Molycorp: Underdog or Just a Dog?

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars, we also have investors who find the chinks in a company's armor and correctly call its fall. We call them "Underdogs" if they've earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I'm looking at rare-earth minerals miner Molycorp (NYSE: MCP  ) , which has lost three-quarters of its value, is under SEC investigation for its public disclosures, and just blindsided investors with reduced guidance on production delays. Having had its CEO suddenly jump ship unannounced last month, there's little doubt as to why the miner carries a two-star CAPS rating.

It's been a long ride down for investors, so if there are any who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will ultimately succeed. And CAPS All-Star TomFoolNC is one who's earned the underdog moniker and recently predicted that Molycorp would rout the shorts.

Molycorp snapshot

Market Cap

$1.2 billion

Revenues (TTM)

$528 million

1-Year Stock Return

(67.7%)

Return on Investment

(2.9%)

Estimated 5-Year EPS Growth

20%

Dividend and Yield

N/A

Recent Price

$8.34

CAPS Rating

**

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

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

A scary opportunity
It was just this past November I warned investors not only to avoid this stock, but to run far away from it as well. A company that would go to such great lengths to hide from investors the fact that it had been under a full-blown SEC investigation for months and only respond to the situation after it had been uncovered -- and then do so late at night on a Friday -- is not a stock you want to put your money in.

Now, the rare-earth minerals miner does trade higher than where it did when I issued my caution, but that's only because of a pie-in-the-sky article by Reuters suggesting that Nissan (NASDAQOTH: NSANY  ) or Siemens (NASDAQOTH: SIEGY  ) might make a bid for it. But there are a lot of problems with that scenario, including its changing its focus from being a strict miner into one that will also process and refine the mineral. On top of that, it'll be using a process that hasn't been commercially tested.

The string of events that followed my article shows it hasn't done anything to warrant a change of heart. This week's implosion on slashed 2013 revenue expectations and delayed production from its Mountain Pass mine in California only serves to underscore my warning.

A smaller piece of the pie
Worse, it's probably thinking about diluting current shareholders again after having done so last year, a capital raising effort that was supposed to have carried it through the mine's development. Apparently it's burning up that cash hand over fist and may need to dip into the equity markets once again. Whatever advantages Molycorp had over other rare-earth miners such as Avalon Rare Metals (NYSEMKT: AVL  ) and Rare Element Resources (NYSEMKT: REE  ) have long since evaporated.

Demand for rare-earth minerals has fallen substantially as the global economy has remained weak. Moreover, alternatives are starting to emerge. While there may be 40 pounds' worth of rare-earth magnets in a hybrid vehicle, Toyota (NYSE: TM  ) is starting to make electric vehicles without the minerals using an induction motor instead, and Renault is producing cars with electric motors that don't need permanent magnets at all. General Electric (NYSE: GE  ) is also reducing its reliance on REs in the manufacturer of its wind turbines.

Apple (NASDAQ: AAPL  ) , Research In Motion (NASDAQ: BBRY  ) , and other smartphone makers rely upon RE minerals to light up their handsets' displays, and while there's not always an easy replacement for a mineral, companies will work to reduce the dependence on them.

For me, a company that has governance issues, plays hide-and-seek with material investor information, and is pursuing a market that may suffer from even further reduced demand is not one whose valuation, even at depressed levels, will hold up very long.

I think Molycorp is a real dog, but let me know in the comments section below whether you think it can still dig its way out of the hole it finds itself in.

If miners are your thing, Cliffs Natural Resources has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It has performed well, relative to many competitors, in a very cyclical industry because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's brand-new premium report on the company.


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Comments from our Foolish Readers

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 January 12, 2013, at 7:39 AM, skypilot2005 wrote:

    If you like rare-earths:

    Pele Mountain Resources

    Trading Symbol: TSX Venture : GEM

    OTCQX : GOLDF

    http://www.pelemountain.com/

    http://www.pelemountain.com/pdf/Presentation.pdf

    http://www.pelemountain.com/pele-in-the-news.php?id=54

    Jan. 7, 2013

    “Pele Mountain Resources, a leader in Canadian rare earth development, is focused on the

    sustainable advancement of its 100-percent owned Eco Ridge Mine Rare Earths and

    Uranium Project. Eco Ridge is located in Elliot Lake, the only Canadian mining camp to

    have ever achieved commercial rare earth production. With well-understood geology,

    mineralogy, and metallurgy, excellent regional infrastructure, and strong local support, Eco

    Ridge is an ideal location for a safe, secure, and reliable long-term supply of critical rare

    earth and uranium.”

    Pele Mountain: Leveraging a multi-resource deposit in achieving rare earth production in Canada

    ----Interview with Al Shefsky, President and CEO of Pele Mountain Resources

    Jan 7, 2013

    Asian Metal: Some mining projects around the world have received backlash or opposition because of uranium and thorium contents of their deposits. What is your position on this matter?

    Shefsky: This is an important point and, we believe, another competitive advantage for Pele. Dealing with the radioactive component of a rare earth deposit is essential and has the potential to delay or derail otherwise viable projects. Clearly, we are dealing with this issue upfront with plans to go through the regulatory and licensing process with the Canadian Nuclear Safety Commission (CNSC) as would any primary uranium operation."

    "The key here is that the uranium at Eco Ridge constitutes a primary revenue source and, as such, is a great diversification to hedge against a seemingly unpredictable rare earth market. In pursuing long-term uranium off-take agreements, we could essentially pay the vast majority of our operating costs with uranium revenue and thus insulate the project from periods of weak rare earth prices. This is a sharp contrast to some of our competitors that must ultimately address the handling of radioactive material that is not a revenue source, but is potentially a challenging waste product.”

    “Shefsky: On the demand side, the recent election of a pro-nuclear government in Japan is likely to bring 35 to 40 reactors back into operation this year and there are also more than 60 nuclear reactors currently under construction elsewhere in the world. On the supply side, about 25 million pounds per year of Russian uranium oxide will be withdrawn from the market at year-end. Based on these fundamentals, we believe that uranium prices should recover close to pre-Fukushima levels in 2013 and then move significantly higher in the longer term. The bullish fundamentals for uranium are very supportive for the development of Pele Mountain’s Eco Ridge Mine Rare Earth and Uranium Project in Elliot Lake.”

    Sky

    Long GOLDF / GEM

  • Report this Comment On January 12, 2013, at 9:17 AM, MurrayZak wrote:

    When Moly's in trouble I am not slow, it's up up up and away I go.

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