When I heard that Molycorp (MCP) had just cratered by $22 from $53 to $31 in two days, I did what I usually do when a mining company I follow gets in trouble. I jumped into an airplane and flew over the pit, making sure that it was still there. I also go into the local bar and talked to the workers with my antennae out to detect any unreported problems.
For good measure, I threw a compass and a few extra bottles of water into the cockpit in case I crash landed in the desert and had to hike out. This is far and away the most remote part of California, and the sands are littered with the bleached bones of unfortunate travelers. Please excuse my shaky pictures, but it is tough holding a stick during severe heat turbulence in a desert mountain pass with one hand while taking pictures with the other.
Long term readers will recall that I pleaded with them to by Molycorp just after the 2010 IPO at $12.50 before its rapid ascent to $78. But anything can go wrong with a mine, including, strikes, nationalizations, floods, permitting delays, opposition from environmentalists, engineer shortages, cave ins, missing spare parts, and SEC securities fraud investigations.
It turns out the plunge was due to a downgrade by JP Morgan (JPM) that reduced its target from $105 to $66. The esteemed Wall Street firm was concerned that the recent flight out of hard assets everywhere, especially rare earths, would eat into (MCP’s) profitability. Since the July peak, Cerium (Ce) has plunged by 48%, Lanthanum (La) by 36%, and Neodymium (Nd) by 22%.
The bet here is that Molycorp will complete its $781 million Mountain Pass project on time, producing 19,000 metric tonnes of rare earths per year by the end of 2012. An investment of several shots of Jack Daniels with a local Caterpillar operator revealed that work was proceeding at full speed ahead, with crews working nights and Sundays. A call to an associate in China informed me that the rare earth sell off in the Middle Kingdom was done, and that prices were headed back up.
The supply demand squeeze is still in the cards. A Chinese clampdown on illegal mining will seriously restrict supply before the Molycorp mine comes on stream, sending prices skyward. The real kicker here is that if congress opts for a rare earths strategic reserve for national defense, which is already being mooted. Remember what the Strategic Petroleum Reserve did for oil prices? Stand by for takeoff!
The bottom line here is that (MCP) will be a great hold once the world goes back into “RISK ON” mode. Play this through the long dated options and you could get a ten bagger.
By. Mad Hedge Fund Trader