Aaron Basile's  Instablog

Aaron Basile
Send Message
Contrarian Investor, Commodities Speculator, Technical Trader.
My blog:
Aaron Basile
  • Reversal In MCP Signals Buy 10 comments
    Nov 2, 2010 3:36 PM | about stocks: IQ


    Last week Molycorp had a long overdue key reversal in share price closing at 33.89 after an open of 39.48. This signals a buying opportunity for perhaps in my opinion the hottest and most undervalued stock in the exchange. Up 150% from the IPO in late July, Molycorp has chomped its way up the ladder as the only American REE producer despite how the average volume is only now beginning to stay above 1-2 million.

    Note: MCP has turned positive on the day and the last candle may actually be green after the close. As expected, the low on the day was 31.40, right near the 20 Day SMA.

    The bearish divergences on the slow stoch all correctly forecasted the pullbacks and the most recent one was no different, a large volume key reversal took place shortly thereafter. The MACD has also just reversed to the downside which is a good indicator of the stock beginning to cool off, but I don’t expect that to last.

    It looks like the 20 Day Simple Moving Average which is rounding out at the 31.30 level is the temporary support, and it appears the most amount of buying volume is sitting close to that mark. Barring the FOMC statement, this stock is without question a buy at this level.

    Disclosure: long mcp
    Stocks: IQ
Back To Aaron Basile's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (10)
Track new comments
  • tripleblack
    , contributor
    Comments (13581) | Send Message
    Closed the day over $34, up 5.11%.


    As more information rearding the Chinese export quotas (vs the hot lamestream media news about the recent export bans) precipitates through a market still woefully uninformed regarding the REE narrative, this picture is likely to change dramatically.


    China has, indeed, promised to be a "reliable supplier" - at levels 72% lower than they shipped earlier this year.


    Though it was the outright ban of shipments to Japan, and then the US and the EU, which grabbed headlines (and created the buzz about an REE "bubble"), the key factors have never changed. China IS dramatically lowering the quantities of REEs exported. Oh, they may, indeed, be a very "reliable" source for those greatly reduced exports...


    But the looming problem is still there.


    A Chinese geopolitical fit and confrontational export ban is just not needed to make the case for REEs. But oddly enough, it just might have created a very interesting buying opportunity for these stocks!
    2 Nov 2010, 05:10 PM Reply Like
  • Aaron Basile
    , contributor
    Comments (92) | Send Message
    Author’s reply » I agree... China is branching out into third world countries in search of REE mines and processing facilities, doing business with that kind of political risk is a clear sign that they are sold on REE's for the future.


    The US has natural resources, but I wonder if the job market will even be good enough for them to be able to produce. The government is going to get in the way, on way or another. Japan on the other hand is really screwed, they have no natural resources and China won't export to them. The soonest they could even get their own project up and running would be 2015, which is exactly the time when China expects their own production to drop.


    I love how the MSM says "REE bubble" and then uses something as fundamental as a supply squeeze to prove it... it's not like the prices are rising for no reason here.
    3 Nov 2010, 11:40 AM Reply Like
  • Long Value
    , contributor
    Comments (230) | Send Message
    "Molycorp has chomped its way up the ladder as the only American REE producer "


    You do realize this is an incorrect statement, they don't produce ANY rare earths, their only revenue source is from stockpiles they have from when they bought the mine. $8MM in LTM revenue. Trading at 336x revenue, not a bargain, not undervalued. Have you read the SEC filings? Their mine is not even operational
    8 Nov 2010, 09:54 AM Reply Like
  • Aaron Basile
    , contributor
    Comments (92) | Send Message
    Author’s reply » They are undervalued in the long term, so undervalued that Goldman Sachs attempted to buy them out when they were still a private company, and even though they are only "producing" 3,000 tons a year, they will be online and producing 20,000 tons a year by 2012... long before any other American company will have a chance to be even close to the stage that they are at now.
    8 Nov 2010, 10:46 AM Reply Like
  • Long Value
    , contributor
    Comments (230) | Send Message
    "Producing" means mining. They are not mining anything right now. Please provide a link to the story that GS tried to buy them out when they were private, I'm very skeptical. I can only find information that Goldman sold their stake before the IPO and they obviously have better info than you or I, so that's not very encouraging...here's a link to that story


    You do realize that when they IPO'd they couldn't even generate enough interest for a successful IPO, right? They had to drop the price to bring interest. It then fell from there until the media picked up the rare earth story and ever Tom, Dick and Harry thought the end was nigh for electronic goods.


    Also, 2012 is still quite a ways away and they haven't even cleared all the regulatory and environmental hurdles. Nor do they currently have enough cash to get the mine producing without doing a follow on, a debt offering or getting assistance from the government. At current share price, a follow on would make a lot more sense since they don't have any cash flow.
    8 Nov 2010, 12:29 PM Reply Like
  • Aaron Basile
    , contributor
    Comments (92) | Send Message
    Author’s reply » Mountain Pass used to be able to meet the world's demand for REE's but China began producing at a lower cost which caused MP to shutdown... the problem is, China is much less environmentally friendly than Molycorp, as you aluded to, and China even attempted to buy out UnoCal Oil which owned Mountain Pass Mine, even after the mine had closed. I think that between China running out of REE production, halting exports, and them as well as Japan attempting to find REE deposits in third world countries will eventually be too much pressure for the DOD or DOE and they will be forced to extend grants.


    In other words, regardless of what their cash situation is now, I'm counting on a supply squeeze, as well as a demand increase. The reason I cite a demand increase is because it was only a handful of years ago that REE's were considered useless elements, and I think that science will find many more uses for them in the near future, especially as we approach peak oil. Triple Black explained it all a lot better than I can but essentially Molycorp has access to the world's richest REE deposit outside of perhaps some politically unstable and/or inaccessable areas.
    8 Nov 2010, 03:44 PM Reply Like
  • tripleblack
    , contributor
    Comments (13581) | Send Message
    GS has been involved as a mediary for years with what is now MolyCorp, dating from when it was a small line item on the books of a big oil company.


