EDITOR: | December 12th, 2012

Molycorp Inc. Still A Buy.

| December 12, 2012 | No Comments

I last covered Molycorp back on November 19th, in “Molycorp  Inc. – Today’s Best Rare Earths Stock?” just after the stock had made 52 week lows, concluding that most of the negative news was already out and factored into the stock, and that most of the dilution had already taken place. Most of the negative Rare Earth Element news was already out in the market too, making Molycorp an interesting stock in the depressed REE sector. True there was an on-going SEC investigation into the accuracy of some of Molycorp’s public disclosures, but I argued that a negative outcome was also reflected in the 52 week low price, whereas an unlikely, but possible positive finding wasn’t. Back then, most professional analysts following Molycorp took the weakness as a sign to give up on the stock. Long after the horse had bolted, they belatedly chose to close the stable door. I hope no one was paying for such advice.

To this old commodities trader, 52 week lows are an interesting place to start  to look for value. After all, we are mostly trying to buy low and sell high. True, some companies might be on their way to bankruptcy, and some left with a product line that time and technology have moved on from, but that isn’t the case with Molycorp. If anything, technologic advance and our new emerging graphene/carbon nanotechnology age, are likely to be good for Molycorp and the REE sector, all this decade and the next. Nor is the outcome of the SEC investigation likely to be more than a small hiccup along the way. Most negative findings get settled by a fine. As wrote at the time “But assume the worst, such investigations are usually settled without a finding of liability, with the company working out a payment with the SEC. If some officer blundered egregiously, at worst that officer leaves to make their way elsewhere in the world.” Even assuming the worst, the SEC is not going to close America’s only REE mine by imposing some unpayable outrageous fine.

Yesterday Molycorp’s CEO Mark Smith resigned, which may or may not be related to the SEC action, the company didn’t say. The stock fell to 10.36 in after hour trading after trading as high as 11.75 earlier in the day.  The company named Constantine Karayannopoulos, vice chairman of Molycorp’s board, as the interim president and chief executive. Mr. Karayannopoulos was previously the CEO of Neo Material Technologies, which Molycorp bought earlier this year for about C$1.2 billion. In a statement from the Chairman of the Board, Ross R. Bhappu, “The Board of Directors thanks Mark Smith for his significant contributions and leadership over the past four years that have brought Molycorp to this natural transition into an ongoing operating business, and we wish him well in his future endeavors.”

Mr. Karayannopoulos is highly respected in the industry, and many will be hoping that the board offer him the job if he wants it. The statement by Chairman Ross R. Bhappu, doesn’t sound like some officer blundered egregiously.  But CEO Mark Smith, for many had become the Molycorp story, and negatively at that, which is never helpful for a company. Far from selling off in after-market trading, my own instinct would be to say that this was helpful.

Back on November 19th, I didn’t set an upside target for Molycorp, which was then trading near $6 when I wrote. I actually had in mind a multiple of about 4 to the 52 week low, although a trader/investor should never get married to some target. There is simply too much else going on in the world. My time frame too, was over the coming year. It was not an idea of where Molycorp should be trading by Christmas.  So what for Molycorp now? Well to this old trader, Molycorp still looks attractive. Molycorp still has a bright future, which just got a little bit brighter.  If the bears take another run at Molycorp in light of this resignation, my instinct is to scale down buy into any sell-off.

Of course, any potential investor needs to do their own due diligence on Molycorp, and certainly shouldn’t just rely on my opinion. I have been known to be wrong before.  For the record, I don’t yet have a position in Molycorp, though I reserve the right to add one soon. For the record, I don’t have a paid or unpaid relationship with the company, nor with any of its directors or officers.



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