Molycorp Plummets on JP Morgan Price Target Cut, Guidance, Secondary Rumor

Shares of Molycorp

dropped on Thursday, falling over 20 percent after analysts at JP Morgan lowered their price target to $5. JP Morgan reiterated its Underweight rating. Earlier in the session, Molycorp itself cut its outlook. The company said that it was anticipating lower than expected revenue and cash flow for 2013. Further, Molycorp said it was "evaluating its capital needs for 2013." Although unconfirmed, some traders speculated that the company could soon be forced into a secondary offering. JP Morgan cited lower volumes and a recent rare earth price collapse as the key drivers behind their price target cut. Specifically, JP Morgan writes, “We continue to believe MCP will likely have to seek additional capital beyond just a revolver and/or equipment leaseback.” Until Thursday, Molycorp had been having a solid week. Shares rallied over 12 percent on Monday after the Chinese government cut its production quotas for rare earth metals.

Rare earths are a class of elements that are widely used in the production of high tech goods including smartphones, hybrid cars and televisions. Technically, rare earths are ubiquitous around the globe, however, spots where they are dense enough to be mined are relatively rare. As China provides well over 90 percent of the global rare earth supply, any restrictions on Chinese output is frequently seen as a bullish catalyst for Molycorp. The company is a leading producer of rare earth minerals outside of china, notably with its Mountain Pass California facility.

In 2011, Molycorp's share price reached an all-time high of nearly $75 per share. Yet, by November 2012, the price tumbled down to almost $6. The primary driver behind the aggressive decline in stock price lies in China's previous rare earth production limits. In the beginning of 2011, China sharply cut rare earth output. Not surprisingly, Molycorp stock soared as the company was able to command higher than normal prices for its products. In 2012, however, China eased restrictions and prices were driven significantly lower.

Molycorp has been seen as a takeover target in the past. Last week,

that the company could be bought out, although Molycorp itself declined to comment. With a current market cap around $1.2 billion, it could be targeted by a larger resource producer. Or, a producer products that require extensive use of rare earths might acquire Molycorp to lock-in supply. Yet, if JP Morgan is correct, any would-be buyer might wish to wait around for a lower price. Molycorp traded at $8.32 on Thursday.