I have to give them credit. Molycorp (NYSE: MCP) is doing everything it can to leverage high rare earth element prices to bring juicy profits to shareholders quickly while expanding vertically. Not only is the company second in line, behind Lynas in Austrailia, to open a rare earth mine and processing facility, but the company is also expanding its reach quickly beyond a single mine.
In April, Molycorp acquired Santoku America, a producer of high-purity rare earth alloys. That was followed in September by purchasing a position in a wind turbine company that it hopes has technology that will leverage rare earth minerals. And yesterday Molycorp announced that it's buying the approximately 10% of AS Silmet it didn't already own. The acquisition spree is adding to Molycorp's capabilities at a time when I'm already worried about oversupply in the market.
The acquisitions have created something of a vertically integrated company, but all parts of the supply chain are reliant on high rare earth mineral prices to maintain high levels of profitability. When Lynas' mine came online, it caused a jolt and a drop in rare earth mineral prices, and Molycorp is likely to do the same at a faster pace.
Molycorp is planning to add 40,000 metric tons of capacity to the market, and the project's timeline is only moving forward. Phase 1 of Project Phoenix, Molycorp's code name for the mine and accompanying facilities, was moved up three months recently, and phase 2 is expected to achieve mechanical completion by the end of 2012.
That may give Molycorp another six months of profit before junior miners like Avalon Rare Metals (AMEX: AVL), Rare Element Resources (AMEX: REE), and a boatload of other miners start building capacity. But it may cause the price of rare earth minerals to fall earlier than they would otherwise as supply is dumped on the market.
I'm still skeptical of Molycorp's stock and think it's headed for a fall once Project Phoenix opens. I've even given Molycorp a red thumb on My CAPS page to back up that prediction.
Interested in reading more about Molycorp? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.
