Is Molycorp the Perfect Penny Stock?

Low-priced stocks often have significant problems to overcome, but those that have fixed their problems may be ready to take off to the next level.

At Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is transformed into ratings from one to five stars, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning single-digit investments. We identify them with a penny icon; by pairing up All-Star opinions with companies trading for pennies on the dollar, relatively speaking, we may end up with more than just chump change.

Of course, just because a stock is low priced isn't enough to suggest it will record big gains. Low-priced stocks are often low-priced for a reason. But this week we look at rare-earth-minerals miner Molycorp (NYSE: MCP  ) , whose stock has lost more than 80% of its value over the past year with more than a quarter of it coming in the last week. It now trades at just over $7 a share.

Molycorp snapshot

Market Cap

$874 million

Revenues (TTM)

$528 million

1-Year Return

(81.9%)

Return on Investment

(2.9%)

Estimated 5-Year EPS Growth

20%

Dividend and Yield

N/A

Recent Price

$7.17

CAPS Rating

**

Source: FinViz.com. N/A = not applicable, Molycorp doesn't pay a dividend

Rare as hen's teeth
SEC investigations are inconvenient things. They tend to fall harshly on a stock price, and management is left to explain why it is they'll "vigorously defend" themselves against spurious claims. At least that's how it's supposed to go. Molycorp simply chose to ignore it.

Under investigation since August, the miner didn't disclose this fact in its earnings release or discuss it during the ensuing conference call. Molycorp left it to investors themselves to find buried on page 30 of its 10-Q that it was under a full-blown SEC investigation. In fact, Molycorp didn't issue a press release about it till nearly 11 p.m. Friday night, well after the markets had closed and investors were concentrating on the weekend.

Oh, and the reason for the investigation? The accuracy of the company's public disclosures. Yeah, it's easy to see why.

I see you
On the surface, Molycorp seemed to have the edge on other rare-earths stocks like Avalon Rare Metals (NYSEMKT: AVL  ) and Rare Element Resources (NYSEMKT: REE  ) , which have years to go before their projects are operational. Yet, the rare-earth-mineral miner is facing substantial doubts about its financial position, and had completed a secondary offering several months ago to shore up its position. The base deal includes $300 million in convertible senior notes due in 2017 and $150 million of common stock, plus potential over-allotments.

Earlier this year Molycorp also acquired Canadian rare-earth-elements processor Neo Material Technologies, but Standard & Poor's thinks the mountain of debt its piling up and ranks its credit rating as junk. Neo processes rare earths at facilities in China and Thailand, giving Molycorp a gateway into Asia. While China produces 90% of the world's rare-earth elements, it also consumes 70% of them. Molycorp is developing its mine in California and will ship the rare earths to Neo's plants for processing.

A shocking result
There's plenty of reason to think the whole rare-earth metals phenomenon that exploded two years ago, and then quickly deflated, won't ever gain traction again. When it comes down to it, rare-earth metals aren't really all that rare. And while Molycorp could have been one of those leading the charge forward to gaining some of the share that China currently holds, its actions in regard to this SEC investigation raises substantial doubt about it being an ethical company.

My colleague Christopher Barker had held out hope that the miner was at a transformational point in its existence, but thinks investors would be better off looking at real metal miners like Kinross Gold (NYSE: KGC  ) or Goldcorp (NYSE: GG  ) . While I've opted for an investment in SPDR Gold Trust  (NYSEMKT: GLD  ) , I agree the gold miners are a better bet than Molycorp.

I'll be blunt: Run away from this company. When management hides material information like this or, at best, cloaks it so it's not easily found, then it's not a company you want to trust with your money. But feel free to let me know in the comments section below if you think this is all just business as usual and Molycorp can dig itself out of the hole it's in.

Make some change
One well-run metal miner, Goldcorp, is a leading player in the gold mining market. For the last several years, investors have been the beneficiaries of several successful acquisitions and strong organic growth. Goldcorp's low-cost production of one of the most sought-after metals in the world continues to make them an attractive choice for long-term investors. Click here for our detailed report to discover more about this mining specialist.


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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 November 14, 2012, at 3:14 PM, JackLifton wrote:

    You're right about his company. It was a smooth hype operation as a newly organized junior (exploration) mining venture in 2007-8 when it was only planning to re-start an operation closed for economic reasons by the the owner at the time of the closing the original Molycorp, then a subsidiary of Unocal.

    It seemed to me at the time that the cost of re-starting the operation with the goal of bringing it back as a 4,000 to 8,000 tpn per year producer of separated industrial grade rare earth raw materials for American fluid cracking catalyst producers and for non-Chinese Asian rare earth metal and alloy producers was a sound idea. I thought Molycorp could provide an alternate source for the non

    Chinese market, and that if it were competitive it could get 10 % or more of the global market, which I then in 2009 estimated at between 1 and 1 and 1/2 billion dollars per year. I really thought that it could be back in operation for less than 150,000,000 including the purchase price of $80 million and that it's target should be sales of 150 million a year at 30% margin.

    I well remember being told on the phone by a large Molycorp original investor in the fall of 2009 that the plan was to take Molycorp public in 2012 after it was up to "speed."

    A hype mentality then took over the junior mining share market and a bubble rapidly inflated.

    After literally years of opportunistic "announcements" about markets, products, and prices by Molycorp we suddenly find that the "fully funded" project and "the world class scientists and engineers who needed no outside help" were flummoxed by an engineering company that derailed the " plan." I don't believe that is all there is to the company's current problematic state, and I suspect the the engineering company will come out of this better than Molycorp does.

    This may well be a great penny stock,but the company has yet to show that it can be a low cost producer with a low breakeven. Until then its customer base will not be risking their security of supply.

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