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Molycorp's Bold Move

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Molycorp (NYSE: MCP  ) has made its biggest move yet, announcing that it is acquiring Neo Material Technologies, a processor of rare earth minerals, for $1.3 billion. The deal will be paid for with 71.2% cash and 28.8% newly issued Molycorp stock, and the market has cheered the deal today, pushing Molycorp shares up 19%.

The company said that the deal will give it more exposure to China, the world's largest consumer of rare earth minerals, and capture even more of the company's production in finished-goods processing. Molycorp has a history of similar moves, buying Santoku America, AS Silmet, and a stake in Boulder Wind Power in 2011. What these moves do is allow Molycorp to reduce dependence on raw rare-earth minerals prices and get exposure to the end-market demand. In the end, however, the prices for these end products will be driven by the underlying mineral price -- and prices have been falling fast.

Since February 24, the average composition of Lynas Corp.'s Mount Weld composition pricing of rare earth minerals has fallen, from $91.05 then to $82.72 now. That's a 9.1% drop in two weeks, all before production really ramps up for either company. This drop in prices may show that this is an extremely wise move for Molycorp, but it's also what's kept me cautious since prices peaked in the middle of 2011.

What Molycorp has also done is show how irrelevant junior miners have become in the current environment. Rare Element Resources (AMEX: REE  ) and Avalon Rare Metals (AMEX: AVL  ) don't even have shovels in the ground or downstream demand lined up, and with prices falling and new capacity coming online, they look to be in a tough position. Unless rare-earth mineral demand increases significantly and potential mines around the world don't begin production, these companies will be left in the dust.

Based on falling rare-earth prices I'm going to keep my underperform CAPScall on Molycorp, despite the fact that it's currently losing to the market. I'm less confident in this pick than I was a few months ago, but until prices start rising, I'll hang on. I am also adding underperform calls on both Avalon Rare Metals and Rare Element Resources even after their bounces higher today. I just don't think they're in a strong position compared to Molycorp and Lynas right now.

Interested in reading more about rare-earth elements? Add these stocks to MyWatchlist, and it will find all of our Foolish analysis on each stock.

Fool contributor Travis Hoium 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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Read/Post Comments (2) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2012, at 10:01 PM, LouNg wrote:

    It has been projected that China will become a net REE importer by 2020. If that holds truth, there is a market of REE for Lynas, Molycorp, Avalon, QRM, and REE. What is so appealing about Molycorp is its vertical integration mine-to-magnet strategy. Finished products are worth a lot more than raw materials. Better yet, Molycorp is a low-cost producer than even China, and the plunge in natural gas price has even enhanced it low-cost position even further.

  • Report this Comment On March 11, 2012, at 12:42 PM, ravens9111 wrote:

    Just looking at the charts, it appears that MCP has hit bottom. Valuation is actually attractive right now. I am a buyer of MCP at these levels. With about 40% short interest, I think a major short squeeze is imminent. I would not be surprised to see MCP hit $45 within a few short months. Morgan Stanley still maintains their $80 price target. The risk/reward here is too great to ignore. I would set my stop at the bottom around $23.50. I would not confuse the move MCP had with the other junior miners. Those are still speculative in my opinion. Surely, MCP could buy one of them out, but which one? I don't think anyone really knows so playing the juniors is more of a gamble. MCP is already producing and is profitable with plenty of growth on the horizon.

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