Molycorp Inc (NYSE:MCP), a development stage company, focuses on the production and sale of rare earth oxides from stockpiled feed-stocks in the western hemisphere. The company operates the Mountain Pass mine, a non-Chinese rare earth deposit located in San Bernardino County, California. Its rare earth products are used as inputs in various existing and emerging applications comprising clean energy technologies; multiple high-tech uses; defense applications; and water treatment technology. The company was founded in 2008 and is headquartered in Greenwood Village, Colorado.
I first heard of Molycorp back in the summer of 2011 when a fellow investor brought it to my attention. The stock price at that time was around $55 a share. I decided to do some basic DD on the company and found what I considered to be red flags everywhere. I began my DD by first looking at the insider transactions;
We can clearly see almost every insider sold their shares at around 50 dollars.
How much profit did most of these insiders make?
Insiders bought near the lows in 2010 when this stock first arrived on the NYSE. Most insiders bought at $14 a share. Why did all the insiders purchase massive amounts of shares at $14? Something smells wrong here.
But who can blame them for selling? They had huge profits from $14 to $50 a share. The major red flag here is that only 2 of them bought back any shares. How confident were these guys about their own company if they did not "flip" their shares? I know if I had confidence in my company's future, I would certainly buy back shares after taking massive profit, wouldn't you?
This was the first red flag for me with Molycorp.
Molycorp's big buzz was over their purchase of their Mountain Pass mine in California. Molycorp suggested that this mine would yield billions in rare earth metals once they raised enough money via public offerings to get it back online safely using the latest green technologies.
On that hype, investor speculation buying commenced in 2010, and drove the pps all the way up to an all-time high of 79.16 in May of 2011. This is a mind boggling stock run in such a short time. Some analysts were even calling for up to $400 a share in 5 years or less.
When I decided to look deeper into that mine in California, I found that the Mountain Pass mine shut down in 2002, even as researchers elsewhere were perfecting a welter of green energy applications for rare earth elements. The mine closed because China's production costs were lower, because a mine pipeline leaked faintly radioactive water in a nearby desert and because state regulators delayed renewal of its operating permit.
I began to think to myself; "Why would California allow this mine to come back online when they are overwhelmingly liberal minded, environmentally friendly regulators?"
Now I was getting a better picture why insiders were not buying back into their company. They had the same doubts I was having about their mine ever being able to produce anything substantial.
This was another huge red flag for me. I went to the stock boards to see what people were saying. It was pure madness in exuberance, as next to no one was seeing what I was seeing with Molycorp. Most were talking about how rich they will become. Others were saying how Molycorp would go past $500 a share. I was shocked - I know bubble talk when I see it.
I even posted a few times my doubts on the boards, I voiced my concerns, only to be called a "basher."
The stock at the time I first started looking into it was selling for around $55 a share, off of the recent all-time high. I decided to short some shares because I just knew I was right, all the red flags I was seeing.
I rarely short stocks, as I really do not like to bet against a company's success and see investors fail.
As it turned out, I made a little bit of money from my short there and went my way (I should have held that short longer). The stock made one more run up to around $65 before coming back down to near $23 on Dec. 29th, 2011. When the stock was over $60, I saw one poster on a stock board say;
"I would bet my life this stock never closes below $57 a share ever again."
I replied to his post with;
"If I was the Grim Reaper, I would take you up on your offer."
Since the Dec. 23 intra-day low, the stock has had what I consider to be a dead cat bounce to an intra-day high of $30.19 on Jan.12th, 2012.
As of Jan. 13th, the stock price is $28.69.
Two insiders did buy some shares just recently as the chart I list shows. Hardly bullish when we consider the rest of the insiders have not bought back a single share, except one likely bag holder, who bought near $57.
In my strong opinion, Molycorp will never succeed in getting their California mine to produce anything. I feel bad for those who bought into the hype without any fundamental backing to warrant such a high run up.
I feel even worse for anyone attempting to buy now for a long term investment.
In my strong opinion, the market will continue to punish Molycorp until it is near $5 a share or less. I am sure many will comment on this article calling me names for my strong opinion here. Some will say I am full of something worse than just hot air. People will hold out hope, and some might even still believe they will strike it rich with Molycorp.
Do not be shocked if some day, an official investigation into Molycorp is opened. Something is just very wrong with the Molycorp story in my opinion.
Everyone is welcome to check my twitter feed from the summer of 2011 and see my tweet about Molycorp being a short, and how I felt it would come crashing way down.
Do not buy into what hype there is left about Molycorp. In fact, do not buy Molycorp at all.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.