Since the Colorado-based Molycorp (MCP) news release of Feb. 5 of a dividend payout to holders of convertible preferred, MCP has convincingly extend its rally above $5 to close at $5.33 per share on Thursday from the Feb. 5 close of $4.71, or a 13.1% rise in price in only six trading days.
From the looks of the recent price action against a backdrop of approximately half of MCP's float held short, it's not a stretch to conclude a considerable short squeeze is underway, catalyzed further by some fresh buyers above $5 per share.
But will that immense and stubborn short position eventually provide the gunpowder for an extended leg up in the price of MCP over the weeks and months ahead?
Risks to MCP Shorts Outweigh Further Downside in Share Price
In my opinion, the risks of a protracted short squeeze outweigh the potential for profiting from further deterioration in MCP's underlying fundamental picture. Much has already been priced into the stock during the two-year collapse in the price of rare earth elements (REE), as well as a string of company disappointments and scandals throughout the same time period.
From delays in production at MCP's Mountain Pass project in California, less-than-hoped-for geological findings at Mountain Pass, an SEC investigation, a $200 million common stock sale, to a departing CEO, have crushed the stock to as low as 65.2% of Book Value in mid-December.
However, and for the most part, all of that untidiness have come and gone.
So, what causes me to now boldly think MCP has some blue skies immediately ahead?
In short, the fundamentals of the rare earth elements market have changed, as well as MCP's ability to capitalize upon that change in the chaotic supply/demand mismatch of the recent past (see here and here).
For the sake of brevity, this article will focus only upon MCP's potential to realize top line growth through higher REE prices in 2014.
REEs could be on the rise again in 2014, according to industry sources, due to depleting customer inventories - those same inventories that once were bloating during the panic buying-and-hoarding period of April 2009 through May of 2011.
News of a Beijing crackdown on smugglers of REE and operators of 'dirty' mines rippled fear of imminent shortages with suppliers, sparking a buying frenzy, which dramatically shifted inventory from suppliers to customers during that two-year period.
To make matters worse for REE prices, the dearth of demand that followed the free-for-all binge ran congruent with a sell-off in all commodities that began in earnest during the summer of 2011.
However, the anguish that's characterized commodities bulls could turn to relief, as the entire asset class has shown signs of life since the start of the new year.
As demand for all commodities begins to creep back to healthier levels, the once-plentiful supply of REEs may not be so plentiful in 2014.
"[T]he [REE] market is poised to recover going into 2014 as consumer inventories dwindle, excess stocks are sold off and volumes show signs of growth," according to one source to metals intelligence publication, Metal Pages.
"My view is that as Chinese actions to reduce illegal mining, processing and smuggling bears fruit and that consumers exhaust their stockpiles built during uncertain times in [the] last two years, you will see market tighten up and prices rise," another source told Metal Pages in December.
Even as far back as Nov. 2013, the then interim CEO Constantine Karayannopoulos noted a tightening in REE inventories.
Karayannopoulos told Reuters, "a semblance of stability" of demand had returned to the marketplace; and added, "We haven't gotten what I would consider an historical normal yet. But it certainly looks and feels like we are on our way towards that."
Incidentally, it was also at that time, in late fall, that bearish articles of the REE industry cited instances of Chinese deception as a basis for their bearish case regarding companies such as MCP. Therefore, why would Wall Street believe the Chinese with respect to its announced reforms in the REE mining industry? Will Beijing order the shuttering of mines?
Actually, China Does 'Mean Business' on the Environmental Front
Columnist and founder of Technology Metals Research, LLC, Jack Lifton, agrees with various anecdotal discussions regarding a cutback to Chinese production, expounding upon the subject of China supply constraints with - what he believes is - a wrong-minded Westerner skepticism of Chinese communiques regarding their resolve to enforce environmental standards in its domestic mining sector.
Speaking with Tracy Weslosky of Investor Intel, Lifton said, "We're probably at an absolute bottom [of REE prices]. And we're headed up, because the Chinese have come through with their threat, so to speak, to lower production."
"As demand increases, which it is, prices have to go up," he added.
Lifton went on to say that, when he was in China to talk with industry professionals, the subject of environmental regulations and rogue operators came up again and again.
As I watch the interview, not only did Lifton sound credible, he appeared confident with his assessment of the industry as he travels to fact check, inspect operations, and draw out information and sentiment from his contacts in China and elsewhere.
"All they [the Chinese] were talking about was environmental problems and illegal mining. Both of those had to stop," Lifton continued.
"The cynics outside of China always say 'you can't trust them; they always talk about ending illegality and environment and they never do anything'.
"They're doing things. Believe me," he insisted. "When you cannot see your hand I front of your face in Shanghai, that's a problem . . ."
"How can prices not go up? he said, rhetorically. "This should have been factored in months ago," noting it took until a formal announcement from Beijing to assuage investors back into the REE space.
"So, I see 2014 as a great year for rare earth prices."
Watch Copper Prices for Clues to Future REE Prices
Since REE prices don't come with a real-time pricing infrastructure, Lifton recommends monitoring copper prices for a sense of where REE prices are heading.
'Doctor Copper' is a term used in the financial industry to denote the wisdom of the Ph.D of metals as to the direction of other metals prices. In essence, the theory is: where copper prices go, soon after, so do the prices of the rest of the metals complex.
"I urge people to watch my favorite leading factor, which is copper. Copper is the key technology metal . . . on everything we do is fed to us through copper wires," Lifton recommended. "Copper prices are now going up. . . . Watch copper. Don't ignore it. It's the leading indicator for technology expansion, and right now it's looking very hot in 2014."
As I stated in a Nov. 15 article, entitled, "Molycorp Multi-Bagger Potential in 18 Months," MCP's fortunes appear to be changing. With prices of REEs poised to return to higher levels, and production at the company's Mountain Pass project expanding, the very worst may be over for MCP.
Mining shares, in general, have taken a protracted and painful beating for more than two years. In the case of MCP, the stock price has dropped approximately 95% from its May 2011 peak price of $79.16.
At some point, a buyers' market in REE will change to a sellers' market.
From comments made by those working in the industry, as well as those analysts specializing in the industry, the REE market appears to be turning back to a sellers' market for REE again.