Rare-earth element producer Molycorp (NYSE: MCP) has been one of the more volatile stocks on the market since it debuted nearly two years ago. Shares shot up out of the gate from a price of $12 all the way up to near $80, but have since crashed along with excitement in general for REEs, which are used for high-tech applications such as smartphones and wind turbines. Starting the year at $25, the miner's stock climbed throughout the first quarter along with the broad market, but has currently lost about 20% of its value for the year as the chart below shows.

MCP Chart

MCP data by YCharts

As we reach the midpoint of 2012, let's take a look back and see why Molycorp has struggled.

In a commodity industry like Molycorp's, shares can be particularly volatile as news events affect the value of the resource. That alone would be enough reason to consider Molycorp a riskier investment than most, but when you throw in the fact that China, as cryptic a force in world politics as any, often calls the shots in the industry, it becomes even harder to predict the future.

Shares of Molycorp spiked in March on a series of announcements. First, the company announced it was buying Neo Material Technologies, a Canadian rare earth processor, for $1.3 billion in a move investors applauded as a step toward forward integration. In the announcement, Molycorp argued that the move would give it more access to markets  in China, the world's biggest consumer of rare-earth elements. Soon after the deal, the U.S. announced it would file a complaint with the WTO on Chinese rare-earth export quotas. Since China produces over 90% of the world's REEs, its quota adjustments often lead to huge swings in price. Molycorp share prices jumped to over $32 on the acquisition news.

Molycorp stock jumped even further at the end of March when China's largest rare-earth miner reported a blowout quarter with earnings up a whopping 363%. Finally, on April 9, the American miner reached its 2012 peak at an intraday price of $35.79 when it announced that its proven and probable reserves had increased by 36% to 18.4 million short tons of rare-earth ore. Word from China that it would work to promote more sustainable development in the rare-earth sector also gave Molycorp a bump.

Prices slid throughout the end of April and May as Molycorp lost more than 50% of its value, going as low as just under $20 a share as the broad market fell amid concerns over the European debt crisis and a slowdown in China. Prices for Molycorp's major rare earth minerals such as lanthanum, cerium, and didymium have fallen sharply throughout the year, and Molycorp's principal Mountain Pass mine generated 60% of its sales through those elements last year.

On May 8, Neo Material Technologies, the company Molycorp agreed to purchase, reported that first-quarter profits dropped 66% to $12 million due to higher operating costs and one-time charges related to the acquisition. Without those non-recurring costs, earnings still would have declined 34%. Revenue, meanwhile, grew at Neo by 34% to $179 million. Molycorp dropped about 2.4% on the news.

Two days later, Molycorp reported its first-quarter earnings, disappointing analysts. While adjusted EPS came in a penny ahead of expectations at $0.18, revenue was far off at just $84.5 million when Wall Street had expected $116.2 million, and shares of the miner dropped another 2% after the earnings call. The company announced the following Monday that it would sell $650 million in debt at a 10% interest rate to fund its purchase of Neo Material, a decision that would more than quadruple its long-term debt. Over the next week shares dropped more than 20%.

Since then trading has chugged along near $20. The stock received a brief bump last week when China said recent price increases had been based on demand rather than its own meddling with supply. Molycorp jumped as much as 12% that day but has since given back those gains.

Foolish takeaway
Like solar energy, rare-earth minerals occupy a fast-changing industry where supply-and-demand economics have yet to find equilibrium. The number of unknown factors such as China's export quotas and how supply will affect prices when Molycorp's mine comes fully online will keep investors in this sector guessing.

An investment in Molycorp certainly looks like a risky one, but that doesn't mean it's a bad one. The company has a forward P/E of just 5.5, so it seems like much of that risk is already priced in. Right now, Molycorp certainly looks like a better bet than its rare-earth peers like Avalon (NYSE: AVL) or Rare Earth Elements (NYSE: REE), both of which will not reach production for several years. The Colorado-based miner also aims to be the lowest-cost producer in the industry, with costs half those of China, by producing its own energy and using recycled salt water for separation. If the company can pull that off, there may be surprise benefits to lower market prices.

Looking ahead to the rest of 2012, investors will want to keep an eye on rare-earth prices and any updates from China. At today's prices it's hard to see Molycorp going much lower. CEO Mark Smith thought $28 was a good price when he purchased shares last December, but when your company's dealing in commodities, anything can happen. Looking forward to the next earnings report, analysts are expecting an EPS of $0.10 on revenue of $111 million. Stay tuned to see what other steps the company is taking as it brings its Mountain Pass mine up to full-scale development.

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Fool contributor Jeremy Bowman owns shares of Molycorp. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.