Molycorp (MCP) Downgrade Shows Trouble From Neo Materials Acquisition

I had a few positive things to say about Molycorp’s (MCP) acquisition of Neo Materials when I was a TREM12 panelist this past March. The company was showing some real strategic thinking by going whole-hog for vertical integration. Now the bloom is coming off the acquisition rose with S&P downgrading Molycorp’s credit rating.

The strategic bet for a company like Molycorp is that the long-term added value from tighter integration will generate enough free cash flow to pay down the debt used in that acquisition. The monkey wrench in the formula has been the weakening global demand for high-tech goods that rely heavily on REEs for their capabilities. That hurts demand for Molycorp’s ores.

MCP is trading at a P/E of about 10, and is only about a dollar above its 52-week low of about $11 (compared to a high of over $58). It would be a bargain if not for the likelihood of a very serious downturn in Europe and the U.S. That would spell further difficulty for any REE producer, no matter how dominant their position.

Full disclosure: No position in MCP at this time.

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

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