Colorado-based Molycorp (NYSE:MCP) is the only rare earth oxide producer in the Western hemisphere and owns the world's largest, most fully developed rare earth project outside of China. Molycorp is a relatively small and specialized mining company that currently operates the Mountain Pass mine in California.
Demand growth for rare earths is driven by the increased adoption of new green technologies, such as hybrid cars, and by spending on military applications. As a result, demand will fluctuate based on the outlook for these industries. This means that although the overall demand trend for rare earth elements (REE) is rising, the growth won't travel in a straight line.
Although I maintain a favorable long-term outlook for Molycorp, I've also advised to adopt a cautious stance toward the company. In April I recommended that investors take profits on Molycorp when the stock traded at USD71. At the time, I worried that speculators were opening positions in the stock too rapidly.
I remain cautious about Molycorp given the recent decline in REE prices and REE stocks. However, although China's domestic REE prices remain weak, they've risen on average more than 300 percent since the beginning of 2011. It appears that prices in China are beginning to stabilize, but should remain suppressed in the near term as China implements a new REE invoice system and clamps down on illegal mining.
Meanwhile, top rare earth stocks outside China, namely Molycorp and Australia's Lynas Corp. (OTCPK:LYSCF), have bumped up production and the market may take some more time to absorb this supply. Nevertheless, REE production cuts and the end to destocking by speculators in China should help stabilize prices.
In the delicate REE market, Chinese actions have been instrumental in setting prices. The Chinese government has implemented export and production quotas, restrictions on mining licenses and has attempted to put an end to illegal mining.
Although there is more to be done to clamp down on illegal mines-illegal mining still supplies about 30 percent of the market-if China's government reverses any of these restrictive policies, prices will have to adjust to rising supply. The opposite will happen if more restrictive measures are implemented by the Chinese.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.