Molycorp Stock: Too Good to Be True?

Jan. 4.11 | About: Molycorp, Inc. (MCPIQ)

For a company that is not earning any money and has no plans to do so this year, Molycorp (MCP) stock sure is doing well. From what I can tell, much of the hoopla over the stock is based on China announcing that they are going to curb exports of the metals that MCP at some point may start mining.

Yesterday it was announced that MCP is considering whether they should double production. I think the odds do not favor an increase in production due to the amount of risk that will need to be taken on in order to do so.

The interesting thing is that for MCP to double production they will need financing. The easiest method of getting that financing would appear to do a secondary offering which would send the price down. I don't think that the board and pre-IPO holders want to send the price down at this time because the lock up period is about to end. Once the lock up period is over - in less than three weeks - they can sell their shares on the open market.

I would expect that with the price of the stock moving higher the way it is, if a secondary is announced it will be after those that want to liquidate will be out.

The other interesting thing is that everyone is buying into the whole concept that China will actually limit the exports. With the prices above market value due to the "limits" I expect to find that China sell quietly, for as long and as much as possible, knowing that other countries are increasing production.

Shortly after companies commit to putting in all that capital to increase production, the price will fall back to pre "China Limits" due to a plentiful supply of metals. China reportedly has over 95% of current production but by no means has a monopoly on the ability to produce the metals. As soon as it makes economic sense for mines located outside China to produce, you can count on them doing so.

For this same reason, MCP is "thinking" about doubling the production. If MCP dilutes the stock with a secondary and China (either by announcing or quietly) allows greater sales, it could make it impossibly difficult for MCP to ever make a profit that would be reasonable on a per share basis.

MCP is priced for more than perfection and I feel that any hiccup will put downward pressure on the stock. With all the great non-stop headline news and the lockup period about to end, I starting to short Jan call options to capture what I consider sky high volitility prices in the options. I am not quite sure that the stock price will go down, but I firmly believe that the price will not be able to continue going higher enough to offset the time decay in the next few weeks.

Disclosure: I am short MCP.