    I do know that GS was involved when MolyCorp (at the time a private firm backed by companies with deep pockets) sought to pick up Great Western (GWMGF.PK) for a song. As I recall that failed deal would have ended with GS holding a large chunk of the combined company (part of it their fee for brokering the deal, of course).


    With most fully intergrated mining operations, there are 3 major components:


    1. The physical mine. Creating this follows a series of steps:


    1.1. Exploration. Commercially exploitable REE deposits are notoriously rare (and the real secret behind the "rare earths aren't really that rare" story). MCP is sitting on one of the richest and largest such deposits on earth. NO single deposit includes ALL the rare earths, but Mountain Pass has an excellent percentage of most of the light to medium weight elements. The relatively small percentages of the heavier elements, however, is often misconstrued to imply that they are not present, when, on the contrary, they will be producing these HREEs in good quantity when the operation is once again in full swing.


    1.2. Drilling, sampling, testing: This phase is done for the primary deposit which was once mined, of course, but it is less well known that attendant additional deposits have also been identified, extending the potential value.


    1.3. Preliminary filings and mining permits, mine safety, etc: Again, these were all done, but will have to be updated. Needless to say, it is MUCH easier and quicker to update such things than to initiate them.


    1.4. Development of the deposit, removal of overburden and establishment of the hard rock mining operation: Again, a gigantic chore with any mining project, but already accomplished in this case.


    1.5. Construction of the mining infrastructure: This includes such things as roads, buildings, hiring, training, rail lines, power, utilities, water, sewer, etc, etc, etc. Much better to already have these things built out and waiting, of course.


    1.6. Primary equipment: Equipment that can vary from huge earth movers to specialized mining drills and diggers. Very expensive, and a prime expense to reopen MCP.


    2. Concentration and transportation: This is the second requirement, and the place where MCP is already up, running and in operation (using the stored ore from the last time the mine was in full operation). I won't go into all the different steps, but suffice to say that having them all up, running and in place puts MCP ahead of, say, Lynas (LYSCF.PK), who is hoping to get their Mt. Weld facility up and running sometimes next year. Lynas, however, DOES have their mine in operation, unlike MCP.


    3. End Product Refining/Processing: MCP has SOME of their lighter REE production processed on site, so they have a partial capability in this case. Otherwise they can create concentrates that require further refining and processing - and hence the reason they sought to purchase Great Western (GWMGF.PK), for they posses both functions, fully ready to go. This is the area where MCP is weakest, and the final piece of the puzzle they must address.


    Re-starting the mine is a fairly straightforward proposition, but as GWM discovered over the years building their 2 facilities (their Less Common Metals works is one of the best small facilities of its kind on the planet), this is perhaps the hardest part of the equation to get right.


    So, to recap:


    MCP will almost certainly be able to restart their mine without too much difficulty, and they have the second part of their business in excellent shape and working, but lack the final phase. (Needless to say they will be able to sell their concentrate to others - or pay folks like GWM to process it for them - but its almost certain that they will be making a move in this area soon, one way or another).


    Lynas has their mine in operation, and is building both a modern concentration facility and a refinery in Malaysia.


    GWM is still trying to figure out how to get their existing mine in South Afrika back into operation, but they have the other 2 parts of their vertically intergrated operation ready to go.


    In 2011 China will be shipping 28% of the REEs they shipped in 2010 - assuming no more geopolitical spasms like their tiff with Japan over semi-submerged Pacific islands and fishing grounds.


    Japan's government estimates they have about 6 months supply of REEs. They are the #1 ex-China consumer of REEs, so it would figure that their stockpiles are the largest. Korea, another large consumer, has already exhausted her stockpiles. The United States, LOL, sold our stockpiles for chump change back in the Clintonian era.


    Even so, this is a story about forward looking demand, not backward history of supply. Demand for REEs is climbing on a steep curve, while the supply side (essentially all in China, right at the moment) is shrinking - and shrinking even were China NOT creating an REE cartel structure and squeezing export quotas.


    Frankly, the REE narrative does not need geopolitical conspiracy theories to make its point.
    8 Nov 2010, 01:38 PM Reply Like
  • robert.b.ferguson
    , contributor
    Comments (10491) | Send Message
    Let's not leave out China's exploratory operations in Afghanistan. They will have no qualms about destroying the environment there and raping the land should they find commercially viable deposits there.
    8 Nov 2010, 02:20 PM Reply Like
  • ricoq
    , contributor
    Comments (5) | Send Message
    Would it be better to take a position now or wait until after earnings later this month? Do earnings mean anything yet, for such a young company? This seems more like a long term play.
    9 Nov 2010, 10:34 AM Reply Like
  • Long Value
    , contributor
    Comments (230) | Send Message
    Well, there will be no earnings, so they will actually have a loss statement. I mean, if you're really excited about MCP long term, I'd wait till it was back in the low 20's because there is huge downside risk here.


    PLEASE read the 10K/Q on sec.gov. This thing is so hyped up right now it's like stamps.com in 1999.


    Also, read this article and ask if you still feel comfortable buying a company that currently has a $3Bn market cap and $8MM of revenue in the last 12 months.
    9 Nov 2010, 10:43 AM Reply Like
Full index of posts »
Latest Followers


  • UUP Jun 11 $22 up 50%
    May 23, 2011
  • AG - much needed reversal
    Apr 6, 2011
  • MCPIQ continues breakout on Chinese quota cut!
    Mar 25, 2011
More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.