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

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 (AVL +6.01%) 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 (KGC +4.41%) or Goldcorp (GG +0.00%). While I've opted for an investment in SPDR Gold Trust (GLD +1.70%), 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.