On January 8 after the market closed, I read a cryptic message on Molycorp (MCP) from Jim Cramer's thestreet.com, "Molycorp Stock Falls on Unusually High Volume." Molycorp's trading volume of 14.7 million shares was not only twice its daily average, but it drove the stock down 61 cents (-5.3%) to $10.95 in late trading. My initial thought was, "Somebody knows something." On Thursday January 10 at around 7:30am, well before the market opened, I saw news articles from Bloomberg, the Associated Press, Thomson Reuters, et. al. that Molycorp was predicting lower revenue and cash flow for 2013 than originally estimated, and it was delaying expansion to it Mountain Pass rare-earth mine. The stock price plummeted in pre-market trading, to which I reacted, "Somebody saved himself a lot of money by trading ahead of this news."
Molycorp has been an exciting story since China's 2012 rare-earth embargo set off an international manhunt for rare-earth minerals and created renewed interest in rare-earth manufacturers. The stock went on a wild ride, but the company has suffered setbacks as ((i)) rare-earth prices came crashing back down to earth, and (ii) Molycorp attempted to round out its product line and expand its Mountain Pass mine. Yesterday was one more setback. Molycorp divulged weakening prices for rare-earth minerals and order delays, dampening 2013 revenue projections. It also affirmed that though it was still on track to produce 19,050 metric tons annually at its Mountain Pass mine by June 2013, it was postponing additional expansion until market conditions improved. The stock finished down nearly 23% to $8.34 with approximately 41.1 million shares changing hands, making Molycorp the fifth most active stock on the New York Stock Exchange.
According to Molycorp: "The Pain" Is Here, a continuing erosion of rare-earth prices was the culprit for the expected revenue shortfall:
The price erosion in rare-earths continues. According to the company's third quarter 2012 10-Q:
- Resources (10% of revenue) - Average prices for the primary products in this segment (cerium, lanthanum, neodymium and praseodymium), declined 80% in comparison to third quarter 2011.
- Chemicals and Oxides (45% of revenue) - Average prices declined 13% versus third quarter 2011.
- Magnetic Materials and Alloys (34% of revenue) - Average prices declined 23% versus third quarter 2011.
- Rare Metals (12% of revenue) - Average prices increased 78% versus third quarter 2011, partially offsetting price erosion in other segments.
Don't Attempt to Time Molycorp
Molycorp's announcement on its 2013 revenue shortfall was the second consecutive incidence of unusual trading in advance of a major announcement affecting the stock. On December 11, 2012 there was a flurry of trading volume that sent the stock up nearly 6%. After the market closed, Molycorp announced it was replacing its CEO, Mark A. Smith, who had been tainted by an SEC investigation into the company. Certain Molycorp investors have seemingly benefited from trading on leaked information at the expense of others. I would not be surprised if such trading activity has not reached the radar of FINRA, Wall Street's non-profit self-regulator. FINRA has pioneered new ways to detect suspicious trading ahead of mergers or announcements that trigger unusual price or volume movement in a stock.
Molycorp has attracted attention from a bevy of speculators, as evidenced by its 3.2 short ratio. However, I encourage investors to make their bets - long or short - based upon solid, fundamental analysis. Attempting to trade on short-term, speculative news is a losing strategy, given that some shareholders seemingly have access to leaked information. I like the Molycorp story but am awaiting a more attractive entry point. I currently rate the stock a "hold."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.