Molycorp: An Intriguing Prospect

 | Feb 11, 2013 | 1:30 PM EST
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At the end of January, Constantine Karayannopolous, vice chairman and acting CEO of Molycorp (MCP), bought $100,000 worth of the company's stock on the open market, part of a cluster of insider purchases at the Greenwood Village, Colo., company in the past few months.

Mark Smith spent $120,000 in November to beef up his holdings before stepping down as CEO and now owns more than a million shares. Charles Henry, a director, spent more than $300,000 in November to increase his holding in the rare-earths producer to 110,593 shares. Two more directors also purchased shares. Molibdenos y Metales SA, a Chilean company that already owned about 10% of Molycorp, spent $110 million in January to increase its stake to 18%.

These buyers are increasing their holdings in a company that I regard as an intriguing speculation. It owns the Mountain Pass rare-earths mine in California's Mohave Desert, believed to be the richest deposit of rare earths outside of China, which produces more than 90% of the world's rare earths -- 17 scarce substances used in aerospace products, wind turbines and hybrid cars. The world's second-largest economy has lately become stingier about exporting the substances.

That doesn't make Molycorp a safe bet. The company said in November that the Securities and Exchange Commission is investigating the accuracy of its financial statements. That's a huge risk factor.

Also significant, the company issued a lot of debt and stock recently to fund the development of its mine. Long-term debt stood at $1.18 billion as of Sept. 30, up from less than $200 million six months earlier. To feed the hungry mine, the company also issued more than 37 million common shares in January at $6 a share, only a few months after its previous share offering of about 14 million shares at $10 in August 2012.

One more risk factor: Though the company was profitable in 2011, it wasn't in 2012.

These risks deserve to be taken seriously; however, the insider purchases give me some confidence that the company now has the capital it needs and that its prospects are good. Meanwhile, revenue is ramping up. In 2012, Molycorp booked about $561 million in revenue, compared with about $397 million the year before.

A safe stock? No. A good speculation? Probably so.

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