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Molycorp: CEO Change Is Good, But Timing Is Bad

 December 13, 2012 03:04 PM

(By Mani) Molycorp, Inc. (NYSE: MCP) named Vice Chairman Constantine Karayannopoulos as Interim President and Chief Executive Officer as it is immediately undertaking a search for CEO after the departure of Mark Smith.

The management change comes as the SEC is probing the rare earth metals company over public disclosures. Though, the replacement of Molycorp's CEO does not come as a surprise, but the timing of such a change, as it moves into the ramp-up phase at Mountain Pass, is less than ideal.

"This will keep new investors from stepping into the name in the near term, though a successful ramp-up may change this," CIBC analyst Matthew Gibson wrote in a note to clients.

[Related -Molycorp Inc (MCP): Will Q3 Results Impress Investors?]

The stock's lackluster share price performance, capex overruns at Mountain Pass, financing overhangs, and waning sentiment towards the space left few choices, but for Mark Smith to step aside. The board of directors is actively seeking a permanent replacement for the position.

Smith's interim replacement Karayannopoulos is an 18-year rare earth industry veteran and the former CEO of Neo Materials, acquired by Molycorp in June 2012. Karayannopoulos will have his work cut out for him.

"We expect the ramp-up at Mountain Pass, a solution to the $200MM in additional liquidity that will likely be required to complete the project and the integration of production into downstream processing capacity to be key for the stock," Gibson said.

[Related -Molycorp, Inc. (MCP): Bottom Fishing Insider Buy?]

Molycorp is the largest existing supplier of rare earth oxides outside of China. It has mined and manufactured rare earth products at its Mountain Pass, California facility for more than 58 years and is now building a new mill and separation facility.

Poised to become the first large-scale North American producer of rare earths in the past seven years, Molycorp represents an opportunity to participate in the rerating of the company to producer status post the construction of the fully expanded Mountain Pass facility in 2013.

Molycorp produces rare earth magnetic materials as well as a variety of high-purity, custom engineered products from 13 different rare earths (lights and heavies) as well as five rare metals (gallium, indium, rhenium, tantalum and niobium), and the transition metals yttrium and zirconium. These rare earth metals are used to make aerospace components, camera lenses, nuclear batteries, portable X-ray machines and tubes, etc.

Through its Molycorp Magnequench subsidiary, the company is a leading global producer of neodymium-iron-boron (NdFeB) magnet powders, used to manufacture bonded NdFeB permanent rare earth magnets. Through its joint venture with Daido Steel and Mitsubishi Corp., Molycorp expects to begin manufacturing next-generation, sintered NdFeB permanent rare earth magnets in early 2013.

The ramp-up at Mountain Pass should be in full force by the end of 2012. The company is expected to exit the year at 20,000  tonnes per annum (tpa) run rate and exit 2013 at 40,000 tpa. Expansions at the metals and alloy divisions, along with the construction of the magnet plant in Japan and the integration of Neo Materials, will also be key developments for the story going forward.

"While this will expose investors to above-average risk, the potential is also above-average returns. Being a first mover also affords the company the opportunity to be the consolidator in the space, making it a great place to be in the longer term," Gibson noted.



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