Cerium production unit, Mountain Pass mine. Source: Molycorp

Shares of rare earths miner Molycorp (NYSE: MCP) surged nearly 12% higher yesterday after Bloomberg News reported that China is considering dropping tariffs and export quotas on the minerals following a World Trade Organization panel's declaration that such measures were discriminatory.

That hardly seems a cause for celebration among investors, as it was only the quotas on exports from China that propped up global pricing of the minerals (and even then, it was a fairly weak support system as prices have collapsed 50% to 70% from their highs). The free flow of rare earth minerals out of the country should have a deleterious effect on their future valuation. 

Inner Mongolia Baotou Steel Rare-Earth Group, the favored, government-owned rare-earths miner, reported in April that first-quarter sales tumbled 53% year over year. It cast aspersions on the WTO ruling in March as contributing to the decline. However, considering the decision was handed down only a week or so before the end of the quarter, it seems doubtful it played any real part in the poor performance; it also suggests that eliminating the quotas will not improve the situation whatsoever.

Rather, it may be the persistent presence of buyout rumors that is fueling Molycorp's rise. Just the other day, stock in industry peer Lynas (OTC:LYSCF)surged by a similar percentage on chatter that Chinese buyers might be sniffing around the company. But Molycorp might be the better bet for them.

Two years ago, the miner bought Canadian rare earth elements processor Neo Material Technologies for C$1.3 billion, giving it a gateway to Asian markets as Neo processes rare earth minerals at facilities in China and Thailand. While China produces almost 90% of the world's rare earth minerals, it also consumes 70% of them. Of course, there might be a bit of a problem in selling the sole U.S. producer of rare earth minerals to the Chinese when it was their strategic value to aerospace, defense, and technology that served as the impetus for the renewed interest in the minerals in the first place.

Some have questioned the wisdom of the purchase as it necessitates Molycorp mining the minerals at its Mountain Pass, Calif., mine first before shipping them abroad to Neo for processing, raising its costs.

Furthermore, Neo, or Molycorp Minerals Canada as it's now known, next month faces expiration of its most important patent covering bonded magnets made with its Neo Powders. While it has other patents that extend beyond 2014, Molycorp admitted "none are of an equally essential nature as Molycorp Canada's fundamental patents and exclusive rights." As a result, Molycorp's entire competitive position is called into question as new rivals may enter the market at will and undermine whatever limited pricing power it has. Still, a locally situated processor could be of significant value to a Chinese company. The quotas that had been in effect were of little relevance to the processing facility, and now that they're being eliminated, its ability to ship rare earth products into China becomes even easier.

With questions remaining about Molycorp's financial wherewithal, a buyout offer might be a welcome advance. But Molycorp has often been subject to rumor and speculation only to see nothing materialize, and that's hardly a prudent way to invest. More worrisome should be the looming patent expiration. Adding in all the other troubles this miner has weathered and still faces, it remains a high-risk investment that at best deserves placement in only the smallest corner of your portfolio.