By following the actions of those who have a greater understanding of a company's operations, shareholders can often ride the coattails of insiders who have a more intimate understanding of that company's future prospects. It is for this reason that investors should watch the transactions of insiders from time to time. In the case of rare earth producer Molycorp (MCP), one particularly recent purchase by CEO Mark Smith stands as a transaction to raise some curious eyebrows. On a recently filed Form 4 found here, Mr. Smith directly purchased 20,000 shares of common stock for an average price of $6.20. While there are many reasons for insiders to sell their shares of a company, there are often very few reasons to buy shares apart from having a positive outlook on the company's share price.
Yet what makes Mr. Smith's most recent $124,000 purchase most intriguing is the fact that it comes on the heels of an information request by the U.S. Securities and Exchange Commission (SEC) into the company. As disclosed by the company, the SEC requested information from Molycorp back on August 28 in connection to a formal order of investigation pertaining to, among other things, the accuracy of Molycorp's public disclosures. According to a public statement found here, Molycorp stated that it could not predict the "length, scope, or results of the matter or impact, if any, on the Company's results of operations." Indeed, it appears that uncertainty has taken hold of the company's stock as a direct result. On Friday, November 9, the company was halted twice during the day as investors initially triggered a safeguard while fleeing in a short period of time. Subsequently, they triggered another safeguard as the stock began trading again as investors reversed direction and fervently bought the stock in a condensed period of time.
But as the share price subsequently fell over 30% in the week to follow, the question remains if anything has fundamentally changed from an operational standpoint. Based on the CEO's most recent purchase, one would likely conclude that the fear has become somewhat exaggerated. After all, this was the same person who was smart enough to sell off a portion of his shares near the stock's peak back in 2011 as seen here.
Indeed, just prior to the breaking of the SEC information request, the company had just reported that their long-awaited modernization and expansion project was still on track for Phase 1 production in the coming quarter. Up to this point, the investment community had limited patience as the project endured cost overruns and various setbacks. The project was initiated in January 2011 and the company was coerced to raise capital on several occasions.
In itself, the Phoenix project remains a light at the end of the tunnel. The completion of the project will transform the Mountain Pass location into the world's most technologically advanced, energy efficient and environmentally superior rare earth production facility in the world. Most importantly it fills a key link in the company's path to becoming a vertically integrated enterprise capable of low-cost manufacturing while capturing a high-margin output.
As Project Phoenix nears completion, confidence in the company's future remains difficult to hide. Even as witnessed during the earnings call found here, CEO Mark Smith appeared upbeat throughout as he announced ongoing progress to the company's top priority. Concerning the Phoenix Project he states the following:
"Let me start by saying that I've never been more proud of what our team has accomplished in a single quarter, especially in terms of how this team has worked to overcome every single obstacle in our path to achieving Phase 1 production in the fourth quarter, which we are absolutely on track to deliver." -- CEO Mark Smith, Molycorp
It appears now that investors in Molycorp find themselves at a crossroad. On the one hand, the vast uncertainty regarding possible SEC intervention remains a dark cloud bound to hover over the company until completion. Yet on the other hand, the fruit of the flagship modernization project found in Mountain Pass is about to be partially realized. This is especially bullish considering the better-than-expected third quarter results that have just come to pass. Throughout it all, the CEO's confidence in the company's future can now be seen through his most recent action in buying company shares on the cheap.
Molycorp currently supports a market capitalization of $968 million. The company trades at an alarmingly low price-to-book ratio of 0.57 as investors severely discount its prospects. Yet despite this figure, the company still trades on a forward price-to-earnings ratio of 33.43 as the company's production continues to ramp up in the coming year. It would also be an understatement to say that the share price has been less than bullish in the prior year.
Altogether, it may be best for investors to take caution in light of the opportunity in front of them. While it is true that the CEO feels comfortable in adding to his position, the truth remains that a production ramp-up will take some time to be truly meaningful. While the company is undeniably cheap when compared to its book value, the outstanding issue of the SEC investigation remains a fear that is hard to ignore by any investor. It remains comforting to see the ongoing confidence of the CEO, but at least for myself, I plan on taking the wait-and-see approach to let things play out as they will.
Disclosure: I am long MCP.