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TheStreet Open House

Molycorp Counting on Project Phoenix, New Demand

NEW YORK (TheStreet) -- In 2013, Molycorp (MCP) reported a loss of $197.2 million, or 95 cents per share. However, the situation will improve this year as demand of the rare earths produced by Molycorp is improving. Moreover, volatility is decreasing in rare earth prices. The company can achieve breakeven operating cash before interest by year-end and positive cash flow by the end of 2015.

The upshot: Increasing rare-earth demand provides a positive outlook for Molycorp. In addition, the company's production cash cost will also be lowered after commissioning of its chloralkali plant, more on that later. With these factors, Molycorp could rise again.

Hoping for the turnaround

Molycorp's major capital spending is focused on rebuilding its Mountain Pass facility under a project named Phoenix. The total capex for the project will be approximately $1.55 billion.

Although spending on the project will continue in coming years, major construction is almost complete, following the completion last October of the chloralkali plant and the final unit of a multi-stage cracking. Both of these units are operational now.

These units will help the company increase Mountain Pass facility's production rate at a lower cost, which is required to increase margins in the current low rare-earth price environment. Prices of most of the rare-earth metals were at an all-time high in 2011, but they are now back to 2008 levels.

The cracking plant will improve the company's rare-earth recovery rate from Mountain Pass facility, as only 8% of ore the company mines at this facility is rare earth. With the addition of this final unit of a multi-stage cracking plant, the company's recovery rate will improve and is projected to be about 90%.

The chloralkali plant will help the company to recycle wastewater and regenerate chemical reagents like hydrochloric acid and caustic soda, which are required for rare-earth separation. Regeneration of these chemical reagents will reduce variable cash cost for this facility. Once both these units are operational, the company can lower its rare-earth cash production cost to about $6 to $7 per kg, which will make the company competitive to the low-cost rare-earth producers.

Molycorp is focusing on de-bottlenecking and optimization to increase annual production rate to about 23,000 metric ton of rare-earth oxides by the fourth quarter of this year, at its Mountain Pass facility.

Its production from Mountain Pass will comprise of the following rare-earth elements:

Demand varies element to element.

High Demand: Out of these elements, neodymium and praseodymium demand is increasing year over year as they are used in manufacturing of neodymium-iron-boron, or NdFeB, magnets, which are widely used in various industrial as well as defense applications. From 2013 to 2020, demand of NdFeB is expected to grow at a CAGR of 9.4%, and major demand is expected to come from the automotive industry. These magnets are used in the manufacturing of moving parts of car, battery and engine components, and other integral systems.

Molycorp expects to sell these elements directly to its magnetic material customers. The company also supplies NdFeB magnet powders under the Molycorp Magnequench brand in China and Thailand, and NdFeB magnets through its joint venture with Mitsubishi Corporation and Daido Steel at Nakatsugawa, Japan. With potential demand of neodymium and praseodymium, the company expects to allocate incremental production of these elements at its Mountain Pass facility.

Creating Demand: Molycorp is doubtful about selling most of its cerium production -- a major part of its total production this year, as there is currently not much demand for the element. However, the company is trying to create demand for cerium through a water-purifying compound, SorbX, that it has manufactured using the element. The compound is said to be more effective than the normally used iron- and aluminium-based solutions. Molycorp is targeting SorbX for sale to North America's municipal and industrial wastewater treatment facilities.

To expand its customer base, the company has completed an agreement until 2018 with the chemical distribution company Univar. Univar has about 300 global distribution channels with a wide network in North America. Molycorp believes, with SorbX's greater effectiveness over current water-purifying compounds, that its demand will increase in the long term.

Although lower demand of cerium will affect sales, the company expects other elements will be in demand. In addition, the chloralkali plant and cracking unit will help the company lower costs, which will help it to break even in operational cash flow this year.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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