The records weren't enough for Molycorp (NYSE: MCP) to keep investors from sending shares tumbling this morning. Never mind that revenue has never been higher, profit was a record, and the company's Project Phoenix is ahead of schedule -- that all wasn't good enough for this once high-flying stock.

The numbers
Revenue during the third quarter was $138.1 million, a 39% jump from the second quarter as the price of rare-earth oxides rose. Gross margin was an incredible 63%, leading to strong adjusted earnings per share of $0.67. But the market was looking for $0.70 in earnings per share, and the stock has taken a beating as a result.

The near-term revenue and earnings picture should be less of a driver for Molycorp than what the company sees when Project Phoenix opens. The expansion to 19,050 metric tons of production is expected to be complete by the end of the third quarter next year, with Phase 2 done by the end of 2012. By mid-2013, Molycorp plans to be producing 40,000 metric tons of rare-earth oxides.

The acceleration of the project would be great for most other businesses, but the rare-earth market is so small that adding 40,000 metric tons may flood the market and send prices for the commodity down rapidly. I've been making this argument for more than a year now, and we saw plenty of evidence when Lynas opened shop and stopped the rising price of rare earths.

That's a challenge not only for Molycorp but also formines that are years from production, such as Avalon Rare Metals (AMEX: AVL) and Rare Element Resources (AMEX: REE), which may not ever see mines get off the ground. They're counting on elevated mineral prices to make expansion worthwhile, and with at least 60,000 added metric tons from Molycorp and Lynas, they might not be needed.

Foolish bottom line
The market is starting to realize that the gaudy numbers Molycorp is putting up probably won't last much longer. Revenue will probably spike next year, but it will squeeze less and less profit from each ounce of rare-earth minerals.

I'll keep Molycorp with a red thumb on My CAPS until the company proves that thesis incorrect. Do you agree? Leave your thoughts in the comments section below.

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Fool contributor Travis Hoium has no 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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