The Molycorp Case Study And The Irresponsibility Of Capital Markets

May.13.14 | About: Molycorp, Inc. (MCPIQ)


Some market participants are taking huge bets on Molycorp, shorting the stock.

They build a potentially awful short squeeze.

Insiders and MCP's strategic partner are buying the stock.

Molycorp (MCP) reported earnings for 14Q1 on 7 May after the close, and the stock has gone down almost -32% peak-to-valley since then. Market reaction and analysts' commentaries both illustrate the restlessness, lack of hindsight and understanding of capital markets for financing such projects.

Yes, earnings are quite poor, and the 14Q1 86M$ loss is certainly not a positive. But this cannot come as a surprise. The first mistake in this case study is that people who do not know anything at all about rare earth elements and mining projects attempt to predict future earnings. And they are wrong most of the time. And this is the reason for the street to get disappointed. The second mistake, which is tightly linked to the first one, is the time frame used. Quarter-on-quarter results do not really mean anything. Since MCP got quoted on the stock exchange in 2010, it has burnt $1,745M cash, which is of course, a huge amount of money, but not that much money given the nature of Project Phoenix. And in the meantime, revenues have been increasing steadily. So yes, ASP is an issue for REE projects these days, yes, project execution is a challenge. Nevertheless, the strategic appeal of the project remains intact.

And this brings me to my second point regarding strategic issues most investors shorting MCP are missing. The U.S. Department of Defense is assessing its rare earth requirements and supply chain vulnerabilities, and it should start building strategic stockpiles. Which can be easily understood, given the fact that 90% of REE is supplied by China. My guess is that the U.S. Department of Defense in particular, and the whole US Government and corporations in general simply do not want to rely on China's supply of goods or services in whatever businesses. This is the big picture. Lynas Corp. in Australia might bring a solution, at a higher production cost though.

Third, my point is so true that strategic partners and insiders are purchasing MCP, not selling the stock. I won't be too long on insiders, information can easily be found. I would just point out Molibdenos y Metales' 19.08% stake in MCP. Molimet in Chile started purchasing stocks at a much higher price, and my guess is that this industrial partner knows the pros and cons of an MCP investment case much, much better than financial analysts do.

By not taking into account any of the aforementioned points, by not taking time to stand back and think about MCP's big picture, with a very short time frame in mind, some funds are making a highly dangerous bet on MCP, putting either their own money or the one of their clients at risk by building one of the potentially largest short squeezes ever seen in the market: 40% of the market capitalization of MCP is currently sold short.

Disclosure: I am long MCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.