First, Molycorp (MCP) look poised for a rally.
Soon after that, the technicals turned, indicating pressure was building for a big move. I hedged, but I remained bullish.
Tonight, MCP made two financial announcements that promise to place a more sustained overhang on the stock. Certain selling shareholders may sell up to 10M shares in a public offering. In addition, the company is selling $200 million principal amount of its Convertible Senior Notes due 2016 to qualified institutional investors. The key conditional on each announcement is the boilerplate "subject to market conditions" which means the transactions will only execute at the "right price." In the meantime, while the market is left guessing how low that selling price can go, selling pressure will undoubtedly build and suppress the stock price as that limit gets tested … absent some new positive catalysts. Also note that institutional investors will sometimes hedge purchases of convertibles by shorting common stock.
The potential good news for MCP bulls is that we will likely get a unique opportunity to add to positions at better prices. At the time of writing, MCP is down 3% in after hours trading. I for one was hoping that MCP’s other potential sources of financing – like a loan guarantee from the Department of Energy (DoE) for which MCP entered a second round of consideration (see original letter here) – would take care of any further financing needs to get the company fully funded. However, I expect MCP will get a smooth execution of the convertible, making this event a small bump in the road in the larger picture. (My now standard caveat is that the overall stock market appears to be getting more and more bearish which could also weaken MCP).
MCP's May lows are likely to get tested.
Be careful out there!
Disclosure: I am long MCP shares and puts