Short-Term Speculative Angle On Molycorp

| About: Molycorp, Inc. (MCPIQ)

First of all, I'm no fan of Molycorp (MCP). The stock experienced a huge amount of speculation when China restricted rare earths exports back in 2010, leading to large price gains in rare earths and a mania around stocks such as Molycorp and Rare Element Resources (NYSEMKT:REE). Molycorp went as high as $70 per share in early 2011 due to this mania and has been plunging ever since. Even today, the stock still trades at 15 times EV/EBITDA and 17 times 2013 estimated earnings, so it can hardly be called cheap.

That said, there has been a speculative angle emerging in the last few days that might lead to some share price gains in the short term. Basically, ever since Oct. 24 or so we're getting more and more news about Chinese companies halting the production and smelting of rare earths. It started with Baotou, but now it has spread to most major producers. Conceivably, the impact on rare earths prices won't be instantaneous because the export quotas might already be filled. But any reduction in supply must be taken seriously in such a speculative market.

Still, production halts control supply and it can be speculated that those halts will have a positive pricing and margin impact, regardless of whether such really comes to pass or not. Obviously, these companies halting production are doing so to stabilize and increase pricing.


Rare earths are a very speculative segment of the market. News that production halts are happening should be enough to send Molycorp higher on speculative demand for stock alone, even if ultimately these production stoppages don't change the overall supply/demand picture. Rare earths are ultimately a commodity like any other, and one subjected to increases in supply -- including from Molycorp -- that seem likely to keep the market depressed for a long time. So it hardly seems like the kind of stock that ought to trade at the premium it carries today.

But in the short term I'd expect this news to pressure the stock higher, strictly as a speculative endeavor. That said, the move might also constitute an opportunity to offload investment positions in the name, and it should not be seen as a chance to build such positions.

In short, this insight provides a potential short-term (buying today -- as I did -- to sell within days, at most) entry point for speculative long positions. It could also provide a chance to exit long investment positions stuck in the name. The stock remains overvalued, and more likely than not the production halts will only be temporary. So in the next few days and weeks if this event brings higher share prices, it will be a chance to sell into the rally.

Disclosure: I am long MCP. I might sell the position within the next 72 hours, as the trade is speculative. 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.