earth miner Molycorp (NYSE:MCP) is providing exactly that right now, and along multiple lines. There were already sufficient worries in the market about the future of rare earth oxide (REO) prices and whether years of elevated prices had permanently destroyed demand, and the announcement of an investigation by the Securities And Exchange Commission (SEC) didn't help. Now the company has to deal with the unexpected resignation of its CEO at a time when it also likely needs to arrange additional financing.
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An Unexpected Change at the Top
Molycorp announced on Tuesday that CEO Mark Smith has left the company. Unfortunately, that's almost all the company had to say in its press release, apart from the perfunctory thanks for Smith's "contributions and leadership."
With such little information to go on, shareholders are left wondering whether he resigned, whether he was terminated or whether it was some sort of negotiated/nuanced "jump ... before we push." All that shareholders really do know is that the former CEO of Neo Materials (the company Molycorp acquired earlier in 2012) Constantine Karayannopoulos has been named as the interim CEO of the company.
Plenty of Potential Sources of Complaint
Although Molycorp's shares are well off their 52-week lows, the shares are nonetheless down almost 60% over the past year and down about 85% from their peak about 18 months ago. With that sort of performance, it's not hard to imagine that there was some tension in the boardroom.
While the company's Mountain Pass project continues to progress, cost overruns and delays have become problematic. Not only have these problems reduced investor confidence in the company, it has also increased the company's cost of capital. Though management has looked to spread the blame (including filing suit against an engineering firm), the fact remains that Mountain Pass will not be on time or on budget.
At the same time, the company has come under the scrutiny of the SEC concerning the accuracy of its public disclosures. While formal SEC investigations do not mean that a company has necessarily done anything wrong, it does add more uncertainty to the story and further damages the company's credibility - particularly as the company took more than two months to notify investors of the order of investigation.
Last and not least, analysts and investors have been increasingly questioning the company's operating cost structure (particularly relative to declining REO prices) and the likelihood that it will hit projected cash flow targets. As part of the job description for the CEO of a public company includes "lead cheerleader," this difficulty in controlling the message on the company/stock could certainly have played a role in the departure of Mark Smith.
Facing an Increasingly Difficult Road
These are not easy times for Molycorp, with or without the distraction of having to recruit a new CEO.
It increasingly looks as though the Chinese mismanaged their REO monopoly and allowed sustained high prices to lead to actual demand destruction. While some REO customers like Siemens (NYSE:SI) and Hitachi (OTC:HTHIY) have sought agreements with emerging REO providers like Molycorp and Lynas (OTC:LYSDY), a host of companies responded to the high prices by increasing internal recycling and altering product designs to require less REO material. Coupled with the slowing global economy, REO prices have fallen noticeably and there are real concerns that oncoming production increases from Molycorp and Lynas will depress prices even further.
It's also worth noting that Molycorp is looking for a new CEO while still in the midst of ramping up Phase 1 at Mountain Pass and also seeking additional financing. By my estimates, the company likely needs upwards of $200 million in additional cash before reaching cash flow breakeven, and neither the company's stock price nor its credit rating suggests that investors will throw handfuls of cheap money its way anymore.
The Bottom Line
Commodity prices go up, they go down and they go back up again. This is not news to experienced commodity investors, and it is something that larger miners like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) have dealt with for decades. In the case of small miners like Molycorp, though, that volatility can be a great deal more challenging.
I do believe that there will still be ample long-term demand for REOs, even if recent price spikes did some real damage. Likewise, I believe Molycorp's assets have real value. At this point, though, it is difficult to ignore the turbulence and trouble at Molycorp, and while I think long-term investors could do OK from here, I would prefer to wait for the dust to settle a bit and for more information to come out as to why Mark Smith left the company.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
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