A Rare-Earth Preview: Molycorp

Molycorp (NYSE: MCP  ) may have gotten a small preview of what's to come in 2012 just yesterday when its stock tumbled on news that China wasn't cutting its export quota. In the relatively small world of rare-earth minerals, this was big news and bad enough news to send the stock down 14%.

The worst is yet to come
We've seen the rare-earth mineral boom and bust in the U.S. before. The Mountain Pass mine Molycorp is mining used to provide a large portion of the world's rare-earth minerals until China began producing the minerals and the mine was forced to close in 2002.

China's hold on rare-earth minerals was ironclad until it started cutting exports and prices began to spike a year ago. This was seen as an opportunity in the industry, and companies such as Lynas and Molycorp made big plans to produce rare-earth minerals.

That logic works well when prices are high and supply remains tight. But supply won't remain tight with Lynas due to add 22,000 metric tons of annual capacity when its construction is completed near the end of 2012 and Molycorp will be adding 40,000 metric tons of its own supply. That doubles China's exports for 2012 with just two mines. That doesn't even consider junior miners such as Rare Element Resources (AMEX: REE  ) , Avalon Rare Metals (AMEX: AVL  ) , or a number of miners around the world.

Prices have already shown a top, and the trend will only continue downward as supply comes online. To end the third quarter, Lynas' average Mount Weld composition would have fetched $193.21 per kg, and today that price is down to $103.76 per kg.

Not a bet worth taking
Just as Molycorp's operations get off the ground, the supply glut I predicted a year ago is starting to come to light. Demand for these minerals is growing, but with a single mine able to supply such a large amount of the world's supply, I just don't think demand will keep up in 2012.

That's why I'm bearish on Molycorp heading into 2012 and think the launch of the company's new capacity will be met with falling margins.

I'm even backing up this pick with a red thumb for Molycorp on My CAPS page, which can be found here. And if you're looking for a better stock than Molycorp in 2012, check out The Motley Fool's latest special report to discover our top stock pick for 2012. It's free but it won't be available for long, so get your copy now.

Fool contributor Travis Hoium does not have a secret rare-earth minerals stash and does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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